1. Introduction: Needs for New Global Strategies

How should Japanese companies shape their global business strategies, considering the growing importance of developing nations in the global economy? The economic growth of developing countries such as China and India signifies attractive new markets for Japanese corporations. It is critical to the growth of Japanese companies that they expand into these markets. However, the economic growth of developing countries is the result of their efforts to catch up with developed ones economically. During that process, companies in developing countries will eventually acquire technological capabilities and become major threats to Japanese corporations. These local companies can set competitive prices by providing products and services at low cost by taking advantage of factors such as low local wages. In response to such actions, Japanese corporations must provide greater value to customers to compensate for the price difference in the products and services offered. Competition with these local companies is on a local as well as international level, including Japanese markets. For example, Suntech and JA Power are two Chinese companies with top market share in the production of solar panel. Chinese companies began producing solar panels by implementing full turnkey systems that integrated the solar panel production process from raw materials to the finished product, enabling the production of general-purpose crystalline solar cells with a certain amount of efficiency in electricity generation. The competitive advantage held by manufacturers in developed countries, such as Sharp (Japan) and Q Cells (Germany), was quickly lost because manufacturing technology originally held by panel manufacturers was incorporated into manufacturing equipment. Technologically, Chinese electronics companies and other high-tech industries have quickly caught up and are threatening developed countries’ companies, including Japan, that have traditionally differentiated themselves on the basis of their technological prowess. Therefore, while the growth of developing countries presents an “opportunity” for Japanese companies through growing markets, it concurrently poses “threats” through the emergence of competitive local companies.

However, the “threats” by companies electing to forgo global markets and focus exclusively on the domestic market cannot be avoided. Therefore, as Japanese companies aggressively incorporate new “opportunities” into their business models, it is critical that they consider strategies to minimize the damages caused by these “threats.” Three important directions of global strategies are as follows: (1) respond to “good-enough” product markets, (2) strengthen cost competitiveness, and (3) create strong business models in which it is difficult to catch up (Fig. 1.3).

China is an economic giant that has overtaken Japan to become the world’s second largest economy. However, China’s population is ten times that of Japan, and the per capita GDP is approximately USD 5,000 or one-tenth that of Japan. On average, the standard of living in China is still low, requiring products appropriate for these circumstances. China has large income disparities, and many households are said to have income greater than the average Japanese household. However, this so-called wealthy class comprises a small part of China’s overall population of 1.3 billion. On the other hand, it is not realistic for Japanese companies to compete with local companies for providing products to lower-than-average income classes, given the overwhelming cost competitiveness of local companies. Accordingly, it is more effective for Japanese companies to provide products and services to middle- and upper-income classes that have strong purchasing power, despite their relatively low income levels compared with the wealthy class. These middle- and upper-income classes are called a “volume zone” and are witnessing rapid expansion in developing countries such as China and India. For example, in China, high-ticket consumer electronics such as televisions and refrigerators are premium products for the average Chinese; these products were traditionally purchased only by the wealthy. However, China’s recent economic growth resulted in growth among the middle class, thereby making these products a common item in most urban homes. These products are sold by local companies such as Haier and Hisense; however, Japanese consumer electronics manufacturers hold high repute for their brands in China. Therefore, if products can be offered at prices that are affordable to the middle class, they are likely to become popular sellers. In addition, products with a certain level of quality and high cost performance attract the wealthy. The market for “good-enough” products by foreign companies in China’s consumer electronics market is growing rapidly (Gadiesh et al. 2007).

An important rule in a “good-enough” product market is product development that has just the level of quality demanded by customers. High-quality products will be priced commensurately high, which may be problematic for products that target the volume zone. On the other hand, it is necessary to differentiate premium-priced products from products marketed by local companies. In the “Innovator’s Dilemma,” Christensen states that when the speed of a product’s technological progress exceeds the level of technology demanded by customers, low-priced products with lower functionality and quality (i.e., destructive innovation) enter the market, creating market completion for products that are based on their high level of technology (Christensen 2001). When developing products for developing countries, there is a high likelihood that customer demand for product functionality and quality will be lower than that in Japan. Therefore, it is important for companies to determine the product level that target customers will accept, and develop products at that “good-enough” level.

