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Professor Paul Herbig Japanese marketing lecture series Japanese Marketing In 1982, Philip Kotler and Liam Fahey

wrote The World's Champion Marketers: The Japanese. At that time, the Japanese had almost conquered the automotive industry, had finished annexing the consumer electronics industry, were on the upward path toward securing a dominant share in semiconductors and several other industries, and, in general, seemed invincible. Record continuous Japanese trade surpluses of unheard of proportion have existed since 1980. But something else happened en route to the slaughter. Japan Inc. is not as invincible as the world thought it was. The Japanese, too, can suffer from strategic overstretch. Peter Drucker (1981) once said, When the rest of the world was only talking about marketing, the Japanese were doing it. He meant that the Japanese came to the United States to study marketing principles and philosophy and then applied the textbook principles with unparalleled success. Ezra Vogel (1985) in JAPAN AS NUMBER ONE; Kotler (with Fahey and Jatusripitak in 1985) again in THE NEW COMPETITION, and Boyd DeMente (1990) in THE KATA FACTOR all discuss Japan as the next economic superpower, overtaking the United States, with basically Japanese marketing prowess as the major reason for Japans success. What most of these prophets failed to realize, did not properly factor into their equations, or chose to ignore is that when dealing in foreign markets, Japanese corporations, especially in the United States and Europe, overwhelmingly allow nationals to conceive and implement local marketing programs. That is, the success of Japanese marketing in the West, particularly the United States, is derived from American marketing experts working for Japanese subsidiaries in conjunction with American advertising agencies casting their usual American marketing magic. Professor Kotler (1982) admitted that the Japanese hire American industry specialists, consultants and executives to help them figure out how to enter a market and hire American executives to manage U.S. sales Japanese marketing strategy has been formulated not by the Japanese but by the Americans. Where then is the superior Japanese marketing? By extrapolation, the reason the Japanese have succeeded is because they have had a hands-off policy and have let the nationals do marketing the way it needs to be done in each particular country. Perhaps it is not their marketing skills but their cultural sensitivity skills that ought to be boasted about: understanding that people and cultures differ and that to succeed one should let the nationals who understand their own culture market the product the way it must be marketed to succeed in their own marketplace. The Japanese marketing strategy revolves around their management of product market evolution. They choose and sequence the markets they decide to enter, the products they decide to produce, and the marketing tactics they decide to adopt for the market segment. However, the most important factors in their international marketing success has been their acceptance and understanding of marketing principles, which they then apply to the markets they decide to enter. At the time Professors Kotler and Fahey wrote their article, the world indeed looked bleak for American industry. The Japanese dominated automobiles, motorcycles, watches, cameras, optical instruments, steel, shipbuilding, pianos, zippers, radios, televisions, video recorders, and hand calculators and were moving into position for the kill in other significant industries: computers, construction equipment, chemicals, pharmaceuticals, and machine tools. In less than forty years, after beginning with a burnt-out relic of a country in 1945, Japan had achieved global market leadership in industries thought to be dominated by impregnable Western giants. What has happened since? The doom and gloom so often predicted never occurred. The American automakers rival their Japanese counterparts in quality and surpass them in affordability. Japanese engineers are once again touring American factories; Fords factory in Georgia, which manufactures Mercury Sable and Ford Taurus, is on everyones number one list. In a marked turnaround that would have been unthinkable even five years ago, Ford was recently asked by Japanese banks to run Mazda. The computer industry is now focused on personal computers, telecommunications, and electronic databases. The big names are not Toshiba or Hitachi or Fujitsu, but Microsoft, Intel, Compaq, Dell, and Apple. In 1982, all these companies were small and inconsequential; several did not even exist then. The Japanese marketplace, although still dominated by NEC, finds Apple and Compaq picking up share every year. NEC, without an IBM compatible, has turned to Dell to help with its marketing strategy. American companies dominate the software industry. Although Japan still remains dominant in semiconductors, that industry has become a commodity business with little, if any, margin, consistently under pressure from Korean and Taiwanese chipmakers. Meanwhile, the high-value-added portion of the computer industry includes microprocessors (Intel), operating systems (Microsoft), and applications programs, all dominated by American companies. In the late 1980s, it was feared that Japan would dominate the next generation of television signals, the HDTV (highdensity television). Japan had a workable analogue system, which in typical Japanese fashion was an improvement of current systems. Meanwhile, the United States elected to go to digital signals because the quality and data throughput obtainable from such digital signals put analogue systems to shame; it is like comparing the Concorde to the first Wright brothers plane. Japanese companies are now stuck between a system that they understand, have conceived, and have agreement upon, but that is already obsolete, and the leapfrog, superior technology developed by the United States. True, Japan still dominates in consumer electronics: televisions, camcorders, videocassette recorders, and radios. But the software (movies and music) is being developed in the United States: Hollywood is American, and even the Japanese cannot duplicate it (they can buy it, but they cannot manage it nor market it in the traditional Japanese

fashion, as Matsushita and Sony have found out at UA and Columbia; the recent sale of UA by Matsushita indicates succinctly even the invincible Japanese often make costly blunders). In consumer electronics, although still the leading manufacturers and marketers, under pressure from the lower-cost manufacturers in East Asia and other developed countries, Japanese electronic companies have moved almost all their production to Southeast Asia. Profit margins are negligible. Harley-Davidson was in its death throes in 1982. In 1995, it is not only a thriving company, but also one that year after year cannot produce sufficient product to meet the overwhelming demand. Despite increasing capacity every year between 1990 and 1995, dedicated users wait months for their new hogs. The machine tool industry may be down, but not out. American manufacturers learned from the Japanese and have excelled in productivity, quality, and state-of-the-art manufacturing, development, and research. Downsizing over the last five years has produced lean, mean, tough international competitors. The Japanese have only begun their downsizing. Caterpillar was a marked company in 1982; Komatsu had the inside track. In 1994, Caterpillar dominates the world market more than ever; even in Japan it has a strong presence. Komatsu is ever-present and still a dangerous competitor, but not immortal like it was presumed to be during the early- and mid-1980s. Chemicals and pharmaceuticals? The Japanese strategy has been to acquire small companies. Japanese market dominance? They do not even have market presence outside of Japan. Contrasting Japanese strengths and weaknesses in different market segments within industry sectors, some patterns become obvious. Japan exports middle-of-the-line ready-to-wear clothes and textile fabrics. It imports high-fashion items (from the West) and inexpensive garments from the less-developed countries. Japan exports massive quantities of inexpensive watches. It remains one of Switzerland's largest markets for fashion and jewellery timepieces. Despite having the worlds second largest pharmaceutical market, Japanese firms had made a negligible impact on international markets. Japan imports several times as many pharmaceutical products as it exports. Japan exports massive quantities of basic hand-held calculators. It imports Hewlett-Packards advanced, complex, programmable machines. Japan produces and exports large quantities of standard integrated circuits and random access memory (RAM) chips, yet it imports virtually all its microprocessors and microcomputers. The difference is that the former are hardware components, whereas the latter, although hardware, have the majority of their value added in the software (the programs). Add to this the interesting fact that if automobile and auto parts exports from Japan to the United States were excluded from the trade deficit calculations there would a trade surplus, not a deficit, it becomes obvious that Japanese strengths are thin and narrowly focused. Professor Kotler (1982) indicated that the Japanese have not yet demonstrated much marketing success in markets where major cultural differences are paramount success has been almost exclusively in product markets where the notions of function and utility are reasonably consistent across cultures. The Japanese have yet to exhibit sophisticated marketing skills and approaches in services and food products industries. American companies outperform the Japanese on pre-tax returns on equity and operating profits: Although IBM and Hitachi have roughly equivalent revenues, Hitachis profit is one-fifth that of IBM. So what is Japanese marketing? It is not that which is seen outside of Japan, at least not in its true Japanese format. The question remains, How do Japanese corporations perform marketing in Japan, to the Japanese? As the Japanese have catapulted themselves to the status of an economic power, many reasons have been given for their rapid progressionone of which is the claim that they are the worlds premier marketers. Certainly American marketers would argue this point. What is the actual role of marketing in a Japanese corporation? How well are the Japanese versed in the development and implementation of marketing strategy? Is there really a difference between marketing practices used in the West and those implemented in Japan? Are they the worlds greatest marketers? Or do they merely have a very vocal fan club doing superb public relations? And is the marketing that Americans see by Japanese companies in the United States actually representative of Japanese marketing practices in Japan? BUILDING AND PROTECTING MARKET SHARE The Japanese rule seems to be market share or die. The Japanese are very aggressive in pursuing long-term market share. Their main strategy when entering a new market is to build and secure market share rather than early profits. The Japanese are patient capitalists who will wait a decade before realizing their profits within a market. Price is a key element in the Japanese marketing mix and in the strategy to expand their market share. The Japanese use pricing to penetrate, gains, and secure market share. Their concept of pricing a product is to decide first what consumers will pay for the product and then direct engineers and designers to meet that price by pursuing the target cost of the product. When the Japanese first enter a market segment, their price starts low and remains lower than the prices of their competitors in order to gain market share. Japanese organizations use cross-subsidization of their home market as a part of their marketing strategy for their products in international markets. The Japanese maintain high prices in their home markets, but are willing to take substantial cuts in profitability in order to build or maintain market share within their international markets. Even when the Japanese have experienced periods of currency fluctuation, they cling to their hard-won market shares and do not raise dollar prices very much. The Japanese are masters at using a product proliferation strategy. They continue to produce more and different versions of a product to appeal to all end users at various income levels within their market segment. The Japanese saturate the market with their products and subsequently tie up distribution within those markets. The particular

evolving market in which they are trying to increase market share serves as the focus for the development of their products. For the Japanese, market segmentation and market sequencing provide the impetus and the direction for product development. They spot their new market opportunities through sequencing and segmentation across a large number of countries, which will allow them eventually to build a network of world markets and production locations. In addition to market segmentation and sequencing, the Japanese are flexible in choosing what competitive attack or weapon to use against their competitors. The evolution of the market helps determine to what degree they will use price, product quality, product features, service, distribution, promotion, and product line stretches to penetrate and gain larger shares of the market. The Japanese are a master at using adversarial trade as a competitive weapon against foreign competitors. The concept of adversarial trade is to gain market control by destroying the enemy or to obtain such predominance in a market that it is almost impossible for newcomers to challenge the market leader. The Japanese intend to drive the competitor out of the market segment, or industry they are pursuing by destroying their capacity to fight. This has occurred many times in the global market segments and industries the Japanese have aggressively pursued and subsequently dominated. These policies have outraged American and European companies and governmental officials. The cry of unfair trade due to adversarial trade seems to be carrying the day, as noted by the United States sanctions on Japanese luxury automobiles in June, 1995, as an attempt to force the Japanese into lowering barriers for the automotive and auto-parts industries in Japan. More of these battles can be foreseen until Japanese trade policies soften. CONCLUSIONS No doubt exists that the Japanese have performed an economic miracle within their country in a relatively short period of time. They are global market leaders in many industries, and are continuing to become a stronger competitive force as they penetrate more global markets. The cultural aspects of the Japanese, their unique business practices, and the supportive role of government policies and subsidies are a few of the factors that have enabled the economic miracle, and the resulting global leadership, to occur in Japan. However, it is the Japanese skill in marketing strategy formulation and implementation that has resulted in much of their success within global markets. The quest for the secret of Japans success has no simple single answer. It is cohesion of numerous elements into one direction and one force. It is a lack of fragmentation. It is a common goal and gambare, the emotional ingredient that is so thick one can cut it with a knife. It is a total system of people, government, business, labour, and education all working together for an understood objective. And this philosophy is multiplied over and over in successful companies that have made their mark in Europe and the United States. If one were to single out a particular factor to point to, one could focus on the philosophy of maximizing resources. The now famous just-in-time technique of manufacturing is a direct spin-off of maximizing resources. The Japanese, and Japanese firms in particular, live it in everything. The Japanese strategy revolves around their management of product market evolution. The Japanese choose and sequence the markets they decide to enter, the products they decide to produce, and the marketing tactics they decide to adopt for that market segment. Their constant acceptance, understanding, and application of marketing principles to the specific market they decide to enter have resulted in an extremely successful and powerful global leadership position. Japanese Market Research Introduction Thirty years ago, the practices of Japanese marketing research firms lagged considerably behind those of American firms because of the recency of the introduction of such practices and the Japanese business tradition. Even with the passage of time and the growing sophistication and economic power that has occurred over that period of time, Japanese firms tend to be sceptical about the Western style of market research. The Japanese approach is more intuitive. Japanese clients spend more time observing than number crunching. Japanese companies put greater faith in the information they get from channel members. They want information that is context specific and make greater use of hands-on and soft data gathering approaches. Any hard data used are generated typically from channel sources such as dealers and distributors. Japanese market research is different from that done in the West, especially in the United States. Americans collect data; the Japanese try to identify future trends. In Japan, this is often a matter of watching trendsetters in Tokyo, since Japanese consumers tend to follow the leader. Japanese companies will sell several variations of a new product to satisfy customers. Americans are more cost conscious and stick with a uniform product. Thus, Japanese marketers, lacking statistics and focus group results that tell them what consumers want, vary product characteristics instead and learn what to drop or retain from sales. Having learned beforehand, Americans can be more targeted. Whereas the Japanese cover business risks by expanding product variety, Americans expand market research. While learning from mistakes in manufacturing can be admirable, it can be folly in marketing if less expensive research techniques exist. Levi Strauss attributes much of the companys success in Japan to its allJapanese research and design department, which tracks consumer trends and then adds new designs to a continually expanding line; about 90 percent of the product line in Japan is also manufactured there. The two most important categories of market research in Japan are those concerned with product research and

market research of potential markets. The rank order for product research is comparison of competing products, new product feasibility studies, new product concept testing, consumer panels, brand name evaluation, and package design. Japanese market researchers tend to conduct consumer sales promotion studies, sales analyses, sales territory research, and sales compensation studies with greater frequency than do those in the United States. In addition, the propensity of Japanese firms to conduct research for long-range forecasting, short-range forecasting, the design of marketing information systems, the development of export strategies and the development of import strategies is greater than that of firms in the United States. As for distribution research, Japanese firms conduct more channel relationships studies, studies on the selection of wholesalers/retailers, and distribution cost studies. Japanese research firms tend to have greater numbers of full-time personnel with undergraduate degrees, particularly in economics. Thus, true to the stereotypes, Japanese firms tend to be more long-term oriented and aggressive in global trade. Since Japanese distribution channels tend to be longer and more complex than channels in the United States, the greater emphasis on distribution research confirms that Japanese channels tend to be more stable and more vertically integrated than those in the United States. Japanese market research tends to be personal-interview oriented. The Japanese tend to utilize two kinds of marketing data. Japanese managers believe that soft data obtained from visits to dealers and other channel members reflect the behaviour and intentions of real consumers. When Japanese managers use hard data (about shipments, inventory levels, and retail sales and other information that show the items actual movement through the channels), it is to compare their products to those of their competitors. They also visit channel members at both the retail and the wholesale levels to analyse any sales and distribution coverage reports, all monthly product movement records (weekly for some key stores), plant-to-wholesaler shipment figures, and syndicated turnover and shipment statistics on competitors. Senior as well as mid-level Japanese managers get involved in gathering soft data because they see the information as critical for gaining market entry and for maintaining good relationships after market entry. This hands-on gathering of data gives the managers a distinctive feel for the market, something they believe surveys or quantitative research methods cannot supply. This soft-data approach appears to lack the methodological rigor of scientific market research, but it is by no means haphazard or careless. Results can be more meaningful because managers actually observe how consumers behave in buying situations and how salespeople actually respond. The soft-data approach is popular even after a Japanese company has penetrated the channel. Frequent visits to people in the distribution channel help manufacturers resolve problems before they escalate and damage sales or relationships. Japanese managers try to track changing customer tastes closely and quickly. After analysing both hard and soft data on their channels, they make incremental changes as necessary. This approach provides them a deep and focused understanding of the marketplace and enables them to fine tune their marketing rapidly. Hence, Japanese companies rely heavily on personal observation as a means of obtaining information. When Canon cameras were losing ground to Minolta, Canon decided that its distributor was not giving adequate support. Canon did not use data from a broad survey of consumers or retailers to make the decision. It did, however, send three managers to look into the problem. Acting like customers, they would note how the cameras were displayed and how the clerks served customers; they concluded that the dealers were not enthusiastic about Canon cameras. Japanese companies learn by observation. They expect their personnel to spend time in the field talking to customers in order to keep up to date on needs. Company personnel are also expected to learn about the market firsthand and not just from some research report or sales analysis. Seiko has its watch designers spend up to half their time outside of Japan talking with distributors, retailers, and consumers. The purpose is to keep the designers fingers on the pulse of changing consumer preferences. Watching or imitating their competitors is another source of learning. If a competitor introduces a new consumer appliance, the retailers affiliated with other competitors clamour for the same product in order not to lose ground to their retail competitors. The fear of losing ground or yielding advantage to a competitor spurs copying and the Japanese tendency to play follow the leader. Another reason for the preference for personal observation and interviews over preferred Western methods such as phone or mail could be the lack of telephone usage for socializing in Japan. The cultural acceptability of the telephone is not the same in Japan as in the United States. Even among the youth, the phone is used not to chat with friends, but to arrange meetings to get together face-to-face and converse. Interpersonal sensitivity is higher in Japan as well. A greater emphasis is placed on direct, interpersonal relationships, and, as a result, the Japanese are usually hesitant to give a direct no to a personal request. Japanese companies want accurate and useful information about their markets as much as American and European companies do; they just go about it differently. Japanese executives put more faith in information they get directly from wholesalers and retailers in the distribution channels. They also track what is happening among channel members on a monthly, weekly, and sometimes even daily basis. Detailed and timely information collection and analysis are the hallmark of Japanese competition. Japanese External Trade Organization (JETRO) was initially established for the purpose of providing Japanese companies with market research information. The sogo shosha (general trading companies) provide world market intelligence sources for Japanese competitors. Japanese companies pay tremendous attention to research on what customers want. Market research for Japanese product development frequently begins in their home market. Their experience within this market provides insight into customer preferences, product deficiencies, and effective marketing strategies. These firms collect extensive market data on consumers quality preferences, expectations of product life, changing attitudes toward breakdowns and

