Abstract
Long noted as highly competitive, the Japanese market has become even more cutthroat in the “post-bubble” era, the period following the Japanese economic collapse. Only the fittest are likely to survive the correction taking place as Japan grapples with a severe recession that is threatening to extend worldwide. The research question pursued is how these “moment-in-time” market changes affect foreign-affiliated companies in Japan. The study examines whether lessons that may be learned from those foreign companies that have successfully negotiated the minefield of Japan's business culture can be applied to other world markets. It then aims to induce, from their responses, some implications for international marketing strategy. It is based on a study of the post-bubble changes in the Japanese market from 1990 to 1998. Using a Grounded Theory approach, the research process involves 58 personal interviews with executives of 52 successful foreign firms operating in Japan. A framework distilled from a previous article by the author is used to compare and contrast the pre- and post-bubble situations.
Turmoil in Japan and the Region
Riding a seemingly endless wave of economic success, Japan in the late 1980s and early 1990s added manufacturing capacity equivalent to that of France (The Economist 1998e). Coinciding with this dramatic growth was the bursting, in 1992, of the so-called “economic bubble.” Subsequently, the yen appreciated significantly, approaching ¥80:US$1 (Shilling 1996) at one stage, only to decline again to ¥132 by May 1998 (Financial Times 1998). Property prices plummeted, and residential land prices declined by 40% to 50%. In October 1998, the Nikkei stock market index reached a 13-year low, and correspondingly, the paper wealth of the average person shrank. Investment spending also appeared to be weakening, and unemployment increased to the unprecedented level of 3.9%, equivalent to approximately 8% to 10% if calculated by North American standards (The Economist 1998e). This discrepancy is explained by Japanese companies’ reluctance to release staff, which then remains “unemployed” within corporations. The Bank of Japan's October 1998 Tankan Survey of business confidence pointed to a further severe slump in business confidence; the key index of business sentiment among large manufacturers slid from negative 34 to negative 51 (Wood 1995).
Whereas once its economic performance invited admiration (well-deserved, if at times overstated), Japan now invokes despair as it fails to escape from its economic slump, falls short in its ability to reform its shaky politics and corrupt bureaucracy, and flunks the leadership test in failing to guide East Asia out of economic peril. Yet, to outsiders, the depth of the problem is not immediately apparent. There is no obvious sign in Tokyo or any of the other big Japanese cities of the boarded-up shops or streets full of beggars that were typical in North American and European cities during the recessions there in the early 1990s. Japan still appears affluent; its living standards are high, and its unemployment, though rising, is confinable (The Economist 1998c). The onset of the recession, however, along with a volatile yen and changes in world markets, is effecting less visible changes, such as the structure of management and employers’ diminishing obligations to employees (Takahashi 1997). An example of this is Sony's announcement on March 9, 1999, to restructure and eliminate 17,000 jobs.
The Japanese economy has been the envy of the world and its financial markets the source of spectacular wealth. Countries once were scrambling for Japanese investment. Much of that investment poured into North America to buy bonds, property, and companies and to build factories for Japanese manufacturers that were reinventing entire industries. Foreigners wanting to discover how things were done flocked to Japan, where the firms were studied as models of efficiency and innovation, and their ideas of employee involvement, quality control, and design were copied around the world (The Economist 1998d). Now, in a changed climate, even the chairman of Sony has warned that Japan's economy is on the brink of a collapse that could cause a worldwide recession (The Economist 1998a).
Few foreigners travel to Japan currently in search of answers. Instead, they come from Washington, DC, Brussels, and other capitals to prod the Japanese government into reviving its failing economy. The foreigners cannot understand why paralysis is so widespread and so entrenched. Their worry is that Japan's sluggishness threatens to not only plunge East Asia into even deeper financial turmoil, but also drag down a large part of the world's economy with it (The Economist 1998d).
What is often misunderstood is that almost half of Japan's industrial output still comes from small and mid-sized manufacturers—some 800,000 small operations in which much of the work is often by hand in small workshops that line suburban back streets. Thornton (1998) maintains that many of these small suppliers are battling for survival. They are struggling for bank credit, trying to cope with stagnant domestic demand, and crumbling under pressure from big corporate customers to cut their prices.
In dealing with the “bubble burst,” then-Prime Minister Hashimoto resolved to boost the economy, but for much of his tenure, he failed to mention any specific measures. Under his leadership, the government remained noncommittal about whether to concentrate on stimulating the economy or adhere to a policy of austerity. When Hashimoto did act, he was overambitious. He initiated a “Big Bang” initiative for reforming and deregulating the country's finance, securities, and insurance industries. Japan's Big Bang really got underway on April 1, 1998, when a revision of the Foreign Exchange Law went into effect (Jameson 1997). Seemingly, without pain there can be no gain, and the downside has been bank failures and bankruptcies of life insurers and securities companies (Focus Japan 1998). Although the reforms were overdue, The Economist (1998d) considered Hashimoto's program too ambitious, insofar as he embarked on too many initiatives at one time. Each sector required the full-time attention of the government.