When providing products for “good-enough” markets, it is important to strengthen the cost competitiveness of the overall company. In light of the rise of companies from developing countries such as China, strengthening cost competitiveness is necessary not only for competing in local markets but also for global competition in Japan and elsewhere.

On this point, Japanese companies have been continually working on local production in low-cost regions such as Southeast Asia and China. Overseas production began in earnest among Japanese companies in the mid-1980s, originally as a countermeasure to rising domestic production costs resulting from a stronger yen. Figure 1.4 shows the relationship between various globalization measures such as exchange rate fluctuations, Japanese export volumes, and overseas revenues. The rise in the yen following the 1985 Plaza Accord resulted in an expansion in overseas production. The yen continued to strengthen slowly thereafter, and overseas production resumed rapidly after 2000. In 2000, overseas revenues among manufacturers were greater than export revenues, and while revenues dropped somewhat after the 2008 global financial crisis, they have recently trended upward again.

Figure 1.5 shows the number of subsidiaries, both domestic and foreign, of Japanese companies by year of establishment and country as of 2011. The graph indicates that the movement overseas to developing countries began with investment in New Industrial Economies (NIES) and ASEAN countries. Backed by the strong yen, Japanese electronics manufacturers and automakers began to aggressively enter these regions during the latter half of the 1980s. Investment in China began to grow rapidly thereafter during the 1990s, after China implemented liberalization policies to the outside world and began to aggressively seek foreign investment. During the latter half of the 1990s, the number of overseas subsidiaries drastically reduced, with many companies suspending new overseas investment due to domestic issues resulting from the 1997 economic recession brought about by failures of large economic institutions. In the 2000s, investment in NIES and ASEAN countries remained flat while investment in China again picked up dramatically. This was perhaps brought about by China’s entry into the WTO in December 2001 and improvements in China’s business environment.

The entry into the overseas market, primarily of production facilities, focused on China as a means to strengthen cost competitiveness. However, wages along China’s coastal regions, which have agglomerations of foreign firms, continue to rise, and more companies are increasingly considering moving to the interior regions of China or to lower-cost countries such as Vietnam. However, when moving production facilities, companies cannot ignore logistical issues such as procurement of raw material and transportation costs, as well as costs associated with investments in production infrastructure and employee training. In addition, companies must consider a host of other factors when selecting new production bases, such as procuring land and dealing with different environmental regulations, tax laws, and investment incentives that are specific to each country.

Japanese companies are in the process of expanding production overseas for many years, although strengthening cost competitiveness of a company as a whole requires the consideration of overseas resources in areas of research and development (R&D). The results of an international comparison of R&D within foreign firms in China show that Japanese companies lag behind their European and US counterparts (Motohashi 2011). In terms of management of overseas R&D centers, Japanese headquarters exert strong control and do not facilitate open innovation between local subsidiaries, local corporations, and universities (Motohashi 2012). Till now, Japanese companies have been cost competitive by transferring production overseas; however, they must also consider the optimal global placement of overall operations, including R&D. Furthermore, creating partnerships with local firms can be used as a means to strengthen cost competitiveness to drive global business. However, joint ventures and strategic alliances increase the possibility of nurturing potential competitors; therefore, costs and benefits should be closely considered when selecting partners and forming alliances.

We have discussed market efforts in developing countries and the use of management resources such as personnel within developing countries. However, as preparation for the eventual rise of local companies in developing countries, Japanese companies must create strong business structures that make it difficult for local companies to catch up. First, in terms of technology, every method possible should be exploited to increase the exclusivity of a company’s proprietary technology. Policies that enable this exclusivity are as follows: (1) protection by intellectual property rights, (2) protection by know-how (trade secrets), (3) protection by product design complexity, and (4) improvement in the speed of product development. None of these measures fully protect a company’s proprietary technology; therefore, inevitably, companies in developing countries will catch up in terms of technology. Therefore, while “product development speed” is critical, generally, open innovation via outsourcing some aspects of development or external partnerships must be used to increase the speed of development. When doing so, companies must provide an overall balance because exclusivity of company’s proprietary technology via know-how or design complexity decreases along with outsourcing or partnerships.