reliability rates, and perceptions of product performance and rely heavily on this information when redesigning old models and creating new products. Japanese manufacturers tend to be well attuned to their own customers' particular needs. Service is the name of the game. Japanese companies do use the tools and techniques popular in the United States, but they trust their instincts first. Even when attitude surveys are conducted, the goal is to obtain data about the experience of actual consumers of the product and not about the attitudes of the general public. Zen has engendered distrust of the overly rational, which, in turn resulted in the development of the intuitive. The press-the-flesh or human-contact approach to obtaining marketing data, compared to the more scientific, dry approach popular in the United States, is what one would expect from the Japanese. In contrast to Western practice, Japanese executives do not give managers sole responsibility for market research. They conduct research and make decisions by consensus, and they lean toward intuitive judgment. Rarely do Japanese executives call in an outside professional, and, when they do, they often disregard the consultants report if it goes against their instincts about the best course of action. Japanese research companies use group think techniques to develop accurate market share estimates and competitive assessment information. Japanese companies want information that is context specific rather than context freethat is, data directly relevant to consumer attitudes about the product or to the way buyers have used or will use specific products rather than research results that are too remote from actual consumer behaviour to be useful. When Japanese companies do conduct surveys, they interview consumers who have actually bought or used a product. KFC (Japan) customized its American product and strategy to suit the tastes of the Japanese consumer. By using indirect Japanese market research techniques, it positioned the stores as trendy and high class, not as fast-food stores. After consulting directly with customers, French fries were substituted for mashed potatoes, the sugar content in the coleslaw was reduced and fried fish, cold corn salad, and smoked chicken were added to the menu. Dominos initial market research in Japan indicated that home delivery of pizza was not feasible. The Japanese emphasized such foods as raw fish, rice, and seaweed in their diets and dislike such pizza staples as tomato and cheese. Pizza is considered a snack food rather than a meal, which makes it difficult to justify the high prices necessary to make the home delivery business profitable. The consumers who like pizza the most are teenage girls, the segment with the least disposable income. Those most likely to pay a premium for a meal would prefer to eat out in a spacious restaurant than in their own cramped residence. Finally, Dominos guarantee of speedy delivery was perceived to be impossible in Tokyos traffic. Dominos did not give up. It made the pizzas smaller (10 and 14 inch pies rather than 12 and 16 inch versions favoured in the United States), added optional toppings preferred by the Japanese (corn, squid, and tuna), and used motor scooters (with customized roof design and Dominos logo) instead of cars to move around Tokyo. In addition, they retained the thirty-minute delivery promise by concentrating on populous, affluent neighbourhood of big cities and limited delivery radius to two kilometres. Many companies occasionally use new consumer surveys and other quantitative research tools, but senior executives never base marketing decisions primarily on the information gathered from the research. These findings merely trigger more thorough audits of the channels using soft and hard data gathering. When Japanese consumers are asked directly for their opinions about a new product being tested, they are much more reluctant to criticize the new product than are consumers in the West. To the Japanese, right and wrong are relative values. A tradition of courtesy makes for cooperative respondents, but they say things that will please the interviewer even if the statements do not give an accurate account of the subject being investigated. Pre-competitive research is carried out through research associations in which the goal is to create an engineering infrastructure as the basis for competition. To obtain cooperation among rival firms, the subject for research must be fundamental and of common interest to all participants. The resulting research efforts emphasize development of a prototype. The research association conducts studies to articulate needs of the marketplace, the results of which are shared by association members. Afterward, each competing company is on its own. FOCUS GROUPS Focus group market researchinterviewing a group rather than individualsis a well-acknowledged source of market information. The main advantage of the focus group method is that it engages respondents interactively: One respondents remark stimulates anothers thought. In the United States, focus groups are primarily composed of strangers; Americans do not hesitate to speak their minds when they do not know others and will probably never see them again. Conversely, in Japan, in a room full of strangers, the Japanese will not speak up; instead, they tend to follow more strict rules concerning when to be quiet and when to be talkative. The Japanese do not care to embarrass the presenters if they do not know the answer or to ask a question if it is of less value to the other participants; therefore, they raise few questions even when invited to do so. Instead, a successful Japanese focus group consists of friends, relatives, or a similar in-group (one with demographic homogeneity; those of equal status who know each other well); The Japanese are more likely to speak their real feelings to those they know. In such a grouping, there will be more responses, less superficial agreement and more healthy differentiation. Mixing users and non-users is not recommended when any social judgment is attached to the art of using or not using the product. The Japanese pay close attention to the relationship between people and inanimate objects. They are concerned with who owns it or what interest people have in it rather than with the thing itself. Therefore, negative comments must be not only encouraged but also pulled out by the facilitator. The Japanese do not want to upset the people who are attached to the object. They will not comment negatively if they think the facilitator represents the company making the product. Increasing the distance between the speaker and the issue helps get varied opinions from Japanese respondents. Status is important in Japan. The oldest person (male if in a

mixed group) with higher social status has the authority to speak first and more than others. Having social equals in the focus group eliminates the status problem. Unlike the format of an American focus group, where one question posed by the facilitator is followed by an average of three to five comments by different respondents, a Japanese focus group facilitators utterances are typically followed by only one or two respondent statements. In Japan, the facilitator stands in the middle, and after one respondent has answered, the facilitator must take control and ask another respondent for his or her opinion on the previous comment. The Japanese respect the group leader and place on him or her all the responsibility for directing the discussion. Often, the facilitator will get only short answers, superficial and tentative nods of the heads, or simply guttural noises from the respondents, indicating that they have understood the question, but have no particular follow-up answer to present. This is because the facilitator has posed the question in a way that is incompatible with the Japanese. The facilitator must not use an aggressive communication style. A challenge will be perceived as rude, manipulative, insincere, or simply stubborn and ignorant. Educating the participants by inviting them to express their opinions and having the facilitator be native, help solicit comments and feedback in a Japanese focus group. A tendency to conform among Japanese group members may initially suppress varying opinions. The Japanese need to be coaxed slowly to express opinions that differ from others in the group. The non-verbal must be carefully observed since just 7 percent of the total impact of a message is conveyed verbally, 38 percent para-linguistically (through voice tone, pitch, amplitude, inflection), and 55 percent through body language. Surprisingly, the Japanese are better respondents in a group than in a one-to-one interview. No matter how skilful the interviewer may be, he or she is still a stranger, and the Japanese are not prone to open their hearts to a stranger. On the other hand, in a group situation they are with others like themselves. A great amount of interpersonal trust can be developed and very candid views can be exchanged without any animosity. That is why those with similar lifestyles and backgrounds and ages must be chosen. The Japanese are great in groups because they are attentive and interested in what others have to say. Since opinions are not immediately expressed, the opening part of a session is typically slow. When an idea is introduced, typically a respondent expresses a very tentative reaction. However, another respondent picks up on some nuances of the comments and adds some of his or her own. Gradually the idea will be positioned and a consensus formed. Betty Crocker attempted to market its cake mixes in Japan only to find customer obstacles. After numerous focus groups, it was found that the essential problem was psychological; making the cake mix in the rice cooker raised the danger of contaminating the rice, and, hence, housewives hesitated to use the product. CHANGES One of the major changes occurring in Japan is a deceasing accessibility to interviewees at home. Japanese women are rapidly joining the work force, and fewer housewives remain at home during the day. Use of door phones or intercoms has increased, as fewer people will open the door to strangers. The Japanese home is much more private than American homes (It is standard courtesy to offer tea but not to invite people into ones house, even if you have known them for years.) The increasingly higher cost of marketing research is attributed mostly to the increased cost of reaching interviewees. Recruitment of high quality interviewers is another problem when more opportunities exist for the best and brightest in Japan. Applying sampling theory in real-world situations is becoming more difficult due to the increasing number of unlisted subscribers. Marketing research clients are also more sensitive to cost efficiency. They want to obtain the result as soon as possible. They tend to be less concerned with accuracy in terms of traditional sampling theory. There is more emphasis on qualitative than quantitative analysis in Japan. Japanese companies have increasingly higher expectations of market research firms and are requiring such firms to provide them with value added services rather than simply gathering data and statistics. In order to be salable to the client, the results of hard data must be confirmed by the soft data. WEAKNESSES One danger in the Japanese market research strategy has been the reluctance of Japanese companies to hire nonJapanese executives. Due to this tendency, management attention is typically focused on products and markets that the company already knows well rather than on potential markets and industries. In their intensive channel monitoring, Japanese executives may see the narrow rather than the big picture; hence, a broader perspective may be necessary. Japanese market research tends to be heavily weighted toward after-the-fact data, such as market share figures and audience ratings. The industry tends to be weak on the systematic testing of concepts before the product is introduced, and Japanese executives have the tendency to feel that they should follow instinct. In Japan, they do not conduct test markets, as is the custom in the West. The tendency is to offer the new product to the market, and if it does not sell, it is withdrawn. When Sony researched the market for a lightweight, portable cassette player, results showed that consumers would not buy a tape player that did not record. Company Chairman Akio Morita decided to introduce the Walkman anyway. Moritas disdain for large-scale consumer surveys and other scientific research tools is not unique in Japan; most other Japanese consumer goods companies are just as sceptical about the Western style of market research. Japanese Product Marketing

Introduction The Japanese have a holistic view of products. They see the total product as consisting of both tangible and intangible components. The Japanese concept called kansei involves the oneness of the product and the user. Kansei takes into account all the intangible things that make a customer feel both confident and at home when using the product. From a management perspective, a companys purpose is to supply customers with items that offer maximum value which is determined by cost and quality. While American management views cost reduction and quality improvement as contradictory objectives, Japanese firms see them as objectives that go in tandem. In fact, the Japanese word keihokutanshoka means lighter, slimmer, shorter, and smaller, and implies that less expensive items are more useful products because they are economical to purchase, use and maintain. Smaller versions of standard products follow the Buddhist concept that small is better. The Japanese demand fashions and styles to match their individual lifestyles and ages. Although the cohesive, groupdecision-making society of the Japanese is well documented, individualization has become one of the keynotes in consumer marketing in Japan. Japanese consumers are quite fastidious when it comes to the quality and performance of products. If a purchased product turns out to possess even the slightest blemish, Japanese consumers will complain to the retail store and manufacturer. If a product does not function properly only a short time after purchase, they will return it or demand a replacement. And if an accident occurs as a result of careless manufacturing, they will seek compensation and apologies from the producer. Retail stores and manufacturers must take steps to prevent and solve such problems, or they will lose both customers and prestige. The Japanese have developed extremely high standards for product quality, durability, and reliability. This is due to the relatively high costs of most consumer products: Consumers in Japan generally pay much more for the same item than do American consumers. Japanese quality demands are the most sophisticated in the world. A typical Japanese consumer will refuse to accept anything not in perfect condition. If a newly purchased car stalls, for example, the buyer will probably refuse to make any payments until the dealer performs all the necessary servicing. Thus, dealers must go through tremendous efforts to appease their customers. In Japanese eyes, American cars break down too often or their paint jobs are imperfect or they have defective parts. This is not what a Japanese buyer expects from a new car. Japanese firms place more emphasis on meeting consumers needs with good-quality and reliable products at competitive prices. The word quality is used in Japan the way the word excellence is used in the West. Japanese consumers view cosmetic anomalies as an indication of something wrong with the manufacturing process that could lead to more serious problems. Outward appearance is an important indicator of anshinkan (the peace of mind that comes from dealing with reliable and trustworthy persons). In Japan, it is believed that the occupant of an untidy desk cannot think clearly; such a person's mind must be as disorganized as his or her desk. Japanese customers like to visit their suppliers' plants; a dirty plant usually leads to scepticism about the quality of the plant's output. Output and process cannot be separated. The Japanese consider early problems to be a sign of poor longterm reliability. Their major concerns with imported goods are safety and after-sales support. Unless a proper guarantee or warranty is offered, foreign manufacturers usually experience difficult times. For all major purchases, the Japanese expect prompt service and a wide choice of items. Foreign businesses in Japan must, therefore, carry a large and complete inventory of parts and provide trained service personnel. This is especially important in the automobile industry, since many Japanese fear that buying a foreign car means they will not be able to get necessary parts or good service. Knowing that building customer loyalty is a prerequisite to effective selling in Japan, salespeople put forth tremendous effort to achieve this end. No strings are attached when providing services for the products and typically no additional charge for any warranties exists. In Japan, the product is supposed to work even after the initial warranty period expires and any minor problems are to be taken care of without additional payment. Japanese consumers also place heavy emphasis on the packaging and overall appearance of products. The product packaging not only must be right, but also the product must be wrapped and tied in the right way. Specific kinds of strings must be used for specific items; the presentation is as important as the event itself. The typical Japanese consumer will not purchase a product that is not well wrapped. Utilitarian packaging is rarely used. The Japanese consumer typically views products much more as valuable in and of himself and not in the instrumental manner of a Westerner. The beauty of a product lies not only in its functional aspects, but also in its appearance, size, and the like. Products have an intrinsic value and thus should be enjoyed in their own right. To the Japanese, form is as important as function. Packaging must be beautiful and of high quality; it is expected to be aesthetically pleasing as well as functional. Fingerprints should not adorn department store products; no defects in fit and finish are tolerated when an automobile is delivered. The Japanese typically avoid any product that is presented in economy packaging. Packaging paper used for wrapping and bags are of excellent quality, and wrapping an item in three layers is standard practice. In Japan, poor execution can kill a good concept no matter how powerful the concept may be. Adherence to proper etiquette (form) often can be equated with morality and sometimes takes precedence over truthfulness and intellectual honesty (function). The packaging, how you give the message, the execution cannot be overemphasized. The pressure for proper form obviously places great pressure on the individual toward conforming. The Japanese feel that if you do not go to the trouble of presenting your ideas properly, how cans they be any good? The Japanese stress the way things are said; Westerners stress what is being said. Japanese commercials are typically done the same way: reactions to how the commercial was made are of utmost importance, with interest in what was being said about product being very low. The Japanese also dislike certain colours for certain products: they abhor yellow for cosmetics or toilet articles

because they associate yellow with laundry or cleaning products. Many customer complaints centre on scratches and other exterior damage to daily necessities and household goods. Retailers must then take extra care in handling merchandise to prevent damage. Standards for product performance are also strict. Consumers demand reliability and good after-sales service, as previously noted, and will change brands if they find an item functions poorly. The Japanese consumer expects an immediate response from the manufacturer. A major concern for the Japanese in purchasing imported products is the length of time it takes to have them repaired. Typical Japanese consumers have an ethnocentric attitude. Oftentimes they quickly reject foreign-made items, regardless of quality, in favour of locally manufactured goods. Consumers in Japan do not hesitate to choose domestic products over imported ones. To them, their country comes first, and they know that Japanese firms must be ichiban (number one) for the country to prosper. Japanese children are taught to support their fellow countrymen and all things Japanese. Foreign products are thought to be appealing in terms of design and individuality. However, their function and quality are not necessarily rated as reliable. Mercedes Benz and Wedgwood represent the European image. Colas, jeans, cigarettes, and chain restaurants represent the American image. Most Japanese have an exotic image of foreign goods. The fact is that most Japanese consumers distrust products not made in Japan. However, this is changing. As more Japanese travellers are introduced to foreign products, they tend to return home demanding these items. Japan is a polyocular societyevery member has an important vantage point from which to view an issue and sees different aspects. Products and services are multidimensional with as many facets as there are customers. There is no such thing as a completed product system to which no improvements are possible, since there is always another viewpoint to be taken into consideration. All employees can and must participate because each has a new view to add. The Japanese view as valuable the number of particular human satisfactions that have been wrought into the whole combination. The larger the values combination, the more potentially valuable the product, the higher its quality, and the more multifaceted and hence the wider its appeal. The polyocular approach seeks to reconcile many points of view into a choice combination rather than a choice between alternatives. The consumer must demand this values combination, but the more consumer values that have gone into its making, the more consumer satisfactions that will be realized in its consumption. Wholes are more valuable than parts. Japanese cars are safe and high performing, compact and roomy, economical in gas mileage and quick to accelerate. Japanese manufacturers offer combinations, not choices. The marketing philosophy of Japanese enterprises is to discover ways to match technology with the traditional lifestyle and culture of Japan: for example, having Japanese-language word processors with handwriting typefaces, noiseless washing machines, rice cookers designed to change cooking time automatically to match the type of rice being cooked, and high tech kotatsu (traditional Japanese heaters). A high value is placed on retaining the culture and making technology serve this. The introduction of a new product is often accompanied by demonstrations in numerous homes as well as new product shows held at large hotels in the major cities. BRANDS The Japanese worship brand names, the perfect solution in a society where individual preference is muted. Once a designer name or brand logo catches on, the scramble begins. As soon as consumers are confidant the logo means status or prestige, they will snap up anything that sports the reassuring logo. The Japanese have taken this fanaticism a step further. They do not rush out and buy just any recognizable brand; they buy catalogues filled with photographs of accepted brand products. Before making a purchase, many consumers must consult a reference work to guarantee its prestige. Different reasons for this brand loyalty exist according to age groups. The main reason the older Japanese rely heavily on brand names is that in their formative years (during The Second World War and the years of post-war poverty) goods were scarce and few opportunities existed; being unsure of exactly what they wanted, they opted for the safety of a famous name. The youth tend to prefer brand names because of their fashion consciousness. Consumers associate product quality, safety, and reliability with the image of the company that produces it. They need to see the company as trustworthy and reliable in order to evaluate a brand favourably. The Japanese consumer is more likely to purchase a product based on brand name recognition than on price. If a brand name product seems to be priced too low, it may be rejected in favour of a more expensive product. Purchasing expensive brand name products is especially important to the middle class and the young, who seem to find group identity and economic pride in this activity. This hierarchical concern with brands can be seen in the way the various Suntory brands have clearly defined ranks and, therefore, occupy different positions in society. In the early 1960s, the best selling Suntory was a light whiskey called Red; a few years later, Kaku was priced higher. The most premium brand was called Old. Later on, priced even higher for senior executives, came Suntory Reserve. When a Japanese salaryman selects a Suntory brand, he does so solely according to his position in the company. Suntory Old dominates the Japanese market in the middle level. Reserve is what you drink when you reach high management. When Nabisco went to Japan, consumers there found the Oreos too sweet, so the amount of sugar was reduced to give them a more bitter taste. Some consumers still found them too sweet and told Nabisco they just wanted to eat the base without the crme, so Nabisco added a modified Oreo without the crme, Petit Oreo Non-Crme Cookies, which consisted of single wafers without the crme. General Foods attempted to sell instant cake mixes without success during the 1970s. The Japanese prefer beautifully wrapped cakes purchased in pastry shops in Japan. Few Japanese households have ovens and the suggestion that housewives use idle rice cookers did not work either, as the rice cookers are almost in constant use. PRODUCT MARKETING In Japan, the typical new product marketing plan calls for achieving a dominant market share in the home market, learning from the experience of beating domestic competitors, and selling enough units at inflated prices within Japan