In his policy speech of 1998, Hashimoto's position was to maintain a stance of fiscal reconsolidation while trying to boost consumption. His apparent indecision deepened general distrust of the administration, as international markets tired of his lip service and that of other Japanese politicians (Aita and Koseki 1998). As a result, on July 13, 1998, Hashimoto resigned, replaced by Keizo Obuchi.
The Economic Planning Agency in Japan allegedly concealed the opinions of some of its panel members that the economy had entered a recession in May 1997 (Japan Times 1998). By October 1998, the Nikkei had reverted to January 1986 levels (Abrahams 1998). The banks’ problems were exacerbated further as the index dropped 2000 points below 15,000, that is, 2000 points below the level at which they incurred losses on their stock portfolios. It was clear that Japan, in 1998, was in the grip of a severe credit crunch.
Senior executives interviewed in 1995 in the course of this research revealed that Japanese banks were adopting an aggressive approach and offering multimillion dollar loans on the strength of their published balance sheets. By 1998, however, it was a different story. Strapped for capital and carrying bad debts equivalent to approximately 30% of the country's gross domestic product (The Economist 1998e), Japan's beleaguered banks were reluctant to lend to any company that had the slightest hint of risk. Unfortunately, the effects of this were felt mainly by smallish, domestically oriented concerns. With slowing exports and stagnant domestic spending, this became a matter of disquiet.
Reduced imports arising from the weakness of the economy had increased the current account surplus, which attracted criticism from overseas that the government was not doing enough to help Asian economies out of their difficulties. In response, the government announced in April 1998 the largest fiscal stimulus ever, amounting to ¥16.7 trillion, 12.3 trillion of which was reported to be new money (Barclays Economic Review 1998). Closer examination of the impressive-sounding stimulus package revealed that only about half of it was new money (The Economist 1998a). On April 3, Moody's, the leading international credit rating agency, questioned whether Japan deserved its top credit rating (The Economist 1998b). By October, the new government decided to boost spending by issuing ¥30,000 shopping vouchers, valid for a limited time period, to each of the 125 million people in the population. The government also introduced special holidays, “Happy Mondays,” to encourage people to go to stores to spend the vouchers (Abrahams 1998). In the same month, the Japanese government's proposal to use ¥67 trillion of public money to purchase the banks’ bad debts and reorganize the banking system was met with a collective sigh of relief from around the world.
Competing in Japan
Although the Japanese market traditionally is considered obstructive and difficult to penetrate, experts on Japan have shown this is misleading. For example, Goodnow and Kosenko (1993) identify six strategies that have been particularly successful for North American companies. According to Yoshihara (1991), thriving foreign-affiliated companies (FACs) exhibit several success factors, including a management philosophy that holds true at the international level, high technological capabilities, and acceptance of the Japanese subsidiary as a strategic base. Other studies have pointed to U.S. and European multinational corporations (MNCs) that possess these qualities (Gleckman 1996; Guild, Shill, and Yamaguchi 1996; Sweetman 1996).
Allen (1994) maintains that if a company can understand the Japanese market and play by the rules, it will succeed in Japan. I (Reid 1995a) have presented evidence to show not only that foreign companies can succeed, but that they have developed leadership positions in the Japanese consumer products market. Hirsh (1991), however, stresses that it is only companies competing in the nonstrategic (for Japan) sectors that have been allowed to succeed.
The question is whether the success factors that work for Japanese companies also might benefit FACs (Abegglen and Stalk 1985). Porter (1990) maintains that, because Japanese companies compete ferociously at home, their abilities to compete globally are fine-tuned. In congruence, Yip (1996) argues that the use of a globally integrated strategy provides an additional explanation for Japanese success. In arguing that Japan should be regarded as a strategic base for FACs, Jones (1990) urges FACs to modify their headquarters and shift appropriate parts of their head office operations to Japan to force top corporate management to understand Japan from close up. The challenge for FACs and their parent companies, Jones maintains, lies in harnessing global strength to compete effectively in Japan, which would necessitate changing the organization, both outside and inside Japan. This begs a further question: Is the experience gained by foreign companies that compete successfully in Japan of benefit in other markets?