The manner in which companies create technology management policies differ in each industry and according to company size. For example, differences in the ability to maintain exclusivity of proprietary technology vary by industry and have been researched in Japanese National Innovation Survey by the Ministry of Education, Culture, Sports, Science and Technology. In this study, “protection by intellectual property rights” was effective for pharmaceutical companies, whereas “product complexity” and “development speed” were important for electronics firms (National Institute of Science and Technology Policy 2004). In addition, small- and medium-sized businesses find it difficult to exercise rights even when they have intellectual property rights for their technology. For example, when a company becomes aware of its patents being violated in China, it becomes difficult for small companies to negotiate with IP violating company, litigate in court as necessary, and then win in court with the implementation of a cease-and-desist order or the payment of licensing fees. In these cases, it is more rational to focus on know-how or other methods rather than intellectual property rights.

In addition, protecting technology is not the only requirement to delay catch up by companies in developing countries. International innovation competition involves multiple players and is not conducted on a one-on-one basis with firms in developing countries. International mergers and acquisitions (M&As) are more active; for example, Sanyo Electric sold its consumer electronics division to Haier in July 2011, one of China’s largest consumer electronics manufacturers. Sanyo Electric became a wholly owned subsidiary of Panasonic in 2010. The selling decision was made by Panasonic as it already owned a consumer electronics division and was merely rationalizing the overlap of management resources. However, from the perspective of Panasonic and other Japanese consumer electronics manufacturers, undeniably, Haier was able to take a great technological leap through this acquisition. Consequently, even after a company’s efforts to fervently protect its technology, leaking of proprietary technology and catching up may happen in various ways. Furthermore, changes in industry structure may result in an inability to differentiate technology. The solar panel case mentioned previously is one such example. Production technology for solar panels was integrated into production equipment as a full turnkey system. Therefore, Sharp, Q Cells, and other manufacturers were unable to differentiate themselves from companies in developing countries through production technology. As a result, Chinese manufacturers such as Suntech and JA Power installed large-scale production equipment and created their own general purpose solar panel market by manufacturing inexpensive products. Of course, in terms of the development of highly efficient solar batteries, companies in Japan, Europe, and the US have superior technology, but mega solar systems (i.e., systems for electric utilities that generate electric power in the megawatts) that are the mainstay of the overall market require many panels across a broad area, making cost more important than efficiency.

Such product commoditization can be observed in flat panel televisions and digital consumer electronics, where completely different business model is required to avoid this situation. To date, Japanese companies have pursued international businesses under a “product” model, in which they develop high-performance products and export them to the rest of world. However, there are some products where this product model is no more effective. In particular, electronic products have a high rate of technological innovation, and generally, latest products often have a higher level of technology than what is demanded by customers (Christensen’s Innovator’s Dilemma). This makes it easy for local companies to produce destructive innovation, driving Japanese companies out of markets.

Accordingly, a revision of strategies is required in terms of the product model grounded in the idea that “good products sell” to the “customer value” model, in which the proposition of the products’ value is made to the customer. A product’s value is only realized after its use by the consumer and as such, maximizing its value for money becomes essential. A product’s value is gauged after it has been used by customers; therefore, maximization of customer value becomes essential. In the example on solar panels, the largest customers were mega solar operators. The goal of product development in maximizing customer value was not to increase electricity generation efficiency, but rather to increase product durability and simplify maintenance. Thus, the customer value model requires companies to understand their product’s value from the customer perspective. In addition, the sale of a product should not signal the end of a relationship; instead, companies must maximize the value of product services through the entire lifecycle of the product. Thus, the “customer value model” is called a “service model.” In a commoditized business, in which it is difficult to have a product model with an ongoing business, a breakthrough may be possible by differentiating itself with a “service model” that goes back to the basics of customer value.

Furthermore, companies can increase competitiveness by providing multifaceted services for sets of products rather than single products. Returning again to the solar panel example, these panels cost approximately half the total cost of a mega solar system. This is because they require mounts, foundation work, and power control systems. Moreover, critical technology is required to convert the direct current generated by solar panels to alternating current and control unstable electricity to produce stable voltage and frequency. By designing an overall system that could stabilize the current for an extended period beyond the mere panels, companies are able to avoid the commoditization of a single product model. Compared with single products that are easy to copy, such complex services have the benefit of being difficult to replicate because they are large, multifaceted systems comprising multiple products. In pursuing a “customer value model,” companies make it difficult for competitors to catch up with these large, complex systems.