to generate operating efficiencies and profits. High-mark-up selling at home, in effect, subsidizes a companys entry into the global marketplace, where margin must be sacrificed until a strong position is realized. By selecting ignored or underserved segments, the Japanese develop a market position, technical expertise, name recognition, brand loyalty, and the financial strength to go after the next higher niche. Products are mass-produced in highly focused but flexible factories where production efficiencies can be maximized. With the established low-end product, they move up the value curve, adding features and getting the most out of the factory before a model change and subsequent retooling must take place. When demand for the old mainline products weakens, they will often expand their product offerings with many variations on the existing theme, develop new distribution channels, and cut prices to stimulate sales. The risk of falling behind a competitor is seen as far more dangerous than the financial risk associated with rapid growth or too many new products. Compared to similar American companies, Japanese companies spend more time in planning (40 percent versus 25 percent), suffer development setbacks on a smaller proportion of products (28 percent versus 49 percent), and waste less of their time debugging finished products (5 percent versus 15 percent). Japanese companies also invest more of their managerial time in new products (50 percent versus 40 percent) than the typical American company and receive more revenues from them (44 percent versus 28 percent). The considerable amount of preplanning time is spent on gaining a consensus among the team members and employees on what the product isits features, colour, shape, price, and so on. However, once decided, the company sticks to those specs, and implementation proceeds speedily since consensus had already been achieved. As a result, the Japanese experience far fewer interruptions during development and fewer problems after launch. They believe in settling on specifications as late as possible and then sticking to them. That way people can spend more time planning, discussing, and debating the products characteristics, and afterward, everyone knows that a change will seriously delay the project. Conflict resolution is accomplished by broad consultation prior to decisions and at lower levels of the organization for successful firms. As a result, the average Japanese company receives 44 percent of revenue (versus 28 percent for a similar American company) from its new products (defined as those less than five years old). The Japanese focus on customer satisfaction is also evident in their search for product improvement and development. They continually survey their product users to help target problems or newer features their customers want. The Japanese also test their products on potential adopters to evaluate what is needed from the customer's point of view. This zero feedback time allows the Japanese to determine customer satisfaction with their products and to act on the improvements suggested by the feedback to improve their products on a continuous basis so their products will remain the leader in the market segment. The frequency of engineering changes in the typical American firm is as much as twice that in a Japanese company. This has negative implications for the American firm, since engineering change orders are increasingly disruptive to higher-volume production. The Japanese company deadline for abandoning a new product is the first day it is marketedthe ultimate in creative obsolescence. Due to fierce competition, Japanese companies use multiple-track, parallel development (developing second and third generation products along with the initial version). The theory is that as soon as the pack catches up, the replacement product is ready to go. Although this looks wasteful by American standards, the result is that Japanese companies develop new products faster than their western counterparts at a fraction of their costs. Many Japanese companies work to have the next generation in development before introduction, with improvement targets of 4050 percent. Cycle times, instead of being four or five years as used to be typical in Western industry, are reduced to eighteen to twenty-four months. They are reluctant to pin their hopes on one technology or product. Japanese corporations will often fund several groups, both to stimulate internal competition and to devise fallback positions. It matters little whether the first generation of a product is perfectly efficient or not; what matters is getting the fourth or fifth generation right and getting a product out the door quickly. The speed with which they respond is geared to the economies of scale they gain. The Japanese bring out a new product in one-half the time it takes their American competitors and in one-third the time it takes Europeans. They accomplish this by being less marketing and finance oriented and putting more emphasis on engineering and manufacturing. Japan has 5,000 technical workers per million population compared to 3,500 in the United States and 2,500 in Germany. (A better product or service isnt just the better way to market; its the only way to market.) In 1977, the development of new products overtook cost reduction as a management goal in Japan; about 1979, it overtook the expansion of market share to become the top priority. By 1982, the percentage of new products had reached at least 40 percent among many manufacturers. In 1985, nearly 20,000 new products went on sale in Japan, 12 percent more than in 1984 and 33 percent more than in 1983. Mitsubishi Research Institute (MRI), Japans largest research company, has been researching new product introductions since 1973 and has found that the majority of new products are improvements. Truly new products, based on totally new ideas, constitute only one or two percent of all new products. Intense competition, continual product improvements, and rapid technological change are all helping to shorten product life cycles. MRI estimates new food products have a life of only a few months, toys three to six months, electronics several years. Companies must aim to launch, compete, succeed, and move on all within a short time. It is no longer a question of how many can be produced, but of how few, in order to avoid overstocking and leftovers. And if the product becomes an unexpected hit, how quickly can production be expanded to meet demand? One reason Japanese companies are successful in introducing new products is that they use a team approach, which involves more horizontal communications across functions, a typical characteristic of organic organizations, which helps stimulate inventions through cross-fertilization of ideas. Japanese employees perform diverse functions that are

often teamed to move a product from the idea stage to commercialisation. This approach helps maintain control until the goal is achieved. Small, incremental improvements are perhaps best made by a team. Multifunctional teamwork is likely to vary in appropriateness by the stage of the technology life cycle. Multiple functions do not need to interact as much upstream at the basic research stage because the commercial implications are unclear at best. Therefore, teamwork is most likely to be highest where upstream activities need to be moved downstream. Reasons for introducing new products in Japan include matching changing customer demand, growth, and winning share. Successful products are those matched to customer needs, superior in quality, reliable, or high in value or design. Factors contributing to failure are lack of understanding customer needs, high costs, insufficient pre-launch planning, and lack of a differential advantage. Most products that succeed are generally considered to embody the concept of keihokutanshokalight, thin, short, and small as in light in weight, thin in width, short in length and operating time, and as small in size and cost as possible, all designed to economize on energy, raw materials, time, and space. Any successful product has some elements of each of these four components. In addition, the simplicity, compactness, power, and elegance of the Japanese tea ceremony and flower arrangement find expression today in many Japanese products, classic examples being cars and cameras. Japanese consumer product companies are quick to get technology out of the laboratory and into the marketplace. An example is fuzzy logic, an artificial intelligencelike technology used to mimic human skills for sorting out unclear information. Fuzzy logic is being used in washing machines and vacuum cleaners. To quickly bring new technologies to consumers, the Japanese capitalize on their traditional strengths of high-volume manufacturing technology and skilful application of the same research and development to different types of products. PRODUCT DEVELOPMENT Japanese-style product development is the dynamic and continuous process of adapting to changes in the environment. The key elements of this effort are self- organizing development teams (autonomy is given to these groups, who are composed of members from diverse functional backgrounds, to define their own activities, and to face challenges collectively), overlapping development phases, and a commitment to continuous learning. Project teams are assigned to pursue a broad strategic product development goal instead of a specific new product concept as is typical in the West. The money spent on developing a product or a process is not an investment to the Japanese; it is a sunk cost. Empowered cross-functional teams strive constantly to improve processes. Managers are coaches, cheering on communications and unceasing efforts to improve. The Japanese niche is the mass production of low-cost high-quality standard goods and services. Japanese companies adopted this method in order to develop new products rapidly and with maximum flexibility. Rather, it might be better to say that they were forced to do so in the severe competitive environment of product development. They found, however, because of learning by doing that phase overlapping is an essential linkage mechanism of networking. The success of Japanese new product programs is related to the level of R&D-marketing integration (information sharing, collaboration on specific new product development tasks, organizational structure, attitudes) in Japanese firms. Japanese methods of organizing new product activity are influenced more by corporate culture, which accomplishes the needed items. In the successful Japanese firm, a common commitment to the long-run success of the firm binds R&D and marketing employees together. Inter-functional cooperation is based on this shared commitment and is reinforced through participative decision-making, job rotation, and the use of joint reward systems. Where R&D-marketing relationships are harmonious (each party has great professional regard for the other, each feels that the other is competent, each feels dependent on the other, each feels very trusting of and open with the other), new product projects tend to have greater successes. By their very nature, Japanese companies produce this harmonious interaction. Employee interactions typically involve all these factors; their importance can be traced to the fact that the ability to work well with fellow employees is the second most important criterion for promotion decisions in Japan (after seniority). Employee participation in new product development, product modification, and product deletion is high, as is to be expected in a participative decision-making, bottom-up process. R&D and marketing are involved early in the process. Japanese management tends to be decentralized in firms that are more successful. Highly integrated, highly successful firms do tend to place greater emphasis on role clarity (that is, written performance standards and written documentation of duties, authority, and accountability) than is usually perceived to be true for a Japanese firm. The most frequently used method of organization in Japanese firms has the R&D manager directing new product development. Venture teams are hardly ever used in the development efforts of Japanese high-tech firms. The Japanese good is made by a continuous production process, not in small custom batches. The Japanese are process oriented, conditioned by kata, by doing things in prescribed matter. This is due in large part simply to product standardization for the mass Japanese market. Large-scale production is the kind of production in which ethnically, linguistically, religiously, and educationally homogeneous workers and mangers can excel. The good is sold in Western markets based on price and quality, or durability. One effect of product standardization is to markedly reduce the amount of information needed by consumers before they purchase a good; the necessary information is in the price. Interaction between customers and producer is not vital. Nor need distributors be trained in complex, serviceintensive sales strategies. Being a good (hardware, not software), it is admirably suited in overcoming Japans extreme distance from major export markets as well as the language and cultural impediments to international business communications. The Japanese themselves acknowledge that their language makes communications among Japanese neither rapid nor precise. In the Japanese research system, the product development group essentially contracts with the research group for

certain technologies. That builds such a strong link that research flows directly into products. Many Japanese companies, like Hitachi, encourage researchers to take the long-term view by building additional funds and time into each contract from a development group; the time and money can be used however the researcher likes. Japanese companies also excel at catalogue design; instead of designing each component of a new product from scratch, Japanese engineers are trained to use parts catalogue, to use off-the-shelf products wherever possible, even similar items used in other products. The performance may be only 90 percent, but at half the cost. A more expensive and reliable component would only be used if designers were able to prove that the savings in warranty expenses exceeded the increase in component costs. Changes are not made unless a favourable cost-benefit ratio can be demonstrated. As a result, the Japanese engineer tends to consider the impact of his design on cost or manufacturability, while the typical American engineer simply wants to know whether it can be done from an engineering point of view. This concern for details can be seen by the fact that the Japanese engineers tend to patent smaller parts of the same process while Americans will apply to patent the entire process. Competitive benchmarking is also a typical Japanese corporate practice. The idea is to obtain models from ones competitors and then set production targets based on the features, options, and price of the competition. In a benchmark study of Japanese processes, Xerox found that production lead times were kept low by using a selected supplier base, paying attention to their design suggestions, and eliminating time-consuming price quotes. Quality was kept high by getting vendors to commit to excellence and then training them as needed. Advertising ADVERTISING Dentsu, Japan's largest advertising agency, says that Western advertising tends to be more verbally oriented, having direct and to-the-point messages, and logical, while Japanese advertising tends to be emotional and indirect. Japanese consumers know so much about the products already that the key creative issue is how the message is said. Since ads are emotional and rely more heavily on innuendo than on direct communications, images are very important. In Japan, differentiation among products consists not of explaining with words the points of difference among competing products, but of bringing out nuances and overall differences in tone. This is done by dramatizing those differences in the people appearing in the commercial, the way they talk, the music, and the scenery rather than emphasizing the unique features and dissimilarities of the product itself. Nonverbal advertising predominates; the key is the ability to communicate far beyond what is actually said or written in commercials. The emotional appeals of soft music, beautiful scenery, and soft voices effectively influences Japanese consumers to choose products and brands due to a manufacturer's good works and favorable image. Foreign products that have used Japanese imagery successfully include Coca-Cola, Apple computers, and Johnson & Johnson baby lotion. The information processing capabilities of the Japanese have led to an extensive historical usage in Japan of short (10-15 second) television commercials. It is not that the Japanese necessarily process information faster and thus all the spots can be shorter. Rather, the Japanese have learned from birth to actively complete ideographs, to complete sentences, and to fill in missing words in conversations. Thus, commercials can be left incomplete, that is, without the final successful application shots that accompany virtually all American commercial messages. The high-context, implicit Japanese are extraordinarily sensitive to how something is said or how a slogan or pitch is written. If the language is not exactly right, the consumer will be rebuffed rather than attracted regardless of the product being sold. A manufacturer who does not take the necessary care not to offend me with his commercial, cannot be relied on to be meticulous with its product. Style assumes a heavier weight than concept. Japanese advertising strategy is built around the principles of reach and frequency. Japanese firms supplement their direct, personal sales efforts with heavy local advertising; they try to bombard the consumer with so many messages that he or she is almost forced into trying the product. The Japanese tend to imitate famous people and buy the products they endorse. Celebrities such as film stars and famous athletes are often shown promoting products in both television and print ads. Levis appealed to the retto-kan (love of Western goods by young people) by using James Dean and John Wayne and marketing authentic jeans; Levis became an overnight status symbol. Teenage pop stars are common fixtures during television program breaks. Western models are extensively used in print and television ads. The Japanese regard advertising as a form of entertainment. They value commercial messages that contain a lot of references to nature and sensory experiences. Nudity is quite commonplace in Japanese advertising and the general media (interestingly, the only exception is pubic hair which cannot be shown); bare-breasted women are routinely featured in newspapers and on television. The Japanese are cavalier about bodily functions due to the lack of privacy in their society. (This may sound contradictory; the famous Japanese communal baths are coeducational. However, there is privacy which is observed and that which is imagined, and hence, exists in the mind even if it does not in reality. Privacy to a Japanese means something entirely different than privacy does to an American or any Westerner.) They often rely on earthy humour to sell products. One advertisement for a haemorrhoid preparation depicts a man sitting on a toilet whining about his pain. Fuji Latex Company, a large condom manufacturer, built a tower at its factory shaped like its product. A television spot for Gon mothballs features an elderly grandfather who pretends he is dead so that he will not have to go shopping. Emotional, not Rational Japanese advertising is designed to appeal to emotions, produce good feelings, and create a happy atmosphere. Japanese ads are visually attractive and eye-catching, featuring bright colours. This fits the Japanese visual orientation to life and reflects their sensitivity to aesthetics, colour, and design. They often use symbols and strong gestures in their television commercials. Japanese ads may be humorous or witty, and they appeal to the consumers

intelligence; however, they do not convey much product information. The vast majority of television spots are mood commercials designed to make the consumer feel good about the product. Japanese ads seem to violate many of the American precepts for good advertising; sometimes it is hard to discern what the product is from viewing the ad. Advertising copy has a strong tendency to appeal to the dreams and romanticism of life rather than stressing the function and logic of products. In the West, concept takes precedence over execution; a good concept could overcome a poor execution. In Japan, the reverse can be true; a poor execution can kill a good concept, no matter how powerful the latter may be. The importance of form, as represented in the packaging of a gift, and the importance of how you give the message cannot be overemphasized. How to say what you mean is often more important than what is said. Japanese advertising is emotional, suggestive, and indirect while Western adverting has a more verbal, direct message and is logical. In Japan, the message should provide an emotional appeal about a product or service that is backed by a company with a good image. Toyota created two versions of an ad for one of its automobiles. Engine was a straightforward, to-the-point presentation of the mechanical excellence of the new car. Bird had the same message, but superimposed on it the scene of an open road and the symbol of a bird. Bird was by far the more successful ad. Mechanical qualities are often taken for granted by the Japanese, so the emotional aspects are more important. The mobility of having a car affords the average Japanese consumer psychological escape and freedom, well symbolized by the open road and the bird. The Japanese determine whether a product is good by whether it is likable and cute and what its status is. Japanese advertising attempts to establish a mood or feeling related to the product rather than citing multiple reasons for its purchase. The Japanese have a greater capacity to interpret and respond quicker to visual stimuli. A Coca- Cola sign in Kyoto simply reads: I feel Coke. Image Japanese companies in consumer products industries tend to spend heavily on advertising and promotion purely to build corporate image. After years of trying, Kodak Japan is finally prospering. The Kodak blimp even rivals the Fuji blimp for airspace over Japanese sporting events. Kodak fashioned its airship in the shape of a giant koi (Japanese carp), a revered Japanese symbol. IBM has been in Japan seventy years and has become a company as Japanese as any foreign company could beemphasizing group accomplishment and lifetime development and employment. Most Japanese believe IBM is a Japanese company. As a result, IBM is regularly ranked by graduating university students as one of the top five companies to work for in Japan. Nissan sacrificed twenty-five years of advertising and marketing investment spent in building up the Datsun name so the name Nissan could be used worldwide. Japanese advertising tries to make friends with its consumers and to indicate that the company is nice so all the consumers will want to buy the product and will then find out what is good about its product. Consumers associate product quality, safety, and reliability with the image of the company that produces it. Customer service is a given in Japan; ads do not herald it because it is so expected. The companys reputation and its potential for long-term stability are often more important than the product features or benefits. The Japanese company wants to establish trust, gain respect and suggest familiarity, but in a formal manner, in its ads. Consumers need to perceive the company as trustworthy and reliable in order to evaluate its brand favourably. Company identification is far greater and, image far more important in Japan than in the United States. P&G has undertaken to sell P&G as well as its brands; P&G is promoted during the last few seconds of any P&G-brand television commercial. Japan is the only country in which P&G advertises the company as well as the product. Direct Versus Indirect Style A self-assertive communication stylethe direct style, the hard sell, the logical method of interpersonal communicationis often seen as arrogant, insensitive, egocentric, disruptive, disrespectful, discourteous, impolite, and potentially embarrassing to the company. Indirect is non-confrontational and better. A true danger exists in being perceived as boastful or presumptuous in ones ads; it is better to offer a modest reward than an incredible promise. Japanese viewers dislike garrulous and argumentative sales talk; product information should be short and conveyed with song that sets a mood. Japanese television commercials are typically directed toward affective rather than cognitive attitudes. Japanese advertisements are more likely to develop a story, describe the expression of people, and enhance poetically the mood of the product. Japanese consumers react more to beautiful background scenery, a star of the entertainment world, or the development of a story than to product recommendations. The product message comes at the end of the commercial, almost as an afterthought to the rest of the commercial. P&G found that its ads for Camay soap did not work in Japan because they featured men complimenting women on their appearance; the directness was not well received. In another Camay commercial, a Japanese husband was shown in the room while his wife was bathing, an invasion of privacy the Japanese consumers found distasteful. When the commercial was revised so that the man was removed from the scene, but with a male voice narrating, the commercial was very successful. For years, DeBeers ran ads (which were immensely successful when shown in the West) that showed Western couples in evening dress, reflecting the standard mentality that equates diamonds with grandeur and the women smiling and kissing their husbands upon receiving diamonds as a present. These ads met with minimal success in the Japanese market because this is not the way such a scene in reality plays out in Japan; instead, a Japanese woman would shed a few tears and pretend she is angry at her husband for spending so much money. Subsequently redone, the ads showed a tired wage earner and his hard-working wife in their tiny apartment. Upon receiving the gift, she snaps at her extravagant spouse: Oh, you stupid? The ad was a remarkable success. Comparative Advertising Confucianism, which puts a premium on self-esteem, reciprocity, and harmony, considerably influences the advertising philosophy. Direct comparisons with the competition are almost never used in Japan; it is taboo for any