A select number of foreign players have become established leaders in the Japanese market. Coca-Cola, for example, generates 30% of its profits from Japan. Alfred Dunhill makes 70% of its worldwide sales to Japanese people (Reid 1995b). IBM employs 20,000 people in what is the world's second-largest information technology market. Ubiquitous MNCs, such as Procter & Gamble and Unilever (it maintains), each command approximately 13% of the highly competitive hair care market, achieved at the expense of formidable Japanese competitors such as Kao and Kanebo.
Prior to the bursting of the Japanese bubble, the prerequisites for success in the Japanese market were beginning to become clear. But, as Johansson and Hirano (1996) illustrate, in post-bubble Japan, the business environment has changed and the rules for doing business have altered radically. Notwithstanding, Johansson and Hirano (1996) contend that corrections of this ilk have a positive side and argue that the changing situation in the Japanese market has opened new opportunities for Western companies. This study sets out to examine the changes in the business environment arising from the bursting of the bubble and the impact of these changes on FACs.
Method
The fieldwork carried out in Japan involved 58 personal interviews with executives of 52 successful FACs. These firms, primarily consumer product-oriented and recognizable household brand names, are listed in the Appendix. The research, using a Grounded Theory (GT) approach, studied a representative sample of FACs, each of which had successfully developed a position in the Japanese consumer product market.
The GT approach is inductively derived from the study it represents; that is, it is discovered, developed, and provisionally verified through systematic data collection and analysis pertaining to the phenomenon. Thus, data collection, analysis, and theory stand in reciprocal relationships with one another. It does not begin with a theory then prove it; rather, it begins with an area of study and allows what is relevant to that area to emerge (Strauss and Corbin 1990). As yet, the GT approach is underused in the management literature. For example, a search of ABI databases in the last decade unearthed a mere 34 articles. Nevertheless, the GT methodology has been employed in organizational research by some notable authors (Linstead 1997; Martin and Turner 1986; Sarros 1992; Segev 1988; Simon 1993). Adler, Campbell, and Laurent (1989) conclude that their Western-biased approach to research in China might have yielded more results had they adopted a GT methodology.
The initial sample for this study was generated using snowball sampling. This involves gathering a sample through chain referral (Burt and Ronchi 1994; Waldorf and Biernacki 1981). Using the principle of open sampling to uncover as many potentially relevant categories as possible (Strauss and Corbin 1990), the process of selection begins with a list of foreign consumer goods companies that had successfully established a presence in Japan. The list was developed with the help of major consulting firms such as McKinsey and the Boston Consulting Group; also, major advertising agencies with offices in Tokyo, such as BBDO and McCann Erickson, were asked to name the most successful foreign players. Major multinational enterprises with long-established positions in Japan, for example, Unilever and Johnson & Johnson, also were consulted. The companies identified (N = 66) then were contacted by telephone and invited to participate in the study. As mentioned previously, the executives of 52 companies agreed.
Consideration was given to the assessment of the experience of companies that had failed or made dramatic mistakes. For obvious reasons, outright failures ceased to exist and were difficult to track, though a record was made of some names of executives who had left Japan and might have had experience to share. However, none of the companies interviewed represented pure successes; most had experienced their share of errors over the years.
The individual interviews, lasting on average approximately two hours, were conducted across a range of executive groups: chief executive officers (41), vice presidents (15), and other senior representatives (2). At the end of each interview, respondents were asked to suggest other FACs that, to their knowledge, were achieving success in Japan. As the interviewing program proceeded, it became clear from the extent of duplication of the suggestions received which of the FACs were viewed as the major success stories.
The data were collected in two phases: a first phase during the latter part of 1990, with follow-up by telephone and fax continuing through 1991–1992, then, to examine longitudinal issues, a second phase of 24 interviews in 1995. These second phase interviewees were selected according to the principles of theoretical sampling, “sampling on the basis of concepts that have relevance to the evolving theory” (Strauss and Corbin 1990, p. 176). To keep the research up-to-date, a telephone follow-up was made in 1996. During this second (1995–1996) phase, some of the original companies (1990 fieldwork) were reinterviewed, and some technologically intensive companies were added. In some cases, the same people were occupying the same positions, whereas in others, their replacements were interviewed. The emerging constructs were found to be stable from 1995 to 1996.
The fieldwork followed a list of topics and themes derived from Figure 1 but was not confined to them so that “GT wisdom” (Bailey 1987; Glaser and Strauss 1967) could surface. That is, the study was not limited by a priori hypotheses; rather, the data were allowed to emerge according to their perceived importance by the interviewees.