When creating a global strategy in a flattened world, it is important to acknowledge that local markets, particularly in developing countries, will have barriers of different heights and types. Global strategies indicate pathways to overcome barriers and realize new business opportunities. Methods to overcome such barriers and exploit the differences in the business environments depends on the type of differences between Japanese and local markets. When proposing the Culture, Administration, Geography, and Economics (CAGE) format, Ghemawat states the necessity of analyzing the differences between countries (Ghemawat uses the term “distance”) (Ghemawat 2007). CAGE represents culture, administration, geography, and economics, all of which are country specific. Physical distance, as represented by geography, has shrunk with the IT revolution and advancements in transportation technology; however, languages and lifestyle related differences (“Culture”) and various economic regulations, tax systems, and regulations on foreign investment (“Administration”) still exist as major differences among countries. Therefore, vast economic differences (“Economics”) exist in per capita GDP and wages.

Global businesses with operations expanding into new markets are akin to investments in new ventures. In such cases, differences between the home and destination countries are considered as risk factors when making investment decisions. It is possible to estimate physical distance (“G”) and economic gaps (“E”) with a certain degree of accuracy. In addition, although it is difficult to quantitatively assess cultural differences (“C”), it is possible to estimate them to a certain degree using past case studies, including those from other companies. Thus, the administrative aspect (“A”) remains the one area of barriers and differences in global business environment for which risk must be seriously evaluated. For example, in October 2006, companies in Shanghai’s Jiading District in China were demanded to leave the area without prior notice. The district was designated as a new urban development area headed by the state. Many Japanese companies that became involved in this issue caused the government to also become involved. As of October 2012, this situation remains unresolved. In China, it is possible for the state decision to override a lease agreement for an industrial park, and there have been instances of companies forced to transfer and incur high losses. This example may be extreme, but there have been reports of such incidents in China on a daily basis. The system of contract law, which is the basis for business in developed countries, is imperfect in China; this imperfection is treated as an issue of particularly high risk because of the significant impact on businesses caused by unforeseen changes.

Within developing countries, institutional barriers in business environments arise from domestic circumstances, whether in China, India, or elsewhere. These barriers differ according to the target country. Thus, conducting business operations in China requires an understanding of the institutional imperfections and differences that exist there; the same applies for India and Indian domestic circumstances. Strategies must be created in response to the needs and circumstances of each country.

Finally, the issue relating to the integration of strategies created for individual countries into a corporation as a whole must be solved. It is important that strategies for developing countries such as China and India, which have significantly different economic environments than developing countries, be specific to the circumstances prevalent in those countries. However, the final objective of management strategies in global businesses should be the optimal use of management resources distributed throughout the world and its integration for the benefit of the company’s overall performance. The level of control exerted by headquarters on local entities, or alternatively, the level of delegation to local entities for management decisions, is an issue of concern. Japanese multinational corporations, as compared with those in Europe or the US, are said to be headquarter oriented, with strong management systems exerting stringent controls over local entities (Bartlett and Ghoshal 1989). Until now, Japanese multinationals had focused on expanding production centers overseas. These production centers were managed by transferring production technology from the headquarters to the subsidiaries, resulting in the production of goods that mimicked the parent factory. Therefore, in many instances, the facilities were operated under the tight control of the headquarters. In addition, the product-focused model of “make good products and they will sell” deprioritizes the research of local consumer needs. Accordingly, sales offices were focused on selling existing products rather than gathering information on local consumer needs.

However, capturing the growing “good-enough” product markets in developing countries requires more local R&D. Using ideas unique to the region to target customers and moving forward with local R&D that is reflective of local needs cannot be accomplished by way of traditional, one-way decision making, in which decisions flow from the headquarters to local entities. Many large manufacturing companies in Japan generate higher revenues overseas. Moreover, an increasingly high percentage of their revenues come from developing countries. However, in such an environment, companies must not treat headquarters and local entities as separate entities, but rather consider corporate-wide strategies on a global basis. Doing so will enable companies to select countries and regions of future expansion and start the process of company-wide integration of strategies based on local area conditions.