company to acknowledge the existence of its rivals, let alone attack or put down a rival. Comparison advertising works against industrial harmony. The Japanese Advertising Code says, Let us avoid slandering, defaming, and attacking others. Polite lies are more acceptable than the expression of contradictory opinions. Although Japans Fair Trade Commission (FTC) during the late 1980s eased restrictions on comparative advertising, most Japanese companies and media networks have been reluctant to air them. In most Japanese television ads, laundry soap makers compare their brands to unidentified other products. Pepsis ad with M.C. Hammer comparing Pepsi to Coke was an attempt to go against the cultural grain; it was not successful and was subsequently pulled by Pepsi. It is assumed in Japan that the Japanese product is superior. The marketing strategy of most foreign companies in Japan is to get away from the image of foreignness through localized advertising and to have their products seen as Japanese products. Ads for Coca-Cola and McDonald's successfully use this Japanese imagery. Gillette stressed the American image of its Sensor razor, pursuing a globalised ad campaign that simply translated the American ad into Japanese. Schick, on the other hand, does not use foreigners in its ads and pitches emotion; Schick so far has the leading market share, although Gillette has been gaining. Thus, Schick has succeeded by stressing its Japaneseness and holds 62 percent of Japan's wet shaving razor and blade market. Japanese Language Influences on Advertising In the Japanese language, verbs appear at the ends of sentences, so the listener does not know where the speaker is headed until he gets there; thus, the speaker can change his verbs in response to the listeners expression. Cautiousness signifies patience, dependability, and sincerity. The Japanese tend to base their understanding of people on intuition and emotionality. The Japanese language contains a deeply embedded verbal status system. The user cannot communicate in the language without choosing from a wide variety of words and modes of expression that, in addition to carrying the information he wants to impart, also clearly and obviously define for all hearers the status relationship between the user and the person(s) with whom he or she is communicating. No equality exists in spoken Japanese. The speaker is invariably above or below the listener. No acceptable way exists to communicate in Japanese without making a choice from among the different kinds of expressions that will set up an unequal relationship, if one does not already exist. Each way of communicating denotes a different social relationship. Too much politeness sounds phoney, while not enough is insulting. It becomes essential that status be determined immediately upon meeting, so communications can follow. The typical Japanese consumer is extraordinarily sensitive to how a salesman says something, how an advertising pitch is written; if the language is not exactly right, the consumer will be rebuffed rather than attracted regardless of the product or service being sold. Due to the nature of the Japanese society and the Japanese language, both the seller and the consumer are exceptionally language conscious at all times. This applies to personal selling and to advertising. In commercials, customers are addressed not in the second person, but in the third, Okyaku-san (Mr. Customer). Its usage points to the formal relationship between the advertiser and the customer. This hierarchy also extends through the channel. In Japan, P&Gs marketing task was to convince the Japanese mother (and her influential mother-in-law) that she is not lazy or uncaring if she uses disposable diapers. P&G entered the Japanese market for disposable diapers by giving away millions of samples to consumers. This not only provided consumers with a free taste of the product but also established amae relationships throughout the distribution channel. Wholesalers and retailers had to return the favor, which they did by setting up special displays showcasing the P&G product in supermarkets, department stores, and family shops. Media The average Japanese consumer is an avid television watcher and newspaper reader. The fold-in advertisement for newspapers (orikomi) is widely used. This allows even small stores to advertise to a limited area with a minimum outlay. The Japanese are also the worlds greatest users of mass transit and are exposed to many advertisements going to and from work. Transit advertisements are printed advertisements that are displayed in public transportation such as railway cars and buses; they are very common in Japan because of the high reliance on public transportation and the long commutes for the typical worker. Major users of transit advertising include magazines and publishing companies, food companies, major retailers, cosmetic companies, and hotels and restaurants. The Japanese are more than ten years behind in cable television (Interestingly, the Japanese have had miniature satellite systems for years). The Japanese market finally opened up in 1995. Launched in December 1994 in Tokyo, Suginami Cable TV, a joint venture of U.S.-based Tele-communications Inc. and Japans Sumitomo Corp., offers thirty-six channels to 2,500 homes. Before its inauguration, viewers in Tokyo had only seven channels to choose from. Japans Ministry of Posts and Telecommunications projects that as many as 60 percent of Japans televisionviewing families (30 million homes) will be subscribers by 2010, matching 1995 American levels (only 5 percent of the Japanese currently subscribe). Previously, Japans cable industry was allowed operations only in tiny areas, barred consolidation, and limited foreign companies participation, all meant to protect Japans powerful broadcast networks. In Japan, over 200 new magazines are started annually, and more than half of these are either fashion-oriented or related to consumer life. Japanese magazine advertising is more informative in nature. Because the themes of these publications provide psychographic information, it is possible for manufacturers and suppliers to utilize them strategically besides simply advertising in them. Newsweek successfully launched a Japanese version in 1986; its 150,000 copies sold out immediately, and numbers continue to grow. The Japanese version presented to readers a comprehensive international news magazine that took stories mainly from the U.S. domestic edition and placed emphasis on international news; the main target was intelligent, business-oriented, white-collar workers, with business managers and college students secondary. Japan has over 100 weekly magazines. Six major weeklies compete heavily (Shukan Asahi, Nikkei Business, Shukan Diamon, Shukan Toyo Keizai, Sunday Mainichi, and Asahi Journal) with a combined circulation of over one million.

JAPANESE ADVERTISING AGENCIES Japanese advertising companies began as space brokers, that financed various media (initially newspapers and later radio and television) by purchasing advertising space in advance and then selling it to interested companies. Advertising companies often specialize by medium. Most Japanese companies purchasing ads believe that it would be impossible to leave the design and planning of a complete marketing campaign to an advertising company. Thus, most rely on advertising agencies primarily to secure the necessary time and necessary talent to produce advertisements. The overall coordination of in-channel and mass media promotion and the design of in-channel marketing are typically kept within the company itself. Thus, the full service function that the typical advertising agency performs in the United States is superfluous in Japan. The top ten Japanese ad agencies are Dentsu, Hakuhodo, Tokyu Agency, Daiko Advertising, Asatsu, Yomiko Advertising, I&S, Dai-Ichi Kikaku, McCann-Erickson Hakuhodo, and Asahi Advertising. Dentsu is twice the size of Hakuhodo, and the others tend to be 10 to 20 percent of the size of Dentsu in terms of billings. Japanese agencies have substantial media ownership interests. Dentsu at one time owned 3 percent of the stock of Tokyo Broadcasting System, the largest privately owned telecaster in Japan; it also owned fractions of Yomiuri Groups television operations; Mainichi Shimbun, a major newspaper; and many other newspapers. Dentsu handles twenty-four major golf tournaments, while Hakuhodo controls eighteen others for the Japan Professional Golf Association. The Japanese agencies secure the courses, find sponsors and book the television time. In Japan, ad agencies serve numerous clients who are in direct competition with. Self-regulation in Japan is done by the Japan Advertising Review Board (JARO). Dentsu is the largest independent advertising agency in the world, handling nearly one-fourth of Japans annual billings. Dentsu was founded in 1901, and its name literally translates as telegraphic communications. Its stock is not publicly traded; the two largest shareholders are two Japanese news services, Kyodo News and Jiji Press. It has an interlocking set of connections throughout the Japanese economy. The agency recruits many of its employees from the families of Diet (Japanese Congress) members. Dentsu is more than an ad agency; it is a marketing guru, go-between, image-maker, and impresario of choice for Japanese companies. It calls itself a total communication service provider. Dentsu controls 45 percent of the advertising slots for prime-time network television. Dentsu is also favoured by the media; when time and space are scarce, Dentsu can always get whatever its clients need and especially the most desirable time and space. This reputation has maintained clients. Many corporate advertising managers reasoned (like MIS managers in the 1960s with IBM) that if Dentsu conducted a campaign for them and it did not succeed, they would not be blamed, for if Dentsu could not do it, nobody could. If they had hired another agency and failed, company superiors would have asked why they had not hired Dentsu. However, Dentsu has had a difficult time penetrating overseas markets. Its relationships with domestic clients are naturally tight, which does well in the Japanese market, but such relationships are difficult to achieve overseas; its major overseas success stories have been principally Japanese transplants, not foreign clients. Overseas billings amount to less than 10 percent of its total; even then, Japanese manufacturers tend to use local, U.S.-based or European-based agencies. Japanese Sales Strategy The Japanese selling process is human intensive rather than product intensive, service intensive rather than technically intensive. For example, in sports sections within department stores, items are not sold in a casual manner. Video films are constantly rolling to demonstrate equipment use on the shopping floor. In fact, some stores often hire famous former athletes as sales personnel who provide customers with advice, photographic opportunities, and autographs. At the point of sale, Japanese consumers rely heavily on well-informed sales personnel with their courteous and accommodating personal service. Face-to-face contact is required in Japan. Letters are useful for follow-up communications, but personal relationships are the primary means of conducting business in Japan. Relationships can be established only through extended periods of face-to-face contact. When a personal relationship has not been established, the Japanese buyer will often express scepticism about the sellers claims. The buyer may become unfriendly and aggressively direct. The lengthy process that is typical in Japan for first-time sellers is due to this need to establish a relationship. To the Japanese, a close correlation exists between the number of salespeople and the eagerness to increase sales. Customers are accustomed to dealing with large groups of people from the vendor. Large numbers help give the prospective customer insight into the firm and assure him that they are selling not just a product, but also the entire company. When things get bad, rather than cutting back on staff, the Japanese company frequently hires more salespersons and sends them out more frequently. The Japanese sales force in a Japanese company can be relentless in its personal attention. The Japanese believe in hustling the customer with service. The Japanese sales force tends to be very persistent; they arrive singly or in groups, coming once or a dozen times. Providing this sort of service becomes very expensive. The company must have the right premises in a suitable location providing the right kind of decor. The staff must be trained to show a proper demeanour and must fulfil their roles with suitable humility. Several clerks must be available to not keep customers waiting. All this makes the selling function more costly than in many other countries. Blind calling is even worse. More pointless visits are made than fruitful ones. The customer finds himself approached more often than ever. Less interest exists in the cost side of the ledger in Japan. The factory must be kept humming to allow economies of scale; thus, sales become a conduit to empty out factory stores. Since similar products are often offered by competing manufacturers, human relations becomes the determining

factor. The Japanese will not buy products from salespersons who offend them in any way. The Japanese feel a relationship exists between the amount of time physically spent with the customer and the amount sold. The frequency with which a salesperson meets with the customer correlates closely with the amount of business the salesperson receives. Japanese customers often judge from the frequency of the sales calls they receive whether the company really wants to do business. When the salesperson of one company makes more frequent calls to a potential customer than the competition, he will be regarded as more sincere. This also means Japanese companies have to make frequent sales calls to customers for only courtesy reasons. At least twice a year, during gift-giving season, customers get visited to be given gifts and not necessarily to discuss any business. Selling in Japan is often a lengthy process with numerous repeat visits. One must show that effort is being made, even if only for effort's sake. The hard work and devotion of the sales staff, the value of pure effort alone, often make the difference to the Japanese between a sale and a lost account. The Japanese salesman (not salesperson because even in modern day Japan, the white-collar occupations are overwhelmingly male dominated) serves as the public relations representative for his company. He does not wait for customers to call him or come into his store or office. He makes frequent calls in person. In Japan, after selling a product the relationship does not cease, but rather intensifies; many visits by the vendor are necessary. These visits are not for service or repairs, but just to keep in the good graces of the customer, checking that there are no problems, coming by to deliver any refills in person, or just dropping in to say hello. The salesman may never mention his product or attempt a sale. He may dine with the customer, play golf or tennis, and get to know the customer intimately by building a long-term relationship. When he does make a sales call, he never gets to the point. He visits and spends a long time in pleasant conversation. Sellers must call frequently, see that everything is running well, bow low and apologize humbly if anything is wrong, and see that repairs are made instantly. It becomes a vicious cycle: To sell, one uses personnel: to sell faster, one uses more personnel, thus cutting into margins. A tendency exists for prices to rise to compensate for the higher selling costs. Overwhelmingly store managers and shopkeepers stress the need to take good care of human contacts with customers. It becomes most important to secure regular customers by increasing familiarity and contacts. As a result, it is almost impossible to increase productivity. Japanese customers demand a level of consistency and continuity from their suppliers that is often excessive, if viewed from a Western perspective. Service personnel are more likely to provide off-site service and sales; for example, auto dealers typically provide pickup and delivery for repair service customers. The Japanese believe that their jobs are to identify with and support their customers and to act as the customer liaison officer and advocate within their own company. They feel that to keep their business, they must spoil their customers and satisfy their every business desire. Their jobs are to provide devoted service for the long run. Thus, they build a weight of obligation and dependence that has to be repaidtypically through sales orders, recommendations, testimonials, and so on. In Japan, word-of-mouth recommendations and who you know are far more important than advertising. The hard work and dedication of the sales staff are often the determining factors between a successful sale and a lost account to the Japanese. One classic story exhibits this point. Once an eager young salesman found that a certain shop had already bought from a competitorbut he still wanted the shopkeeper as a client. So he returned several times. When they refused to talk with him, he stayed around and observed the business. He eventually became familiar with the shopkeeper's staff, particularly the wife who ran the cash register; developed friendships with the family and staff; took their little boy for a walk; and even occasionally looked after their baby. Periodically he would give them presents. Finally, impressed by his persistence, the shopkeeper agreed to examine the product. Although he may have not been convinced of its value, he was very impressed by the earnestness and sincerity of the young salesman. Through sheer effort and determination alone, the salesman was able to get a trial order. Keeping close contacts with the customer is called relationship management. The service staff greets all customers with a bow, looks after all their needs most diligently, provides a pleasant business atmosphere, and then follows up to maintain a good relationship. The salesperson is the focal point of the sale and must attend to most problems personally. For the customer, the salesperson and the retailing firm's management represent the supplier firm and are held responsible for everything that relates to the sale. When a customer comes back to the store to exchange or return an item, an attempt is made to deal with him or her even more pleasantly than when the original purchase was made. The salesmans role does not stop with the purchase order. He should be present for meetings before installation, at the installation, and even when an engineer adds a piece of hardware or software. To the Japanese, consistency and accountability are key roles of the salesman. Japanese consumers may clamor for lower prices, but they also want convenient location, broad selection, luxurious surroundings, and personal service. They particularly demand the show of honor and respect Japanese consumers have been getting from mere shopkeepers for hundreds of years. They expect to enter any shop and have people greet them royally, look after their needs totally, and carefully wrap their presents beautifully. In the medical field, that means everything from clipping interesting medical articles to developing slides for a doctors presentations, to playing golf with the customer on weekends. Maintaining the relationship also means repairing sophisticated equipment overnight or being prepared to respond at any hour of the day or night to a customers unexpected demands. For instance, a small cardiograph company's salesmen will pick up cardiograms from their customers, the doctors, and deliver them to an expert for diagnosis. In general, customer demands must be met before equipment can be sold. Having one person in charge of sales and service forces the employees to look on service as a sales function. Oftentimes the second or repeat machines are sold not by the salesman, but by the serviceman. To sell to Japanese companies, the customer is king attitude is not good enough; in Japan, the customer is the ultimate deity. This reverence is an ingrained attitude derived from the Confucian philosophy