Issues Probed
The list of topics was committed to memory, and each interviewee was asked the same questions in an identical fashion. However, the sequence was allowed to vary to facilitate what was constructed as a conversational interaction. The interviewees were probed on the difficulties involved in marketing in Japan, thus enabling identification of specific differences in contrast to other markets. Although respondents were allowed to range broadly in their conversion, coverage of key topics was ensured. All interviews were taped; in some cases, company documents were provided for subsequent analysis. Some interviewees were agreeable to being quoted. Those who refused to be quoted were given neutral attributions in the analysis of data.
I transcribed the tape recordings and, in so doing, reviewed the contents of the interviews several times. In this way, not only was my memory refreshed, but I achieved an in-depth contextual understanding of the issues. The data were then analyzed qualitatively with NUD*IST (Nonnumerical Data Indexing Search and Theorizing). After reviewing the data, I generated a framework that was cross-referenced to the context of the interview.
1990–1996 Pre- and Post-Bubble: A Changed Situation
Key themes that emerged from the data on the Japanese business environment, specifically on the collapse of prices and distribution, are now presented. These are supplemented by a framework, distilled from my previous article (Reid 1995b), which is used to compare and contrast the pre- and post-bubble situations. Several quotations from senior executives, based on the 1995 fieldwork, are offered in support. The framework, represented by italicized summaries of the key elements from my previous article (Reid 1995b), is based on the following topics:
the Japanese business environment,
radical consumers,
heritage,
hedonism,
consumer interest criteria,
product churning behavior,
radical opportunities,
ferocious competitive standards, and
the need to sharpen marketing skills.
Given that the GT approach yields different amounts of insight, depending on what emerges, the sections on the pre- and post-bubble situations are of varying length. Specifically, changes in the Japanese business environment are dealt with in more detail because of their underlying significance for changes in other areas. An analysis of consumer interest criteria is generic to a discussion of market changes, and this topic is tackled in greater depth than the other topics in the framework.
The Japanese Business Environment
Foreign companies in Japan have learned that the primary obstacles to success are not invisible trade barriers but rather the high cost of operating in Japan and the extreme competitiveness of the market (Reid 1995b).
Figure 2 depicts the post-bubble sea change in consumer values. Essentially, the post-bubble environment reveals an increase in pessimism. The collapse of the property and stock markets results in a sharp reduction of paper wealth. As corporate entertaining budgets are cut, Japanese men compensate for the loss of their drinking money by raiding the housekeeping budgets, which results in parsimonious buying behavior.
Influences on Consumer Values
In the 1995–96 interviews, CEOs of FACs cited the new price consciousness among consumers and the consequent price destruction in all business sectors as the most significant changes arising from the bursting of the bubble. They have emerged as a result of both company and consumer responses to the new climate (Figure 2).
Personal care companies, such as Bristol Myers, L'Oreal, Nippon Lever, and Procter & Gamble, typify the foreign companies that experienced a collapse of the prices their products commanded at retail levels. They encountered year-on-year manufacturing level price reductions of approximately 5%. At the retail level, large pump packs of shampoo, the primary packaging unit, in hot spots at the front of stores typically were priced at ¥698 in 1994, a year later at ¥598, and in 1996 were down to ¥498. Premium whisky brands, such as Chivas Regal, experienced price declines from ¥4,500 down to ¥2,000 in selective outlets, a general experience in the consumer product sector. The managing director, personal care products, of Nippon Lever made the following assessment in 1995:
Typically, we are experiencing 5% price declines. It varies, some sectors are less, and some are more. I would say the sectors where it's less are probably the more fashionable sectors. And in the more European sectors, products like hair styling items, we experienced relatively little decline. But look at detergents products, we have experienced quite substantial price declines.
The impact of price cutting on L'Oreal, for example, was typical of that experienced by companies that had developed a market position predicated on premium pricing. Supermarkets contained a series of products, among which there would be subgroups of more expensive products. Foreign manufacturers used to be able to achieve impact with their shelving positions while establishing price points higher than local suppliers’.
Senior executives of L'Oreal have watched significant declines in the prices of L'Oreal products in several sectors between 1994 and 1996. The post-bubble market is characterized by a shift to lower prices, larger packaging formats, and smaller margins; yet, media spending is increasing. The bursting of the price bubble has accelerated retailer discounting, which leaves those companies with high margin brands, such as L'Oreal, especially vulnerable as their brands are increasingly discounted. It is in this context of price collapse that L'Oreal and others similar to it must rise to the challenge to survive in the market.
From a consumer's perspective, the coupling of falling prices with the fear of redundancy suggests postponing purchasing. The ramifications of this deflationary behavior are far-reaching. For example, radical changes are occurring in the wholesaler and retail sectors. (See Figure 3 for a conceptualization of the post-bubble changes in the Japanese business environment.)