of respecting one's elders, ones parents, and is drilled into the Japanese from childhood. By the time a Japanese worker enters a company, knowing how to treat a customer is second nature. This attitude of respect permeates the entire organization. When a change in a delivery schedule is inevitable, neither a letter nor a phone call is sufficienta personal visit is mandated. When a Japanese company asks suppliers to do something, even if it is impossible, they will never say no. They will go through the motions and show they are making a sincere effort to meet the request, no matter how illogical or impractical. It takes longer to solidify a business relationship with Japanese customers. However, once you have their loyalty, they are not likely to change to another vendor capriciously. Japanese sales representatives place heavy reliance on support materials and data. They respond quickly to questions with substantive answers. Sales reps use wet sales approaches, those in which they are flexible, accommodating, caring, and human, as opposed to the dry logic, inflexible approach used by U.S. sales reps. Wet selling solidifies relationships with customers and is more effective in landing new accounts. Service prestige is valued and drives the personal relationships that are so crucial in Japan; style, even in personal sales, assures heavier weight than concept. Sabisu means being helpful, a beneficial or friendly action or conduct; it is the act of giving assistance or advantage to another. The typical Japanese customer attaches great importance to promptness. Service should be free even when it is considered "extra service." Japanese kokoro-zuke (consideration of the heart) is given as a token of appreciation rather than in anticipation of good service and helps to establish rapport between guest and host. The customer expects the salesperson to show his appreciation for the business given to him, to smile and display affability at all times. Vendors must provide sensitive corporate information repeatedly. Sales presentations tend to be low key, that is, non-persuasive with modesty. A major difficulty for Japanese salespeople is asking the client questions, especially those that might seem like prying. Typically they accept what the client requests and then go away to try to work out what he is really getting at and why and how to meet his demands. Asking questions that the other party would find embarrassing to answer or that might require confidential information or that are easy to deduce from what has already been said or from the context or background is likely to be regarded as a sign of insensitivity or immaturity. This is another example of the importance of non-verbal communications to the Japanese. Japanese salesmen usually have poor selling skills. In Japan, the selling profession lacks respect. Traditionally, and to this day, manufacturers, farmers, and craftsmen enjoy more prestige. In the Japanese business culture, the route to the top goes through manufacturing, not marketing and sales as in many an American company. In any company, the sales division is shunned by most self-respecting salaryman. New employees are almost forced to spend time in sales divisions before moving on. Unlike the Chinese, who will spend hours bargaining and enhancing the value of their wares and managing to raise their prices slowly over time, the Japanese want to get the whole thing over with as soon as possible. Quite often they will sell at lower than whatever their competitors offer without checking the merits of such a gesture. Part of the problem is that the Japanese do not really know what an item costs. They expand production to keep up with the competition and to create economies of scale, and oftentimes they get stuck with excess products, which they must sell at any price. The whole ethos of market share counts a good sold as a good sold without the realization of what more could have been gained. PERSONAL SELLING As many as half the cars sold in Japan are sold by door-to-door salesmen, according to the Japan Automobile Dealers Association. Toyota Motor Corporation alone has more than 100,000 door-to-door salespeople (half as many as the entire sales force in the United States for all kinds of cars). All Japanese automobile manufacturers sell cars the same way. Toyota sells two of every five cars in Japan, and virtually every white-collar Toyota executive began his career by selling cars. Many Japanese car buyers never set foot in a dealership. The outlets primarily serve as bases for the sales armies that are pounding the pavement. Pitches are made and contracts are signed in peoples living rooms. The Japanese ethic of ganbatte (do your best, try harder, persist) still permeates the culture. The story of the life of a Tokyo car salesman illustrates this point: A typical Toyota salesman has 3,000 doors in his turf. His book contains notes and details on over 370 customers to whom he has sold cars; many are repeat buyers. He times his pitches to just before the customers car turns three years old or every two years thereafter. (Thats when the owner faces the government inspection system known as the shaken, which often can cost a Japanese owner thousands of dollars in repairs before the car can be certified.) These extensive face-to-face meetings establish trust long before business discussions begin. These relationships do not end with a sale; salesmen maintain constant contact with their customers. There are calls after a purchase to inquire how the car is running, handwritten greeting cards, and special invitations for low-cost oil changes, dealer events, and even driving schools in larger cities to help people obtain licenses. Most new customers are introduced by a previous buyer. Buying a new car is like joining a fraternity; once in the family, many never consider leaving. It is not unusual for a salesman to follow a lead for a year or even longer, paying a visit to the prospective buyers home every month before a sale is finally made. When the deal is sealed, the salesman may invite the family out to dinner and fit the car with an accessory as a present. The service department does its part in keeping the customer satisfied by bringing the car into the shop for the semi-annual checkups mandated by the Japanese Vehicle Code. The service department calls the customer when the maintenance is due and then sends a man around to pick up the vehicle and drive it to the shop. The vehicle is always returned washed and with its interior vacuumed. However, this may be in decline, since fewer women are home to answer the door. Japans manufacturers shift factory workers onto the streets to make sales calls when domestic demand is down. The follow-the-leader syndrome still prevails throughout Japan. Most Japanese want it this way. Salespeople

know that if they can sell a product to a leading company, other companies will generally follow whether or not they need the item. Another story concerns a Bausch & Lomb Japan salesman. When Bausch & Lomb Japan introduced its thennew soft lens line into Japan, the company had targeted influential eye doctors in each sales territory for its introductory launch. The assumption was that once these leading practitioners signed up for the new product, marketing to the majority of eye doctors would be easier. One salesperson was quickly dismissed by a key customer. The doctor said he thought very highly of Bausch & Lomb equipment, but preferred regular lenses for his patients. The salesperson decided, since it was his first visit to this particular clinic, to stay around. He talked to several assistants and the doctors wife who, as is the custom in Japan, was also the administrator for the clinic. The next morning, the salesman returned to the clinic. The doctor was still busy. The salesman talked again to the assistants. He assisted the wife with her cooking and discussed food with her. He picked up the couples young son from kindergarten, bought a gift for him, and played with the boy. The wife was pleased with the salesmans activities. She explained that her husband was very busy during the day and had little free time; she invited him to their home that evening. At home, the doctor received the salesman warmly and listened patiently to the sales presentation. He responded that he did not want to use the soft lenses on his patients right way, but suggested that the salesman try them on the assistants at the clinic. The third day the salesman returned and fitted soft lenses on several of the clinics assistants. The reactions were favorable, and the doctor placed an order later that day.

SHARE, VOLUME, AND TEAMS When business is slow, attempts at sales become frantic. Of some 3,000 Nissan Motor company workers reassigned during 1994, 2,343 were sent to the street to make sales calls rather than assembling cars. With salesmen sent out in teams, the selling process becomes one of seeing one's customers often and longer. Firms bring all types of gifts and are willing to lower prices. They are under tremendous pressures to sell. To the Japanese, market share is very important; to lose share is to lose face. Japan is production oriented, not marketing driven. An innate desire exists to produce at the level of economies of scale at all costs. The company must move goods, with little attention given to the costs of selling the goods. The emphasis on selling to gain market share is common among Japanese companies. Automakers have concentrated on national television and magazine advertising, seeking volume sales and leaving local newspapers, radio, and television to dealer associations. Companies routinely give up profit to capture market share to keep competitors out of their own market niches with prices that can not be beaten. To generate eventual profit, let the price drive the cost. Managers use the learning curve and economies of scale to reduce unit costs. The Japanese strategy is stressing market share, putting the selling emphasis on volume. Japanese companies look to sell large quantities, seeking market share at any price. They secure market share by flooding markets, initiating price wars, and often dumping goods. The whole ethos of market share counts a good sold as a good sold without the realization of what more could have been gained. To many Japanese, selling is the process of unloading what manufacturing has made at whatever price is necessary to secure the deal and gain the needed market share. Selling to generate volume keeps competitors at bay and fosters efficiencies in production. A products high volume supports experiments and incremental tinkering, which can pay off in ideas for new applications. Japanese marketing is driven as much by production concerns as it is by customer desires and is both a push strategy and a pull strategy at the same time. The marketer is an intermediary brokering the manufacturers desire to push product out the door and the customers desire to pull it toward him/her. Selling in the United States is a problem for Japanese marketers, as it is hard for newcomers to generate volume and market share. Managerial success often is measured not by profit margin or customer satisfaction, but by whether or not rankings vis-a-vis competitors have been maintained. This makes sense in a country where everyone (and everything) has his or her place in a vertical hierarchy of existence. If a competitor improves service or quality, a firms managers must do likewise. Managers need to make sure their organizations status reigns supreme. Competitor analysis is immense and important. If they are doing well against the competition, Japanese marketers tend to be happy regardless of whether or not profits are being made.

SELLINGS CULTURAL HERITAGE As with most everything else in Japan, the cultural origins of Japanese society deeply influence the Japanese sales philosophy. As a personal code, giri imbues Japanese employees with a deep sense of duty to fulfill their obligations to their superiors and to their customers. The Tokugawa family during the beginning of the seventeenth century sought to create a stable society by introducing devices for social control through class structure and classified the

entire populace into a rigid hereditary hierarchy (shi-noh-koh-sho): warrior, farmer, craftsman, and merchant. Commoners were ranked according to the Confucian view of productivity. Merchants were ranked at the very bottom because they were considered to be socially unproductive and became the subject of social contempt and humiliation. The merchant's caste was a full step below the customer's. In fact, to the Japanese, as a result of this hierarchy, the merchants (salesmans or vendors) very existence is only justified by the service provided to the customer. Successful Japanese salesmen and marketers are ever mindful of this reality. As such, they are honor-bound to provide extraordinary customer service. As is commonplace throughout status-conscious Japan, the participants are not independent from each other or of equal power. In any Japanese market relationship, the buyer is in a stronger position than the seller and has the right to ask a great many things of the seller. The carrot for the supplier is a long-term relationship. The Japanese markets do not allow for game theoretic cooperation; they are set up in such a way that the buyers can alter the payoff table to their liking. However, the supplier is often dependent on the buyer for technical information or financial aid. Japanese buyers typically behave like arrogant and spoiled children as they revel in the superior status assigned to them by society. For example, ethical drug salespersons (puropa) must frequently endure autocratic behavior from doctors. The supplier's obligation to his customer goes beyond maintenance and service. Too many Japanese find it flatters their ego to be received as a very select client whose patronage is highly desired. Japanese businessmen still make purchases from their favorite salesmen, whether the merchandise is better or not. Young salesmen who are sincere or hardworking also get some of their business. In Japan, buyers are superior in rank and status to sellers, and they tend to suspect sellers of offering exaggerated levels of service at inflated prices. It is expected that sellers should display a suitably respectful attitude towards buyer in their interactions. The seller, beyond meeting pricing, delivery, special specifications, and other usual conditions, must do as much as possible to meet a buyers wishes . . . deliver more than what is called for under the terms of their contract. The seller, being in the lower position, uses honorific language, and the buyer, being in higher position, may speak in less-than-polite terms. Japanese customers feel it is their right to be treated as the central figure in any transaction, to receive careful, respectful service. Sellers are expected to go whatever extra mile is required to ensure that customers are satisfied and that the product or service is giving the performance promised. Sellers or suppliers must accept their subordinate, service-oriented role in the transaction. The salesmen is exceptionally motivated to see that nothing he says could offend the buyer. All employees have direct customer contact: JAL requires new employees to serve as flight attendants in order to expose them to the front lines; Japanese electronics companies assign new employees to work with customers in department stores as a first assignment in the company. Companies will accept responsibility and apologize to consumers or customers who feel wronged by company actions. The head of JAL apologized, accepted responsibility, and resigned after the tragic crash of an Osaka-bound 747 in the mid-1980s. The samurai warrior learned several forms of martial arts to prepare for any adversity presented to him. One favorite was aikido, a self defense tactic reactive in nature, which led to alto no sanki: take your opponents technique and turn it into your own. He was characterized by total dedication to the objective of victory, expending all his efforts toward training, conditioning, and concentration. Appearance was also of paramount importance to this warrior. A samurai would never enter a battle until he was cleanly shaven, his shaven head was polished, and he was wearing his finest armor. The marketing strategy link to the samurai becomes apparent, since samurai, in fact, comes from the verb samurau or saburau which means to serve.

Future of Japanese Distribution Systems CULTURAL RATIONALE The Japanese distribution system stems from the early seventeenth century when cottage industries and a burgeoning urban population spawned a merchant class. This system endures because most Japanese companies typically operate with little equity capital and much debt. Manufacturers supply goods to wholesalers in return for promissory notes with terms ranging up to six months or more. Strong personal relationships between channel members are the norm. Channel members routinely pool and share information. This behaviour has its roots in traditional village life where planting, irrigating, and harvesting rice are activities that have to be shared to succeed. The Japanese distribution system exists to serve social as well as economic purposes, and the social or societal goal sometimes overshadows economic logic. Channel members are not altogether different from family members, with all levels and members tightly interlocked by tradition as much as by emotion. It is a traumatic and sometimes tragic decision if channel members have to be dropped; such members may be unable to bear the social consequence of losing face and pride. Because of these implications, small and inefficient channel members are often retained and tolerated. With no social welfare system comparable to social security or unemployment compensation found in the United States, the Japanese product distribution system provides many service jobs and acts as an employment buffer. Most Japanese retire at age fifty-five with a lump sum pension (of up to three years salary) but live to well past seventy; this payment provides an opportunity to set up shop and thus become independent and receive a steady income during their retirement. Those who cannot find a part-time job with one of their former employers subsidiaries or suppliers and who do not have sufficient funds to live out their livesthat is to say most retireesoften invest their severance pay in small retailers or wholesalers to provide adequate funding for their retirement. The distribution system has social aims, maintains employment and income flows, and acts as a sort of welfare system that provides a living for so many people that the government pays little real welfare. It is a flexible, make-work device, acting as a buffer to absorb excess workers, especially those of retirement age and those who cannot find other work during economic downturns. Jobs in the distribution sector were the easiest to obtain and often required the least skill. (Same in India?) The distribution system is inefficient, with as many as three more tiers than typical in the United States. A product typically goes from manufacturer to general distributor to special distributor to special sub-distributor to retailer to consumer. Sometimes the actual product does not change hands; it is a paperwork exercise. Goods are often trucked from one warehouse to another. This does create jobs; the cost, though, is borne by the Japanese consumer. This is accepted by the Japanese populace as part of the system to keep everyone working. Manufacturers and Distributors: Manufacturers pressure on the distribution system can be intense. This is most effective when they are faced with a serious outside threat, more than likely a foreign supplier. In the 1970s, when phonograph record prices were substantially higher in Japan than in the United States, the rising levels of imported American records prompted the threat of a boycott by local manufacturers. Retailers gave in and refused to handle the cheaper, imported records. As a result, an alternative distribution channel had to be created by the foreign manufacturers. If the prices of the foreign good had been higher, a minimal threat would have resulted, and Japanese reactions would have been much less drastic. This may explain why imported items tend to be priced higher in Japan than in the country of origin. After 20 years of trying, U.S. apples finally gained access to the Japanese market in late 1994. Tokyo stores did such a strong business in Washington apples after they were introduced, some stores doubled the prices of the apples (from 50 yen to 100 yen each, $1 apples). Apples in Japan are not thought of as casual snack food but often given as gifts and highly prized, thus the high price is a connotation of their value as gifts, not their value as a food product. The impact of cost consciousness on the Japanese consumer during the 1990s can be seen in the callback number. A callback subscriber places a call to the United States using a specially assigned user number, but hangs up before the ring is answered. Sophisticated switching equipment in the United States recognizes the encoded number and returns the call. The subscriber answers, receives an American dial tone, and then dials anywhere in the world; the reason being American phone rates are anywhere from 25 to 60 percent lower than Japanese rates. Apple Computer in Japan now is the second largest personal computer (PC) manufacturer in the Japanese market, with over 343,000 PCs shipped during 1993, almost double the prior years total. Apple followed Compaqs lead in heavily discounting its computers; Compaq started the price war by selling its computers in Japan by mail order at steep discounts. Apple slashed its prices four times in 1993. Its nationwide network of 50 distributors and more than 3,000 retail outlets blankets Japan. Apple Japans machines and software have gained their strongest position in business applications for word processing, desktop publishing, and financial (spreadsheet) analysis.

FUTURES

Four reasons why distribution is a problem in Japan are:

1. Limited space and crowded conditions cause low inventories 2. 3.

and many small deliveries.

Congestion on an inadequate roadway system slows transportation. Government regulations protect small distributors and small retailers.

4. The system is restricted by tradition-bound commitments and long-standing trading relationships among distributors, some of which have existed for generations.

Japanese toy manufacturers have traditionally sold through the convoluted, multitiered distribution system of Japan and initially refused to sell to Toys R Us. Toys R Us retained its marketing strategy of signing low-cost direct supply contracts with manufacturers who also provided promotional funds. Toys R Us, by buying direct from manufacturers, eliminated the multiple layers of wholesalers so prevalent in Japan. By 1994,Toys R Us, in Japan since just 1992, had opened sixteen superstores throughout Japan and expect to have as many as thirty-five by 1996. Whereas the typical American outlet has $10 million in sales a year, the Japanese stores average $15 to $20 million each. With almost 4 percent of the Japanese market, it is projected to increase its share to 10 percent by 1996. Despite earlier Japanese prophecies of failure, its stores have been so popular that nearby department stores are feeling threatened and are upset. Some of the local stores in Osaka and Tokyo have responded by discounting toy prices by as much as 30 percent. The Toys R Us store in Niigata has 5,020 square meters and is almost half the combined size of the citys 63 other toy stores. In 1988, these stores had combined annual sales of $31 million; Toys R Us surpassed that amount by itself during the first year of operation. The typical Japanese toy store tends to stock between 1,000 and 2,000 different items, compared to between 8,000 and 15,000 by Toys R Us. Initially few Japanese toy companies were willing to risk offending wholesalers by supplying merchandise directly to Toys R Us. It has now become too successful to ignore. At first, faced with opposition from local retailers, landlords were reluctant to lease locations. But as it became apparent that the stores were drawing large crowds, tunes changed and landlords now seek it out. Toys R Us is a harbinger of the future for the distribution system. The distribution system is changing, abet slowly, in four ways. First, in the 1980s, the number of retail and wholesale stores, especially the smaller stores, began to decrease. This decline in mom-and-pop shops has been ascribed mainly to aging shopkeepers and a lack of young successors and to maladjustment to needs in the market and weakness due to smallness in scale itself. Second, a wide variety of competing types of retail stores has appeared. The growth of these appears to differ according to the emphasis put on price, quality, number of products, convenience, and hours open. Convenience stores have had double digit annual rates of growth. Non-store sales, such as door-to-door and mail order sales, have also been rapidly growing. Specialty stores have shown comparatively good sales performance; these emphasize specialty goods, high quality, and personality. Discounters also have prospered. The stores with low rates of growth have tended to be department stores and large-scale supermarkets. Two competing trends are appearing: a demand for high quality, convenience, and fashion versus a demand for low price with reasonable quality and service. Third, many distributive channels for imports have appeared, widening consumer choice and stabilizing the prices of Japanese-made products. The appreciation of the yen over the last decade has magnified differences in production costs, so that many other countries can supply their products at lower prices because of lower wages and lower costs of raw materials. Technological advances in developing countries have allowed many countries, especially newly industrialized economies (NIEs), to manufacture products of high enough quality to meet Japanese consumers demands. Reverse imports, the import of goods from Japanese offshore plants to Japan, have sharply risen. Fourth, the transaction relationship between channel members has changed, with traditional relationships weakened or broken. The past situation where retailers, due to their size and the powerful influence of manufacturers, were in a poor position now has begun to change, and the retailers with their close relationships with customers are changing the power structure. Retailers are incorporating information and financial services into the retailing function so that they can comprehensively supply the goods and services needed. Manufacturers are also trying to get that information through market research or their own information network. Wholesalers are being

besieged from both sides, leading to mergers and acquisitions. After the Japanese FTC abolished resale price maintenance in 1992, price reductions of at least 20 percent were forecast for many items. This can only lead to bigger and fewer retail stores and the proliferation of discount stores. By some estimates, two thirds of all retail stores in Japan could be eliminated without lowering output, yielding great increases in productivity. In wholesaling, as few as one-tenth of the number of existing Japanese companies could handle the current wholesale distribution volume in Japan without any loss of output. Professor Paul Herbig Japanese Marketing Lecture Series Lecture #7: Pricing

PRICE DIFFERENTIALS A joint U.S.-Japan price study of 112 products sold in Japan released in May 1991 found that prices of comparable products were on average 37 percent more expensive in Japan than in the United States; of the forty products in the survey made in Japan, twelve were more expensive in Japan, including a bottle of sake that was 44 percent more expensive than in the United States. Nineteen of twenty products surveyed were more expensive in Japan than in Europe. Prices of most consumer products are two to three times those found in the United States. Japanese consumers pay unfairly high prices, and imported goods face major obstacles in Japan. An imported car is inspected thoroughly. For example, automobile identification numbers are repeatedly scrutinized; even a minute variation in the length of the downstroke of a single letter has held up the release of the car for weeks. After taxes, an imported car costs nearly double the price of the car in the domestic market; a comparable Japanese car costs less in the United States than in Japan. Producer subsidies and import barriers as well as export incentives can come to 75 percent of farmers incomes in Japan compared to 9 percent for cattle ranchers in the United States; steak costs over $50 per pound in Japan. Reflecting an inherent desire to provide the customer with good value, a high price-quality ratio exists in Japan. Japan is not a price-sensitive market; competitive price ranked seventh among ten factors impacting success in Japan. Since most Japanese consumers are pressured by high housing prices and increased costs of living, they are not so different from Americans and Europeans. They all want maximum value for purchased items. In fact, in a recent survey, 70 percent of respondents stated that they wanted reasonable prices more than high-priced quality goods. Exposure to the West has led many Japanese to believe domestic prices are too high. Nonetheless, few are willing to sacrifice services, store atmosphere, and packaging just to obtain lower prices. Cost of capital is not a key factor in Japanese corporate investment decisions; the fundamental mission of most Japanese corporations is not to earn a return for investors. The keiretsu, banks, industrial associations, relevant government bureaucracies, politicians, informal subsidiaries, employees, and retirees are their major constituencies. The nominal owners, the stockholders, are only one constituency and far from the most important. Stable relationships and traditional stakeholders are more important. As a result, Japanese return on investment (ROI) is 8.6 percent compared to 15.6 percent for American firms. Sales margins for American companies average 5.6 percent compared to 2.4 percent for Japanese companies. The Japanese comparative advantage in capital has been traditionally made possible by easy access to capital and extremely low costs of capital. Japanese consumers do save a great deal of income, three or more times as much as is saved in the United States. Many self-employed Japanese believe their income is uncertain and thus are forced to become conservative and skillful savers. In addition, most Japanese companies pay bonuses to their employees twice a year, which could be equivalent of several months pay. This is often the only savings many salaryman have. Since consumer interest rates are typically high, if loans can be found at all, savings must be maintained as emergency funds. Third, retirement worries many Japanese. A salaryman is typically required to leave his job at age fifty-five and receives only a lump sum when he retires. He cannot expect to live on the retirement money and the miserly social security available in Japan. In addition, health insurance is not adequate in Japan. Costs for higher education must be incurred for the children. Therefore, the typical Japanese worker has considerable inducement to save for the future. The tax system encourages private savings by not taxing savings. This has provided banks and insurance companies with a huge mass of capital, which is then lent to Japanese manufacturers at very low rates, giving them comparative capital advantages over foreign rivals. Finally, banks and companies own each others stock, giving banks a vested interest in the long-run viability of the firm, thus allowing managers of a firm to plan a long-term strategy without regard for quarterly profits. An aggressive penetration pricing strategy in Japan is directed toward gaining and holding market share, particularly abroad. When operating overseas, the Japanese concentrate on pursuing market share rather than profits. Most local companies cannot do this because it is not economically feasible. But as long as the Japanese companies have adequate financial backing (as many do), they have a high probability of success. Japanese exporters absorb significant costs, which impact profits in their home currency, to maintain and perhaps expand market share in their export markets. Import prices start low and generally remain low. Marketing arrangements such as price

collusions, limits on competition, and advertising discounts are legal and extensively used in Japan.

PRICING STRATEGY The most important criterion guiding a companys investment decisions is its long-term goal of maintaining and enhancing its position in the Japanese power structure (i.e., increasing market share, reducing cost, meeting and beating the competition). Considerations of profitability and capital costs play a minor role in Japanese investment decisions. Japans largest companies are controlled by corporate stakeholders. There have been few true capitalists since The Second World War. A great stress is placed on striking a balance among stockholder, employee, business partner, and consumer benefit as well as local community interest. Permanent employment means that labor becomes a fixed rather than a variable cost. There is, therefore, extreme pressure for the Japanese firm to operate at nominal capacity as long as revenues just cover raw material costs. The Japanese firm is operated not for the benefit of stockholders, but primarily for the benefit of employees. Market penetration traditionally has been a much more important pricing objective than quick profit taking with a skimming approach. Entry into a market is viewed as a long-term investment. Individual markets are seen not as profit centers, but as pieces in one large global puzzle. If a firm can generate sufficient funds at home and in some selected country markets where its market share positions are strong, it can survive the lower returns from a low-price penetration strategy in newer markets over a relatively long period of time. One study indicated 87 percent of Japanese companies surveyed gave aggressive growth or market domination as their top goal whereas only one in five British or American firms surveyed did likewise. Short-term profits were twice as important for the British and Americans as they were for Japanese companies. The Japanese concentrate their marketing investments on high-potential customer groups. Superior quality and reliability were given as key features by Japanese companies, citing customer service as a major competitive advantage by a two-to-one margin over American and British companies. Of the Japanese companies surveyed, 73 percent indicated stimulating primary demand was important, 67 percent indicated reviewing new market segments was important, and 87 percent indicated getting share and winning competitors customers were important, a percentage more than double that of British and American companies surveyed. The Japanese companies surveyed were found to be more committed in their market share objectives, strategically focused on expanding volume, and targeted at the higher- volume and value-added parts of the market. Their competitive advantage lay in good products and a broad offering to attract different market segments, more effectively targeted at precise market opportunities and product positioning. The Japanese tend to take a long-term view of profit. Even when demand falls, staffing is still kept in line with mediumto long-term objectives because investing in and training a skilled labor force and meeting customers expectations are vital parts of the strategic process. What matters for many Japanese companies is not the apparent profit an individual product can earn, but the profitability of portfolios of related products. If they believe it makes competitive sense to carry a product, they will, whether it is profitable or not. The competitive edge of the Japanese results from their long-term commitment, relationship building in which business relationships are based on trust between customer and supplier, market share growth, and the correct pricing of new products a re all crucial for overall profitability on a medium- to long-term basis.

PRICING FACTORS Profit tends to be disregarded in Japan. Historically Japanese merchants were bitterly criticized and often ostracized because they sought profits. One classic Japanese proverb is A folding screen and a merchant cannot stand up unless they are crooked. The pursuit of optimal profits is not totally accepted. To a Japanese, normal profit means that the cost of capital is covered; capital essentially is borrowings. Therefore, a normal profit is obtained when the interest on the borrowed capital is paid on schedule. Kami yori usui kosen (margin thinner than paper) is a common saying in Japanese business. In some cases, Japanese agents totally disregarding manufacturers list prices when selling products reflects the Japanese philosophy that some business is better than none at all. Japanese sellers view prices as a highly flexible marketing instrument. In the West, factors that determine pricing are primarily related to the product. In Japan, pricing is a strong tool used by producers to gain influence and control over their distribution channels. Prices may be cut at any level in the marketing channel by firms that must have sufficient immediate income to meet their unavoidable costs. Small wholesalers and retailers have no competitive devices except for price competition and relationships, but vigorous price competition at the retail level is not at all common in Japan. Instead, price coordination is widespread due to the oligopolistic structure of Japanese industry. In most branches of industry, many companies or industrial groups (keiretsu) exist, each of which has strong connections in the financial sector, the Diet, and the bureaucracy. Any attempts by one company to engage in heavy

price competition could cause such a powerful negative reaction from the others that they would probably produce more harm than benefit. Cost-plus pricing is not the recognized price-setting formula as found in the West. Management must first set the price and then see how costs can be brought into line. This is similar to Texas Instruments famous learning curves approach. The selling price is dictated by competition with other companies in the same industry. Then companies must reconcile costs with selling price. The main weapon of the sales department is low price. This strategy involves aggressively setting low prices to win market domination and then rapidly improving production to bring costs in line with prices. Japanese marketers spend as much time discussing the right price for an article as they do discussing the product or its promotion. The price has to be what the consumer expects to pay. Once a price is established for a product in Japan, considerable difficulty exists in raising it. This makes initial price setting more important than in the West because prices must not change, one has to pick a price that one expects to be bound to for many years. The Japanese enterprise tends to accept the market price as a given parameter over which it has no control; management will only be in a position to generate profits if it can control costs effectively. Instead of the American Profits + Costs = Sales Price, the Japanese equivalent is Sales Price - Costs = Profits. The sales price, from the Japanese perspective, is determined outside the company. The Japanese develop their strategies starting from given market conditions. By accepting market prices, they are able to operate quickly at a profitable margin. Profits can be obtained by increasing either the margin or the quantity sold. In the latter case, managers attempt to increase sales even with modest profits by realizing that larger profits may come later. That is, once a company has conquered market share and the surviving few organize into an oligopoly or cartel, prices are raised to provide high profits, making up for those sacrificed earlier. At least, that is what happens in Japan. But this is far from reality in most other markets.

PRICING TACTICS Price per se is frequently only one element in a pricing package that includes discounts, rebates, financing, and free return privileges. This gives the manufacturers various advantages including a deferred and more flexible method of setting the actual final prices and leverage on the retailer. Thus, pricing is a strong tool used by producers to gain influence and control over their distribution channels. Successful price coordination reflects the degree of local organization and industrial cooperation achieved through the huge number of industrial associations in Japan and the usual oligopolistic structure of Japanese industry. Most companies or industrial groups have strong connections. Any attempt by one to engage in heavy price competition would cause a powerful negative reaction from the others. One of the fears of foreign competition in Japan is that foreigners, generally not being members of the industry association, might engage in price competition in a way that would threaten local industry and its system of highly coordinated prices.

Retail Price Maintenance The Japanese system of sales price determination is known as tatenesei. The manufacturer fixes the retail price of each product, tells the wholesaler the price at which each product is to be distributed to retailers, and demands that retail stores throughout Japan strictly observe the retail price set by the manufacturer. The standard price is so commonplace that often Japanese ads will include the standard price for the item in commercials on national media. The standard used is retail price equals 100, wholesale price 70, and manufacturers price 60. This general formula has become established as the method for determining prices. This system infringes on the fair trade provision of the Antimonopoly Law. Nonetheless, it is tolerated. The system attracts public attention only when a retailer disputes a manufacturers right to bind him to a set price. Both wholesalers and retailers accept the system because it has advantages for them. If the wholesaler abides by the price set by the manufacturer, he is assured of receiving rebates in addition to the regular margin. If the retailer goes along with the price fixed by the manufacturer, he is free from the competitive risk and assured of having the manufacturer take back unsold stock at the price he paid for it. The distribution industry accepts the system as the price for getting the manufacturing industry to take over risks. Price coordination and resale price maintenance have advantages for both the manufacturer and the retailer. When prices are uniform, consumers do not have much incentive to prefer large outlets (which can cut prices as a result of economies of scale) over small, more expensive shops. Retail price maintenance thus serves to protect the small retailers. Consequently, price coordination and real price maintenance are strongly supported by small retailers, who are a politically visible and numerically large segment of the population. One example of this can be seen in the summer. Electric fans identical in color, shape, quality, and price are on the market, but produced by several different companies. Numerous outlets will offer identical models of products at discount prices, but the discount prices are the same for all the discount outlets.

Discounts

Two types of discounts are used. The fixed discount is similar to discounts that are given in the West, offered or negotiated in the normal course of a business deal and usually given to all distributors at a uniform rate to promote sales through quantity purchases. This discount can be quite high in the face of strong competition or during a business slump. Japanese companies can often sell at cost in order to maintain the lifetime employment system, forgoing profits instead of laying off workers. The unfixed discount is unpublicized and may be applied selectively to different distributors at different rates. It is sometimes given retroactively after a sale as a one- time gesture. The Japanese goal is not necessarily profit maximization, but often some higher-order social goal, many times relating to keeping employees long term; other goals such as establishing a good reputation and a close relationship may be more important than short-term profits. The unfixed discount is a play on psychological and emotional strings. The distributor receives it on a secret basis, which provides a certain sense of special relationship and goodwill. In return, the distributor can give the manufacturer greater display area, recommend his products more, or accept a new product line that might otherwise be refused. Instead of being under continuous obligation as would be the case with a fixed discount and being exposed to pressure by competition, by granting an unfixed discount, the manufacturer is given more flexibility, since it is given out on a selective basis. Although it might be given on one product only, it serves to create goodwill toward all of the manufacturers product lines. It can also be stopped without hindering the business relationship. Finally, provided the unfixed discount is also kept secret, no risk of resentment from other distributors not given the preferential treatment exists.

Rebates Rebates are offered across the board. Timing varies from annually to weekly; sometimes they are paid immediately. Rebates may also be given without any formal prior agreement, in a sense creating a profit-sharing arrangement between a manufacturer and a distributor. Unfixed rebates, being deferred and informal, might be used by a manufacturer to gain leverage on a distributor, to prevent the distributor from taking on a competing line, and to provide additional cash flow. The average rebate is estimated at around 12 percent of sales and varies with business performance; during a business slump, it might be reduced or eliminated entirely. Rebates motivate wholesalers. A manufacturer may give the wholesaler a 2 or 3 percent commission on sales after the sales have been completed; for a new product, this rebate may be as much as 6 percent. Sometimes a progressive level is used to motivate wholesalers to selling larger volumes. Rebates are also often offered on a case-bycase basis to individual distributors. The purposes of the rebate system as a sales promotion are to motivate distributors purchases and enhance resale, to cultivate new sales channels, to acquire new customers, to expand sales of weak product lines, to provide market entry and expansion of new products, to allow quick disposal of unfavorable inventory, and to provide a stable distributors margin. Rebates can also be used as a reward: for a good location and space provided for display of the good, for an effort at sales expansion, for cooperation in a sales campaign, for installment of a special display corner, and for cooperation in an advertising effort. And, lastly, rebates can be used as a control: to maintain the price system, to encourage cash payments, to limit dealing in competitors products, to limit the return of goods sold, and to control the participation of a manufacturers channel member. The rebate system was developed after The Second World War, when manufacturers thought it would be the sales promotion to end all sales promotions. As the rivalry among manufacturers grew fiercer, rebates became institutionalized as a method of competition and a means of controlling distributors and thus became mandatory. Often goods are sold with no margin whatsoever; the wholesalers cover their selling expense with the rebates they receive from the manufacturer.

IOUs Tegata (promissory notes or IOUs) are another widespread characteristic of the Japanese distribution system. This evolved due to the weak financial position of the average Japanese channel member. A liberal extension of credit is commonplace at every stage of the distribution process. Payment periods range up to 180 days and sometimes longer for some industries and special cases. Sometimes they are referred to as pregnancy notes as they may not become due for nine months or more. Given the extreme scarcity of capital in the wholesaler and retail levels, financing is a very important aspect. Wholesalers receive long-term promissory notes from retailers; they, in return, must ask their own suppliers for equal or even longer credit terms. This continues through the entire channel.

Wholesaler Shipments In highly competitive industries, manufacturers often use mihakarai-okuri (shipments based on the manufacturers own estimate of stock levels and market demand) because manufacturers must dispose of a certain volume in order to maintain economies of scale in production. Wholesalers accept these shipments as the price they pay for harmony and try to push the excess further down the channel. Without a liberal returns privilege, this system would not work. In addition, if the liberal returns policy did not exist, retailers faced with overstocked units

would be forced to heavily discount the product; this would severely harm the brand image of the manufacturer and the product.