Implications for a Competitive Strategy
Distribution
Unlike the system in the West, where manufacturers tend to supply large retailers directly, deliveries in Japan are made to retailers through wholesalers. Aggressive wholesalers are now on the acquisition trail, swallowing up less resilient concerns to expand their coverage while increasing their concentration. Among the interviewees, some major manufacturers, working with more than 1000 wholesalers, are attempting to reduce the numbers of tiers in their channels, as well as the absolute number of wholesalers through which they work.
Discounting
Interviewees from McKinsey estimate that, by the year 2000, discount operations that sell both private brands and parallel imports will increase their share of the household product markets by 37% to 60%. For example, the success of camera equipment discounters has eliminated the category from department stores. Mom-and-pop stores, once considered an extension of the social security system, are being replaced by convenience stores. Chains of outlets, such as Lawson and 7–11, are proliferating, and gaining distribution in these outlets is now a prerequisite for the success of consumer products.
Return on Investment
Many retailers, interviewees maintain, are focused on return on investment (ROI). Previously, they were preoccupied with market share by volume and, in that pursuit, disregarded the cost of maintaining high inventories composed of a multiplicity of brands. Now, these same retailers are appraising commercial opportunities through a different lens, one that focuses on return per square foot. Inventory turnover is now a major issue, whereas it previously was not. Point-of-sale terminals and electronic data interchange are being speedily introduced. Many Japanese retailers are aware of what has been sold in the last two hours. Major retailers are linking into manufacturers’ computer systems and are able to trigger automatic stock replenishment. A rather limited usage of standard bar codes is hampering the process, but when the use of bar codes becomes widespread, as is inevitable, prices should be reduced by up to 20%.
Cheaper and Faster
With consumers’ new value-driven propensity, there is a reduction in shopping purely as a mode of entertainment. Many consumers are prepared to forgo service, providing they save money, hence, the growth of large low-service outlets such as Toys ‘R Us. Japanese consumers, similar to consumers elsewhere, want things faster. This has implications for many companies and their brand strategies. For example, Levi-Strauss Japan typically offered its product in one leg length and expected the consumer to wait 30 minutes while the alteration was made in the shop. Levi's competitor Eddie Bauer meets the speed-of-service need by offering a comprehensive variety of styles and sizes. Levi's president now recognizes that its customers have more immediate expectations, to choose the right leg length and be able to complete the purchase in less than 5 minutes:
So to speed up the difference between 30 minutes and 5 minutes … to some people probably still isn't much. But to you and me and to a lot of our consumers it's 25 minutes too long. Then look at what that does to retail space; they [retailers] are not set up for carrying two or three leg lengths because they are carrying too many brands. So, the decision that many retailers are wrestling with now is “Do I keep several brands of jeans or do I figure which ones are providing the best return in terms of sales per square foot, dump the rest and maximize the sales of those few.”
Vertical Restructuring
Retailers are attempting to improve ROI as well as stock turnover, yet maintain an increasing number of sizes and variations, which is inevitably leading to the exclusion of less popular brands and an increasing focus on so-called “power brands.” This, in turn, may provide additional thrust for the vertical integration of operations such as Levi-Strauss and Eddie Bauer into retailing. Levi-Strauss already owns and operates 2000 stores internationally, and more are being considered for Japan.
International Sourcing
Downward spiraling prices are affecting the arena of distribution severely. In particular, they have encouraged international sourcing. What happens when all retailers can buy at the lowest available price? International sourcing by supermarket chains now poses a competitive threat to those Japanese manufacturers that are dependent on high-cost structures. Conversely, it presents opportunities for those that have international linkages. In this respect, indigenous suppliers, focused on the Japanese market, are likely to be more threatened than FACs that, by definition, have international connections.
Radical Consumers
Japanese consumers sample and adopt new, and sometimes eccentric, products more readily than Western counterparts (Reid 1995b).
Japanese society imposes specific role definitions on men and women. Traditionally, the male household head would leave for work early in the morning, commute to work, then spend time after work drinking and eating with his colleagues. However, interviewees assert that this is beginning to change. Corporate entertaining has been cut back drastically, causing many men to return home to their families early in the evenings. Since 1990, one of the most acute changes in lifestyle is that families are spending more time together.
This shift does not nurture radical consumption behavior. Indeed, the reverse is true. What has happened is that there has been some rebalancing between work and leisure. There is evidence of a new sense of chore sharing between men and women and a slight move from “groupism” to individuality. There is convergence toward values that are vaguely Western. Overall, however, the result is conservative rather than radical.
Heritage
Because of cramped living conditions in Japanese cities, coupled with a heritage of concern for aesthetics, the Japanese consumer is a key target for luxury designer items (Reid 1995b).