Credit Extension of credit to suppliers is one of most common features of business in Japan. Payment terms of 180 days are not uncommon. When a manufacturer borrows to finance his distributors, in essence, interest is passed down the line. Some manufacturers directly invest in or lend funds to retail outlets. Such an investment serves to consolidate the manufacturers distribution channel without requiring the larger outlays necessary to establish an independent network. Most large consumer electronics firms have a network of semi-franchised, partly owned stores that sell only their products. Consignment sales are limited to special types of retail outlets and to a narrow variety of product lines (cosmetics and high fashion items sold in department stores). In some department stores, the manufacturer is allocated a designated space and assumes full responsibility for the sales effort, including recruitment of sales personnel.

Returns Free return privileges, an extension of the consignment concept, are the norm in Japan. For suppliers, this is advantageous; it can be used to convince a retailer to accept and try to sell products that he might otherwise refuse. Taking into consideration factors such as the past business relationship and the possibility of sanctions (reduced discounts and rebates), a retailer might be convinced to help a manufacturer get rid of certain hard-to-sell merchandise; once agreed, the retailer would try to sell them so as not to lose face with the manufacturer. The retailer and the wholesaler can also save on the cost of physical distribution and storage of inventory. Overstocking a small retailer might be used as a way to gain more shelf or counter exposure. Most companies try to limit free return privileges, setting a percentage of sales as the limit for free returns or limiting the period during which the products can be returned. The returned merchandise might be written off against discounts, rebates, or free samples given in order to create pressure on the retailer not to return goods. These returns are not necessarily attributable to deficient or damaged goods. A simple your goods would not sell is the usual and acceptable reason given. Small retailers cannot afford to keep unsold products in stock in their limited store space at their own financial risk.

Other Pricing Techniques The larger the company, the more elaborate and sophisticated the in-channel promotion mechanisms it offers. Free samples are typical (given to familiarize consumers with the productsometimes distributed in such a way that they can be sold [very common in drug field], which can then cut the distributors actual cost of goods). Direct outlet centered promotions (point of purchase [POP] accessories or free gifts) are used quite extensively. Suppliers give retailers ideas or arrange POP displays themselves so as to gain maximum sales exposure. Product demonstrations and product demonstration personnel are part of their sales and service force. Manufacturer-related distributor associations or clubs are quite commonplace. Members receive professional and personal benefits, larger than normal discounts and rebates, increased outlet-centered promotional activities, seminars, and discounted or free trips. These associations serve to establish goodwill and to secure a degree of personal commitment from wholesalers and retailers. Providing or denying such services can be used by a supplier to consolidate his hold on the distribution channel. Free gifts are often given to customers, after the sale, as a token of gratitude. This way the consumer remains uncertain as to whether the gift was given at the initiative of the manufacturer or the retailer and could serve to create goodwill toward both. Quantity discounts have traditionally not been given in Japan. That is, the price per unit is the going rate whether you buy one or thirty.

PRICE AND IMAGE In Japan, perceived value is a major determinant of product success; qualitative images are far more important than product value; high prices portray high quality. BMW and Mercedes have dominated the foreign import market using the image of high cost, high quality. Mercedes advertises in Nibon Keizai Shimbun, an upscale business journal that is Japans equivalent of The Wall Street Journal. BMW spends close to $5 million a year on sixty-second prime-time television spots run weekly.

Johnny Walker Black and Red and Chivas whiskies have long cultivated high- status images in Japan. They are very expensive in bars or clubs and are highly prized as gifts. Hoping to gain market share away from Chivas, Johnny Walker dropped the price of the Black label brand. Instead of increasing sales, the opposite happened: Sales dropped drastically. Japanese consumers saw the price reduction as somehow related to quality problems with the beverage, and, as a result, it suffered a drop in status. While the Black label brand fell out of favor and still today is on the cheaper end of the drink menus, the Red label has maintained its high-end status position.

CONCLUSIONS

What matters for many Japanese companies is not the apparent profit an individual product can earn, but the profitability of portfolios of related products. This allows the companies to offer marginal products for small niches without worrying about their profitabilitythe profits from higher-margin goods will carry it. If they believe it makes competitive sense to carry a product, Japanese companies will add it to their lists and carry it, whether the product is profitable or not. In addition, sometimes these peripheral products do become hits, products that would never have been launched if the company had based its decision strictly on the products standalone profitability. By producing so many products, the Japanese company then allows the market to determine which are winners and losers, instead of a biased company task force. Professor Paul Herbig Japanese Marketing lecture Series Lecture #8: Customer Service

Japanese SERVICE Customer service, product quality, and after-sales service are the pillars of successful marketing in Japan. Japanese business is strongly oriented toward providing service to its customers and is concerned about meeting their needs. The Japanese have developed exacting product quality, durability, and reliability standards for most products. This is due to the relatively high cost of most consumer products. Consumers in Japan generally pay much more for the same item than do American consumers. Japanese cars are cheaper in Europe and the United States than in Japan. Therefore, quality has become a major component of the marketing mix, as the consumer's expectations are based on both the cost and the limited choices available. They expect prompt service and availability of a full line of parts for any major purchase. Japanese businesses, if they are to succeed, must, therefore, carry a large and complete inventory of parts and provide trained service personnel. Adam Smiths classic metaphor is that if each individual pursues his or her own self-interest, an invisible hand will automatically serve the common interests of the larger society. The Japanese say that if the needs of the group are considered first, then the invisible hand will reach down and automatically take care of the desires of the individual. Westerners would say: Concentrate on your own self-interest, and you will automatically serve your customers and society better. The Japanese would say: serve your customers and society to the best of your ability, and you will automatically achieve your personal goals.

CUSTOMER SERVICE EXPECTATIONS In Japan, an automobile dealer will typically provide pickup and delivery for repair service customers as well as making new car sales calls to customers homes. Automobile firms have close relationships with their dealers, who carry only one brand and have exclusive territories. They have a substantial joint commitment and a powerful economic incentive to operate smoothly. Building customer loyalty is a major goal for Japanese salesmen, and they go to enormous trouble and great effort to give their customers fine service. Nissan and Toyota measure their dealers by regular surveys of customer satisfaction with sales and service. The Banking industry is especially service prone. A typical Japanese bank has a greeter (annaigakari) who greets everyone entering the bank and makes sure that they know where to go, handles inquiries, watches for suspicious people, and keeps track of complaints and problems. The bank considers customers to be part of the bank family. An example of service personnel providing off-site service and sales can be seen in the banking industrys gaiko. These personal bankers call on customers at their offices or canvass entire neighborhoods, in the process creating relationships and stimulating new business as well as helping current customers. The gaiko regularly go to such extremes as helping customers sell or buy homes, finding distributors for their merchandise, providing them with tax advice, and finding tenants for their buildings. These off-site activities of service people in Japan are often

intrusive. A gaiko in Japan is expected to know the investment portfolio of both individuals and firms to which he or she may be assigned and to make suggestions as to how the banks services could be employed. This is an example of how firms often provide services that range far from their core business. Taxi drivers spend spare moments shining their cab and often wear white gloves. Trains run on schedule. In department stores, executives and clerks alike line up to bow to the first customers in the store, setting the tone for how customers are to be treated. The training of customer-contact people is very detailed in Japan. KFC of Japan spends two weeks training new hires before they set foot in a store. Instructions are given, for example, on how to greet people, what tone of voice to use, and how to handle complaints or difficult inquiries (One trainer at KFC claims she knows how to say thank you to the customer in over one hundred different ways). A national biennial competition exists in the Japanese banking industry in which customer-contact people are evaluated on their ability to handle three or four standard problems. One competition is for the people who do the transactions; another is for those who open accounts, process loans, and handle non-routine problems; and the third is for supervisors. Most service organizations in Japan have quality circles (QCs). These employee groups meet regularly (outside of business hours) to attempt to brainstorm and improve efficiency and service. Sanwa, one of the first Japanese banks to introduce QCs, had at one time well over 2,000 active groups. The emphasis has shifted to total quality control (TQC), which considers broader issues such as how to develop the business and improve the management system. The QC group of doormen in one Japanese hotel collected names of important people so that they could greet them by name. Telephone operators QC decided to place mirrors in front of the switchboard to improve their self awareness and combat boredom that may interfere with their responses. Customer satisfaction in Japan is highly quantified and a driving force in the management process.

CUSTOMER FEEDBACK AND RESPONSE Japanese companies attach tremendous weight to any customer feedbackcomplaints and comments. The consumer can return any item with a minimum of bother, since the store will be anxious to know if the item is being returned because of some perceived defect. Stores are required to make a detailed report to the manufacturer on any defects and to send the offending item back to the manufacturers quality control center for careful analysis. Service suppliers as well as manufacturers listen to what users complain about most and then design their products to supply those features. The preoccupation with such service is a major element in the Japanese business strategy, since capturing market share depends not only on the ability of the manufacturer to provide a captive distribution network, but also on the kind of quality control and after-sales service that will ensure the companys success in penetrating the market. Consumers expect a serious reaction because it is a measure of the companys sincerity and trustworthiness. In return for a serious reaction, buyers are prepared to give the company a treasure-trove of information: how they used the product, how it could be improved, what they thought of competitors, and much more. Japanese consumers expect an immediate response from the manufacturer. Many customer complaints center around scratches and other exterior damage. Retailers, therefore, must take extra care in handling merchandise to prevent damage. Standards for product performance are also strict. Quality assurance and satisfaction, as in Japanese manufacturing, are built into Japanese products rather than added as an afterthought. JAL gives its cabin crews longer etiquette and politeness training than any other airline, so its customers rarely need to demand an apology or a refund. Service must precede all products, regardless of how advanced or unique they are. Service teaches the entire organization about what the customer really wantsnot just what the supplier thinks he or she wants.

JAPANESE CUSTOMER SERVICE The concept of serving the customer, and transforming this capability into a point of differentiation, takes on a whole new dimension in Japan. Japanese customers demand the very best in quality and service, and they pay for it. Since the world is intensely competitive, Japanese companies have learned to make service a unique definer. When competitors are roughly matched, those that stress customer service usually win. Maintaining continual relationships with Japanese customers requires an ongoing commitment to service. The Japanese philosophy is to listen to what the customer really wantsnot what the supplier organization wants to give or thinks the customer wants. Americans have always believed that if you build a better mousetrap, the customers will beat a path to your door. The Japanese believe that if you beat a path to your customers door, you will build a better mousetrap. First-rate service is the standard by which all Japanese products/services are judged. First-rate in Japan is a level of attentiveness and care for the customers personal needs, as well as business needs, where the Japanese surpass the usual measurements of involvement. Sabisu is the Japanese word for service: helpful, beneficial or friendly action. The service-minded Japanese attach importance to promptness. The rare tip given in Japan is a token of appreciation for, rather than in anticipation of, good service and helps to establish a rapport between the guest and

the host. Japanese firms deliver a much higher level of personal service than those in the United States, an estimated 60 percent higher; however, they have not exported their service culture and systems to the United States. Service is expected as part of the purchase. This extends to after-sales attention. Consumers demand reliability and superior after-sales service and will change brands if they find an item functions poorly. The Japanese feel that if it is a quality product, it will not need to be repaired. If it does need service, that should be forthcoming as a matter of course. In general, the Japanese expect free after-sales service and longer warranty periods. A considerable reluctance exists in Japan to charge for service, as there remains a great deal of resistance to service contracts. A problem experienced by a Japanese customer must be fixed with no regard to cost. Then the customer, being a long-term partner, will tend to work to find an amenable settlement for services rendered, often without any written communication. Otherwise, such charges usually must be either bundled with the parts or included in upgrade packages. The tradition of Japanese hospitality dates back centuries. Under the shogun regimes, feudal lords were required to leave their families in Tokyo and return to their territories on alternate years. Each of the more than 300 lords had to lead a procession of hundreds of samurai every two years. Fifty-three guest houses (honjin) were established between Osaka and Tokyo. In those days, kimono-clad maids brought hot water in a bucket and washed travelers tired feet upon arrival. The honjin served hot green tea with pickled plums (to kill any germs picked up walking along the dirt road). Traditional ryokan (Japanese hotels) are characterized by communal hot baths, extensive room service, and a room maid assigned to the total care of the guest. A service person will be assigned four rooms and will be responsible for all services to the guests in those rooms. Most hotels in Japan employ hostesses to usher people into elevators. Long before you approach the elevator, they press the call button for you, they bow as you approach, and their gloved hands direct you into the open elevator, holding the door open until all their passengers have entered; all large department stores also offer escalator hostess service. Japanese consumers frequent department stores because they find these stores more pleasant, even though they know the stores are using more personnel than necessary. They go out of their way to visit fancy boutiques and high-class shops even when they know goods will be more expensive. They do this because it flatters their egos to be received and pampered as very select customers whose patronage is highly desired. The Japanese consumers has been raised since a child to expect superior service in a culture which places the buyer considerably above the seller in terms of status. The Japanese consumer demands the pampering from shops, not only because of the buyer-seller relationship, but also due to the fact that getting such reception from the store is about the only pampering a Japanese consumer will get during his or her life from any producer.

SERVICEAN INTEGRAL PART OF THE JAPANESE MARKETING STRATEGY In Japan, basic service means the customer is never wrong. Even a customers misuse of a product is seldom considered an excuse for not fixing the problem; it is the firms responsibility to make sure that the customer knows how to use the product. Customer complaints are handled differently than in the United States. The first person who hears about the problem must take total responsibility for dealing with the customer even if some other department eventually becomes involved. One anecdote has become the classic in describing Japanese fanaticism for service:

While in Japan, a couple purchased a Sony compact disc player. The next morning while attempting to demonstrate it, it would not work; there were no innards. Before the husband could call the store at 10 a.m., the phone rang. It was the store apologizing profusely and indicating a store vice-president was on his way over with a new disc player. Upon being alerted that the clerk had sold a floor model, the supervisor went up the chain of command to the vicepresident. All worked all night long to track down the local address of the couple (calling all nearby hotels and finally locating the couple through his parents via a home phone number from American Express). The couple was given not only a new player, but also a set of towels, a box of cakes, and a Chopin disk.

In Japanese retail stores, customers are treated as honored guests. When a customer enters an establishment, staff members nearby will greet the customer with a standardized call of irasshai mase (welcome). This will often be stated in a loud, vigorous tone, which becomes moderated and more decorous as the status of the establishment increases. When the customer leaves, there will be a chorus of arigatoo gozai masu (thank you very much) from all

nearby staff. One can observe this same phenomenon in hotels, where you will be greeted each time you enter the hotel during your stay and wished a pleasant day each time you leave the lobby. Customers receive a much higher level of attention and service than found in the West. Koichi Satoh, president and general manager of the Hotel Okura says, The only thing we deliver or are trying to deliver to our guests is satisfaction . . . we have nothing else. The hotel has installed private fax and data lines with individual numbers. Detailed planning is the norm: What if a mega-earthquake hits you in the middle of the night damaging the kitchen: will you say Im sorry guests, no breakfast? In our business, no excuse is accepted when something goes wrong. We have provisions of food and water for three days. Service tops the list of a survey of Japanese guests from the New York marketing office of New Otani Hotels, while American guests (on the same survey) gave priority to the physical amenities of the room and hotel security. In Japan, the concept of total lifestyle retailing reigns, characterized by a sense of social responsibility and a view that their cultural activities serve as a means of discharging of their obligations to society. Most stores provide a minimum of two weeks full-time induction training, the aim being to integrate the staff into a productive and loyal team. The second week is in-store training. Afterward, the staff is inspected daily on the floor in a military fashion to check that their appearance is up to the typical high Japanese standard. Substantial role playing, customer interactions, and videotaping are used in the training process of even the lowest-level employee. American companies like KFC, McDonald's, and Pizza Hut have mastered this and have had great success in appealing to the Japanese consumer and affecting cultural change in dining habits. Service to a Japanese vendor means no effort will be spared to make the customer feel he or she is the center of everything. To a retail establishment, this means enough salespeople so that no customer will have to wait long, many assistant mangers looking to see that everyone is looked after properly, even a place to leave their children, and maybe exhibits to see while in the store. Often there will be one young lady to help customers into the elevator, another to push the button and call out the floors, and a third to bow low to arriving customers. Having one young lady just to continuously wipe off the escalator railings is the typical high service level for a Japanese retail establishment. At such stores, the prices paid is commensurate with the service expected. Because consumers are paying a premium for the department stores name, they expect not just premium packaging but superior, overwhelming service. Not to do so would endanger the stores prestige, loyalty, and status. Having one person coordinating both sales and service forces the employees to look on service as a sales function. Frequently, repeat orders/business are sold not by the salesman, but by the serviceman. Personal service with face-to-face representation is not only desired, but also demanded in Japan. The Western practice of monitoring calls from faraway centers and scheduling service based on a predetermined schedule for the customers area is much too impersonal for the Japanese consumers, who prefer a local salesperson to assist them and preferably the same one who sold them the product.

OKYAKASUMA WA KAMISAMA DESUTHE CUSTOMER IS GOD For Japanese companies, the customer is king attitude is not good enough. In the United States, it is said the customer is always right; in Japan, it is said okyakasuma wa kamisama desuthe customer is god. This orientation to service to others is drilled into the Japanese from childhood as an ingrained attitude derived from the Confucian philosophy of respecting ones elders and parents. By the time a Japanese employee enters a company, knowing how to treat a customer is second nature. This attitude of respect permeates the entire organization. When the company loses face, each member of the organization accepts culpability and shame: It is not the company, but my company. Anshin is the Japanese word for trust from the heart or for security and comfort. The object is to increase the comfort level of ones customers, to go far beyond providing quality products on time; typical Japanese customers want to feel in touch and comfortable with their business partners and suppliers. Anshin is to understand the customers needs; to be responsive to customer demands is an obligation, not a luxury. Service, therefore, becomes the invisible element in marketing for Japanese manufacturers. The suppliers obligation to his customer goes beyond maintenance and service. Japanese vendors work closely with their customers. The Japanese believe that their job is to identify with and support their customers, to act as the customer liaison officer and advocate within their own company. Their motto is spoil the customer and satisfy his whims or whatever is needed to hold his business. They exist solely to provide devoted service over time to build up a weight of obligation and dependence that has to be repaidthrough sales orders, recommendations, and so on. To the Japanese, word-of-mouth recommendations and who you know are far more important than advertising. The goals of attaining anshin are to enhance satisfaction and to give the customer the assurance that the company will be there for him. Even more important, good communications serve to mitigate the kinds of misunderstandings that can damage long-term relationships. Addressing key issues immediately reassures customers that they have a vendor that is committed to their success. This is done because, according to Japanese custom, the individual is at ease only when the spirit is satisfied. Ki ga susumanai roughly means my spirit is dissatisfied and is used to describe feelings of incompleteness about any unfinished business. Japanese firms intuitively understand that retaining an old customer is less expensive than acquiring a new one. Customer loyalty fosters repeat business and referrals. Anshinkan (peace of mind) is designed to reassure customers that the store is reliable and trustworthy. Customers have the perception that their needs will be satisfied. Japanese consumers demand stricter enforcement of quality, cost, delivery, and service standards than do American consumers and usually get it from their suppliers.