Japan for a long time has been a key market for foreign luxury brand producers. Interviewees maintain this is because Japanese use the products as compensation for living in cramped and otherwise parsimonious conditions.
Given consumers’ newfound concern for value for money, the post-bubble climate might mediate against designer products. However, this is not the case. Major labels, such as Chanel, continue to forge ahead. The luxury goods supplier LMVH had sales rise by 8% in 1998, following a 16% surge in 1997. Whereas Tiffany's Asian sales, excluding Japan, declined by 14% in the first nine months of 1998, they increased by 23% in Japan. Major international luxury brands are investing in further growth; Christian Dior, Lanvin, and Mont Blanc recently opened boutiques in Ginza. Seemingly, the office women who previously made shopping trips to Hong Kong are forgoing these breaks and staying at home but buying their designer bags in Japan (The Economist 1999). Some designer labels even have begun to appear in discount outlets. It seems that during the high-yen era, some of the discount chains, taking advantage of employees’ tax-free allowances, sent their employees on buying sprees to European fashion houses such as Chanel, Louis Vuitton, and the like in order to retail the designer wares through their outlets.
Hedonism
Japanese consumers exhibit a great propensity for foreign travel and out-of-home experiences such as eating and drinking (Reid 1995b).
The average Japanese housewife, as Tajima (1989) notes, has had two wallets from which to pick, her own and her husband's. She controls them both. On receiving her husband's net salary, she allocates “pocket money” to meet an agreed set of expenditures. So-called “salarymen” husbands previously were able to supplement their allowances by claiming recompense for drinks, dinners, and taxis home as a consequence of the “onerous” entertainment practices in which they partook. According to research conducted by Coca-Cola Japan, the increased tendency of men to dine at home has imposed an additional burden on the housekeeping budget. At the same time, husbands’ need for more “pocket money” to offset the loss of expense-account living has further increased housekeeping expenses. As the vice president of Coca-Cola Japan put it,
Cutbacks in corporate entertainment are driving different behavior inside the home. There was a trend to more eating out and more fast-food restaurants but that is changing again. Now more people are eating at home.
Hedonism is being diminished somewhat. Japanese consumers are looking more toward their homes. This is the trend that is driving the popularity of do-it-yourself stores, which now abound in Tokyo.
Consumer Interest Criteria
A preoccupation with travel and an obsession with quality translate into preference for foreign designer brands and opportunities for premium pricing (Reid 1995b).
Japanese consumers, since the economy flourished, have been considered rich in comparison with their Western counterparts (JETRO 1996). However, these purported rich consumers, if living in the cities, normally experience restricted living space and, interviewees maintain, enjoy a doubtful quality of life. There was general agreement among those senior executives interviewed that, to offset these disadvantages, Japanese consumers maintain an obsessive interest in newness by indulging themselves with the consumption of new products, especially designer brands.
The consumers’ latest concern is for value. They regard quality as an unspoken entitlement and are unequivocal about the need for product performance that satisfies their new price/value equation. This has resulted in closer examination of functional claims and less reliance on buying brands merely for the sake of the brand name. The increasing popularity of private brands is partial testament to this. Many retailers are working closely with both foreign and local manufacturers to develop private brands that can be sold at lower prices but that retain consumer cachet. As the CEO of Levi-Strauss explained,
People are looking at things in terms of utility and value more often. “What do I need this for, what will it do for me, is it easy to look after, is it flexible?” They are looking less slavishly at designer brand names…. The price/value equation is much more realistically applied.
Another interviewee, James Abegglen, Chairman of Gemini Consulting and author of Kaisha: The Japanese Corporation, noted:
It has changed from where Japanese will pay any price for quality. Now price/value is the most important thing.
Senior executives interviewed for this study disclosed that, not only have many people forgone salary increases, usually awarded twice each year, but their bonuses, an important remuneration component, have been cut back. Moreover, in 1998, real wage rates declined at an annual rate of 1.5%. As indicated, interviewees noted that consumers were conserving their income and had entered a radically different, for Japan, value-seeking mode.
Research houses that track consumer concerns, ASI Market Research (Japan), for example, observe that consumers’ concern for quality has remained static, whereas the ranking of value for money has increased. Another research house interviewed, Infoplan, performs an annual survey of social values, attitude shifts, and consequent behavioral change. According to Infoplan's CEO,
Japanese consumers increasingly want to make smart decisions and aren't going to pay premiums merely because they want the badge of success. But they don't necessarily want cheap, cheap.
Research conducted by the hugely successful Coca-Cola (it generates more profits in Japan than in the United States) and qualitative research by Kellogg's support the same theme. Thus, though as a result of this price consciousness, some opportunities for premium pricing are lessened, the opportunities for value-for-money propositions are increased. Similar to other companies in Japan, Coca-Cola has learned that it also must deliver value to the consumer. Its research showed that though the Coca-Cola brand name emerged as favorite in many dimensions—perceived as the “favorite brand,” “best taste,” and “the brand consumers most want to be associated with”—there was a disparity between the high rating and consumers’ purchasing behavior. Consumers often chose cheaper imports.
Coca-Cola Japan is so committed to consumer research that it conducts several focus groups each day and uses the input from these sessions to direct its product positioning and development efforts. For example, after nerve gas attacks in the Tokyo subway in 1995, its research demonstrated that consumers had become more concerned about purity. It responded to this by backing away from image advertising. It adopted, instead, an informative approach that made statements about the freshness of Coca-Cola, how it was manufactured locally in Japan, and did not have time to deteriorate, as would happen if transported by ship. In this way, Coca-Cola operationalized value in terms of freshness, asserted its position, and retorted at parallel importing practices.
Product Churning
Japanese companies churn out new products irrespective, seemingly, of market and financial rationale (Reid 1995b).
Interviewees in 1990 maintained that Japanese companies, obsessed by market share, tended to be highly committed to winning business wars. A common practice, detailed elsewhere by Jones and Ohbora (1990) was “product churning,” seemingly irrespective of the relationship between costs and gains.
It was also generally accepted among the 1990 interviewees that Japan's fast pace of change was a significant factor in the business environment. Many people argue that, in Japan, everything happens faster than in any other country. A market leader can rapidly—within months—almost cease to exist. It is a market in which successes soon become history. For example, in the late 1980s and early 1990s, Nippon Lever shocked its Japanese competitors, Kao in particular, by seizing more than 10% of the shampoo market with its Timotei brand. Yet, within four years, that brand had all but disappeared from the shelves.
There is a tendency to follow competition and emulate what competitors do, irrespective of economic rationale. The managing director of Nippon Lever highlighted this trait:
In this market you can be sure if you have got a bright idea, it is copied within a year, and within two years everybody has done it and, therefore, you very quickly lose your novelty. Unless you keep improving it, you could find quickly that you are at the end of the road. So I would say those are the two main lessons out of the Timotei experience.
There is a slight reduction in product churning activity in the post-bubble era, though the interviewees maintain that, with a zero growth rate, the environment has become much less predictable. Consequently, the style of competition has changed. According to several of the executives interviewed, one-time growth industries are operating similarly to mature industries. The managing director of Infoplan gave the following illustration:
It may show maturity in a particular industry, in that brands are becoming more important and there is more concentration on line extensions and product reformulation. I hypothesize that, for economic considerations, there are fewer new products launched. I also hypothesize there's less in reality because the market is more mature.
Radical Opportunities
Major foreign players have uncharacteristic Japanese product portfolios. Opportunities for radically different products abound (Reid 1995b).
Coca-Cola's product mix in Japan is quite unlike anything that exists elsewhere in its international network. Its major seller in Japan is not cola; it is mainly focused on coffees and teas. These products are often dispensed in cans through vending machines, hot in winter and cold in summer. Although not the first into the market, it was able to use its distribution clout to dominate the market for canned coffee. It has made a successful strategy out of being second. But in the post-bubble era, in an arena that still has 1200 new product introductions in any single year, Coca-Cola, of necessity, has become committed to a more aggressive stance in staking out its leadership position.
Functionality now plays a big part in the post-bubble consumers’ evaluative process. According to Coca-Cola, its consumers are becoming smarter and challenging imagery-based claims. Yet this drive for functionality can register in many ways. For example, Coca-Cola consumers that initially switched to cheaper imported colas eventually began to examine their construct of value and reverted to the major brand. Apparently, in this sector, consumers weigh quality, dependability, and reliability as well as price and are inclined to balance these elements.
Ferocious Competitive Standards
A presence in Japan is necessary to maintain competitive advantage worldwide (Reid 1995b).
One of the keys to success for FACs has long been believed to become a Japanese insider. Several foreign companies, for example, Kodak, when interviewed in 1990, claimed that “to become part of the Japanese scientific and technological community” was its primary objective for being in Japan. When reinterviewed in 1995, Kodak had “let a number of people go,” including newly hired graduates and, as a result, had suffered a major credibility setback. The implications of balancing the return to shareholders with the costs of maintaining a competitive edge in Japan are difficult to weigh.
Japan, with its fast-paced business, should be a good training ground for company executives. Abegglen, the Chairman of Gemini, described the changing trends:
As a generalization, through 1960–70, people sent to Japan were of no great distinction, for the most part. I don't think Japan was seen as a training ground in any sense. In the late 1970s, as Japan moved up very sharply and rather suddenly on the agenda of international companies, there was quite an effort made to move potential top management into Japan as part of the training exercise.
The notion of establishing a Japanese presence fails to win general appreciation because of the high operating costs. Several interviewees believe that the costs of doing business in post-bubble Japan are so great and the competitive environment so tough that they overpower the benefits that might be derived from using Japan as a training ground. Some make the point that the United States is also a highly competitive market and a much cheaper location for international executive postings. There is evidence that FACs in Japan are hiring younger, single-status executives to contain mushrooming costs. So, instead of adding to the expertise of senior executives, the level of expertise among the gaijin contingent has declined throughout the 1990s.
Need to Sharpen Marketing Skills
The pace of movement in Japan provokes a sharpening of marketing skills (Reid 1995b).
Successful players in the Japanese market typically require the benefits of scale to contain costs. The absence of critical mass leaves companies vulnerable to their Japanese competitors, which are highly developed predators. For example, according to the president of Bristol Myers,
In the consumer products arena, a sales force of less than 100 will suit only a niche player. Once they sense weakness, Japanese competitors prey mercilessly on the vulnerable party by investing in new products, boosting advertising, and other combative marketing initiatives.
Many interviewees claim that the major players in key business sectors are becoming stronger, generating greater cash flows while strengthening their research and development and product development efforts. Simultaneously, weaker players are being squeezed. Some key Japanese sectors are becoming more concentrated. For example, the top three Japanese manufacturers in the personal care sector, Shiseido, Kao, and Kanebo, now have a combined market share of 40% of their domestic market—much more, according to Nippon Lever, than the top three international players would command on the world stage.
With respect to sharpening marketing skills, there are lessons to be learned from Japanese marketers, an issue brought into sharp relief by the president of Bristol Myers:
My marketers here attend focus groups every night of the week. Every night of the week sitting watching the groups, that's how they get close to the consumer. When I was in the U.K., I would do it once or twice but usually I would await the report. To do that here you would be despised.
Conclusions
Having reviewed the “moment-in-time” market changes, induced as a result of the collapse of the bubble, it is clear that several fundamental changes in the business environment have occurred (Figure 3).
Prices are deflating in all sectors. Consumers, as a result, are delaying purchasing. They have become more balanced in their orientation and weigh value more heavily than they did previously. Consumers shop more rationally and, consequently, are less likely to pay premium prices. Competition, responsive as ever, remains fierce. Despite the downturn, media expenditures remain high, imposing high cost burdens on all players. Those FACs that are attempting to develop market positions are specially challenged because they are squeezed by high costs and increasingly price-conscious consumer behavior (see Table 1).
Summary of Factors, Changes, and Implications
The new climate has spurred changes in the distribution system. Less competitive wholesalers are being swallowed by more aggressive concerns. The demise of mom-and-pop stores has been hastened by the ascendancy of price-competitive convenience chains. Retailers are more focused on profitability and adopting newer technologies that will help depress retail prices further.
Some reduction in product churning among Japanese companies has occurred. Products in the post-bubble era must have a real consumer-based justification to survive. Evidence of this is the premium put on speed of service. Also, keener pricing is stimulating international sourcing, which advantages those companies with international linkages, FACs in particular. This trend to international sourcing and parallel importing includes designer labels, which are also discounted.
The tendency of consumers to buy cheaper products is a challenge for FACs. Wherever possible, they must find opportunities to reengineer the positioning of their brands creatively in ways that justify price premiums. Brand propositions are required that are capable of working responsively in environments in which discounting intrudes, fashions swing, and consumer mores shift radically. There is a need for big brand ideas that not only capitalize on the consumers’ drive for greater value, but also meet their requirement for quality.
Japanese competitors were regarded as unsophisticated marketers. What they lacked in terms of marketing sophistry, if ever true, is now compensated for by their dedication to gaining an in-depth understanding of their consumers.
Japan's post-bubble experience is likely to result in several pervasive changes. Many elements of its previous success paradigm will be reappraised, if not discarded. Newfound wisdom from the price destruction experience will permeate many aspects of business and trading behavior. Japanese companies will negotiate more stringent terms with international suppliers, making Japan an even tougher market in which to compete.
On the output side, Japanese products are likely to become even more competitive as Japanese companies become leaner and meaner. This is especially true in the likely scenario of a weakening yen. For FACs, such an environment poses a formidable challenge but one that will be ultimately to their benefit should they succeed in applying the resultant expertise to their operations elsewhere.