Kikubari means that one is extremely sensitive to other peoples concerns and needs and thus responds to the unstated, doing whatever is necessary to help the customer solve his or her problems. This often means throwing in something for free. Other key Japanese concepts that contribute to an understanding of their demand for service include nintai (patience); kao (face); giri (a duty, an undischarged debt to a person); and on (the obligation that is felt because of a kindness or loyalty bestowed) (Alston, 1989). The Japanese usually consider it impolite to distrust anyone and believe that the other party will most naturally live up to the trust placed in him. As a personal code, giri imbues Japanese employees with a deep sense of duty to fulfill their obligations to their superiors and to their customers. This is particularly so if you are a vendor. The tradition of service, especially among the female portion of the Japanese population, has a heritage that is centuries old. The historical role model for Japanese women is that of a person trained to make life pleasant and comfortable for her customers, especially male customers. Another part of the reason behind this tradition of superior service can be traced back to postwar Japan with its large pool of inexpensive labor. Then little economic incentive existed to cut back on services; services provided competitive advantages over ones competitors. Now, even with much higher labor costs and growing labor shortages, it is difficult for any competitor to reduce service without adversely affecting the firms customer orientation and suffering market losses to competitors. A failure to deliver service comparable to that of competitors could result in dissatisfaction, complaints and a long-lasting loss of market position. It is the typical game-theory scenario: everyone would profit if everyone would do so; but if only one were to cheat and not do so, it would gain and all the other competitors would lose. Japanese serving fellow Japanese do not need to ask, Is everything okay? since they already know the answer without asking (by reading subtle nonverbal behaviors), or they would ask the question in a more culturally appropriate way. Such behavior is expected in Japan but is not transferable to the United States. Lecture #9: The Japanese Consumer DEMOGRAPHICS The myth of the homogeneity of the Japanese people is reasonably accurate. The Japanese are more homogeneous than Americans, although some regional differences do exist. These regional differences are, however, much less pronounced than in the United States. They are largely a middle-class market, and the differentials between the lowest and the highest income classes are far smaller than those found in the United States. Geographically, Japan is a very small area, which makes it much easier for companies to remain in close touch with markets. This should facilitate transportation, communication, and distribution. In the 1990s, Japanese women comprise more than 40 percent of the total labour force. More than 70 percent of women between the ages of twenty and twenty-four work outside of the home, as do 54.3 percent between the ages of twenty-five and twenty-nine, and 50.2 percent between the ages of thirty and thirty-four. The group that is joining the labour force in ever-increasing numbers is women between the ages of thirty-five and fifty-nine; 60 percent of women in that age group work outside of the home. According to a report by the Economic Planning Agency, 68 percent of the women in this age group are expected to be in the work force by the year 2000. The wives, working wives included, typically take the major responsibility for running the household, raising the children, and managing the household savings for the purchase of a home and for the childrens education. They make most of the shopping decisions, except for the most expensive items. Older housewives typically have more leisure time, which they use for studies, hobbies, sports, and other cultural pursuits. The Japanese consumer through improved diet has shown increased average heights since the war, to the point that the Japanese youth of today will be a mere few inches short of their American counterparts. Japanese babies born today will have little if any size differential with their counterparts in the West. Nonetheless, sizes of apparel and shoes differ from those in Europe, the United States, and some other parts of the world. Women tend to have smaller bust lines and flatter derrieres, while men are thinner through the chest and have narrower hips. Feet are shorter and wider, requiring a different assortment of sizes to meet consumer requirements. Increasing wealth has led to other gains in lifestyle as well. While many families in Japan were becoming homeowners for the first time and ordinary Japanese families could afford to live in a home where their children slept in separate rooms, the skyrocketing housing costs of the eighties (with the median price for many small homes an hour or more commute away from Tokyo reaching $500,000) have made the idea of owning their own home an unaffordable dream for many. Modern home appliances are something that they can now take for granted (although central air conditioning and central heating are for the most part alien concepts to the Japanese). Consumers have also started to put a greater emphasis on usage opportunities. When goods were scarce, the very fact of ownership itself had value. Yet today goods are available in abundance, and it is storage space (i.e., land and living space) that is in scarce supply. The truism that is implied is that the Japanese sacrifice time for space, while Americans sacrifice space for time. Traditionally, the Japanese have emphasized aesthetic values and have a non-material orientation. Social position and prestige depended less on material wealth than on non-material factors. Frugality was emphasized as a great virtue and consumption viewed contemptuously. However, today the desire for consumption is no longer seen as an evil to be repressed. The legitimacy of aspirations to obtain material reward and to make ones life more comfortable and pleasant is widely recognized throughout Japan. Due to the rise of the shinjinrui, the younger generation, the traditional values have begun to give way to materialism, consumption, and a search for private joy and immediate gratification of desires. Japanese demographic trends are in general discouraging: Birth-rates are down 20 percent from one decade ago and

38 percent below levels of 15 years ago. The average birth-rate is 1.5 children per family compared to four per family in 1945. Fewer kids are surrounded by more wealthy adults and more is spent on each kid. Other general trends include: the greater participation of women in the industrial labour force; the increasingly important role of the younger generation within Japan; the urbanization of farm life; and the increased popularity of greater individualism, public morality, and individual responsibility. Some salient characteristics of Japanese consumers are described below. QUALITY An overwhelmingly predominant characteristic of the Japanese market is that consumers are not satisfied with the rational and functional, but demand a higher level of quality and operation. This is deeply rooted in the Japanese culture. Over many years, Japanese enterprises have keenly competed with one another to carefully meet the demands of the market. This is how successful companies have managed to survive in the Japanese market. Japanese consumers are very choosy and demanding in their purchases. They have a penchant for quality and reliability, which encouraged manufacturers to embrace the zero-defects manufacturing philosophy. Japanese consumers have a reputation for being very demanding about obtaining quality at reasonable cost. They place emphasis on product appearance and packaging as well as on superior function. Japanese consumers have different tastes; have more stringent definitions of quality, and expect more in the way of service. Standards for product performance are also strict. Most Japanese are willing to pay a fair price for high quality and fashion, but also seek to buy inexpensive products. Thus, famous international brand merchandise sells well in Japan (e.g., Rolex watches).

BRAND LOYALTY Japanese consumers are loyal to stores and view the store reputation as a guarantee of product performance. Many of the products are bought because they appear in the right store, and, therefore, the American approach of dominating the media is not as effective in Japan. A gifts value goes beyond the physical product and includes the store it was purchased in; the same gift that is considered good if purchased in a prestigious store will cause loss of face if purchased in a discount house: If one did not think sufficiently well of me to buy it at a prestigious store, one does not think very highly of me. Japanese consumers have grown increasingly fashion conscious. Fads tend to sweep the market quickly due to the nationwide coverage of the mass media and the high population concentration in urban areas. According to the value and lifestyle survey (VALS), only about one-third of the American population can be characterized as conformist and preservers of tradition; the corresponding figure in Japan seems to lie around 80 percent. The need driven grouping in the VALS scheme (accounting for 11 per cent of the U.S. population) has no direct counterpart among the Japanese, reflecting the greater number of minorities and poor in America. Table 1 provides the Japanese VALS segmentation. Table 2 provides the Japanese psychographic segmentation.

Table 1 Japanese VALS Segments

Segment

Percentage

Characteristic

Marketing Concern

Survivors

Struggling for survival

Focus on basics

Sustainers

Concerned with security

Price and warranty

Belongers 39 group focused

Status quo,Risk adverse, Brand conscious

Emulators consumption

Upwardly mobile

Conspicuous

Achievers

21

Materialistic

Luxury and gift items

Inner Directed

Individualistic

Impulsive,

trendy

Societally12 Environmentally conscious

Simple natural living responsible

Socially

conscious

Table 2 Japanese Psychographic Segments

Group

Percentage Description

Conformist: Rural Traditional Silent Majority 10 35 Family commitments, older Working class,undereducated, middle aged Urban Middle Class 25 White-collar, college-educated salaryman Non-Conformist: Stylistic Individualistic Independent 10 5 15 Single women, office workers Non-group, non-socializers Urban, educated, trendsetters

The Japanese elderly are the first generation to have a life expectancy as high as eighty years; as the first Japanese in history to be in their position, they are trying to reestablish their identities as self-reliant members of society. The urban elderly are more affluent, are better educated, and feel like they have accomplished much in the rebuilding and modernizing of Japan. They tend not to be bound by tradition as the rural elderly are. The urban elderly wish to play an active supporting role and retain some social influence. They seek greater individual fulfillment and are very active in the consumption of services, especially travel.

Teenagers and young adults tend to be more influenced by fads than other age groups. The Japanese, as noted in many articles and books, tend to identify and associate with groups defined by their family, school, clubs, or workplace. Members of these groups often seek to dress similarly or own the same accessories.

Form and Function It seems that the Japanese consumer views products much more as valuable in and of themselves, not in the instrumental (utilitarian) manner of a Westerner. For a Japanese consumer, the beauty of a stereo set lies not only in the functional aspects, but also in the appearance, the size, and so on. Whether product features are ultimately functional or not is much less important than to the Westerner; products have an intrinsic value and can thus be enjoyed in their own rights. The Japanese shopper can be found in the store examining products for a longer time than his or her Western counterparts, and shopping becomes a kind of leisure. Professor Paul Herbig Japanese Marketing Lecture Series Lecture Series #20: Collectivism in Japan

COLLECTIVISM Japan is a collectivist society, but also is high on uncertainty avoidance and masculinity and relatively high on power distance. These characteristics suggest a system that seek consensus among group members, but is competitive and has clear distinctions in terms of power; job security is stressed, and jobs are allocated on the basis on gender. Japan is like a group of people on a train. Everyone goes in the same direction. The train cannot stop for one person. In the United States, one travels by automobile, and when you want to stop, you stopvery individualistic. In Japan, no amount of individual sacrifice is too great for the sake of the family or the nation-state. One of the major distinguishing characteristics of Japanese society has been the lack of individualism. In the networks of large numbers of mutual dependents, one cannot conceptually differentiate the self or ego from others. The self merges into the sea of totality of mutual dependence. One always needs to justify his or her existence on the grounds of some type of social unitthe nation, a company, the family. The very existence of the individual is dependent on the existence of some totality. No concept of a private domain exists in Japanese society. This social attitude enables individual members of a private company to see themselves as members of the same clan and motivates management and financial backers to see their company in exactly the same light. This attitude is rooted in Buddhist philosophy and produces a tendency to regard broader human relations in the context of quasi-blood relationships, so that the senior members of a company have a quasi-parental relationship with the other employees. Greater importance is placed on the success of their entire group. Individualism (kojin shugi) was traditionally equated with selfishness and was viewed as a severe character flaw. The Japanese concept for doing something according to ones own style, jikoryu, has negative connotations, while the concept of doing something for the public has the connotation of community well-being. The Japanese people have traditionally shown a willingness to accept discipline, a regimented style, and a lack of individualism. From their very first day in school, Japanese children are taught they are to serve the good of the larger group. They still believe that an individual's willingness to sacrifice for the good of the group is one of the greatest virtues he or she can posses. The collectivist orientation of the people influences all facets of Japanese organizations and remains a strong part of their culture. The concept of loyalty is also a part of the Japanese culture that has been ingrained in the Japanese people for hundreds of years. Their strong sense of loyalty extends beyond loyalty to ones company to family, country, and social groups. The Japanese emphasize the need for group loyalty and cooperation in order to achieve a common cause for the collective good of the entire group. The group is desirable for three reasons. The Japanese are so conscious of their cultural, racial, and linguistic differences that they are afraid of facing the world alone, without the support of a group. Many Japanese tour groups are made up not of strangers, but of work colleagues, association members, and others who already form a group. The tour is a reaffirmation of an established group. Most Japanese go overseas not for a unique experience, but rather to reproduce the experience other Japanese tourists have had. The best group tour is one that is a copy of the tour ones neighbor took the year before. When the Japanese travel, they try to take along a familiar group environment, and they seek out the bits of Japan that have been transplanted overseas, staying in hotels with Japanese management, eating in Japanese restaurants, and traveling with Japanese tour guides and buses. In a Japanese group tour, every minute is accounted for. The tour organizers seem to feel that their charges will worry if they are not told how to spend every spare moment. The collectivist orientation of the Japanese society has been deeply ingrained and a part of their culture for

hundreds of years. It continues to be strongly stressed within the family, the work group, and the formal education system in Japan. The Japanese rank as one of the most collectivist societies in the world. Japanese groups are determined largely by school and college affiliations, year of graduation, place of employment, and date of entry into the hiring institution. Other Japanese groups include families, companies, government departments, and even clubs and organizations. In Japan, the group can be exclusionary; the Japanese are group-centrictheir groups exclude everyone, including other Japanese, from the in-group. Non-members, be they Japanese or foreign, are viewed with suspicion. A newcomer without a proper introduction is not fully accepted as a fellow human being by the group. The Japanese are taught from an early age to adjust their own desires to the demands of the group. Gifted individuals are supposed to let the rewards of talent flow back through them anonymously for the benefit of their group. Even speaking about ones self, let alone about ones achievements, is considered inappropriate. This groupism is reflected in the Japanese definition of the word individualism. The original word in the Japanese language has always been in ill repute in Japan, denoting selfishness rather than personal responsibility, isolation from others, and concern with ones own advantage rather than being willing to work for the welfare of others. To be individualistic means that the person gains by weakening the group or in spite of the group. On the other hand, everyone gains when each member seeks to make the group more efficient or works to help the group as a whole, whether it be a team or a company. Non-members are outsiders whose concerns are less important than those of the own group. The Japanese have sacrificed privacy (individualism) for collective security. The lack of individualism is the price the Japanese had to pay to minimize conflict, a necessity on a small island. Any decision, no matter how trivial, has to be agreed on by the group before it is implemented. Most members become almost family to each other. Companies are often very exclusive and limit advancement within their companies to insiders. Blame for failure is never placed on an individual; rather, it is placed on the group. Management practices give precedence to the personal factors in all decisions and behaviors and attempt to be holistic in the consideration and treatment of employees as well as customers. Everything, therefore, is relative. All employees are forced to share the same set of attitudes and values. Everyone believes that the development of the corporation is a social good and that the accomplishment of the work of the company is a goal of society. If something is for the corporation, this permits one to ignore the expectations of others outside the company and even to break laws. Work is a sufficient excuse to ignore family. Everything is then evaluated in terms of whether it is good or bad for the company community. To be a good employee, one must belong only to the workplace. Japanese staff have a strong identification with their company. If someone makes a mistake, even if it is not you, you feel sorry about it, try to explain it to the boss, and even apologize as if it were your mistake. In Japan, when something goes wrong, the person in charge takes the blame. In the United States, decision making is centralized and responsibility is diffused; in Japan, decision making is diffused and responsibility is concentrated. The level of competitiveness that Japanese individuals may show is often surprising. Even when alone, the Japanese individual knows he has his group behind him, and this group support seems to propel him forward with unbelievable energy. One of the highest goals in life is to be able to contribute to the group against the competition. The Japanese value motivation more than ability as a precursor to success. A good employee is diligent; if diligent, he or she will develop as a person. If he or she develops as person, this will help the company be successful. He or she works hard to cooperate with others and what he or she learns is shared with the group. Individual success is the groups success. In Japanese business organizations, the scope of the job assigned to each individual is not necessarily clearly defined; work is not designed with the individuals job as the basic unit, but rather is farmed out to each section, department, or other unit of the work force. As a result, priority is put on accomplishing the task assigned to the work force rather than on the individual employee who is performing the job. Any rewards that result go, not to the individuals who achieved them, but to the entire group for their combined efforts. One example of cultural differences lies in the importance attached to the group versus that to the individual: In Japan, the impulses and needs of the individual tend to be subordinated to the good of the group; in the United States, any intrusion by the group on the rights of the individual is regarded as unwarranted ( the former is the land of the big WE, the latter is the land of the big I). Compatible with this orientation is a concern in Japan for minimizing differences, preserving harmony, and reinforcing group loyalty; these customs are derived from ancient Japan where a nation short on resources, but long on people, required the participation of all its members in an orderly manner if survival were to resulthence, a strong collectivist tradition evolved. In the United States, the prevailing customs tend to maximize difference, confrontation, and compromise. This individualistic approach may be derived from the frontier days when ones nearest neighbor was miles away and one had to be very driven, self- oriented, and individualistic to survive. The aim of decision making in one is to avoid discord in pursuit of consensus, while in the other it is to promote competition among ideas in pursuit of objective truth. Decisions in Japan tend to be based on mood, but in the United States, they are based on arguments.

Amae The two major aspects of Japanese collectivism are amae and wa. Amae is defined as indulgence or dependence on others; it denotes the connectedness, the complex hierarchical, collective interrelationships that exist in Japan. It is the attitude that nothing of consequence occurs as a result of individual effort, that individuality is

expressed only within the context of the group. Wa is the Japanese concept that stresses group harmony (loyalty), trust, sensitivity, and social cohesion. It translates as the search for the existence of mutual cooperation so a groups members can devote their total energies to attaining group goals, submerging their individual (selfish) goals in favor of the groups goals. Amae is conforming to the wishes of others in order to win their approval. In the United States, a mother tends to push independence on her child; in Japan, the mother, once the baby has left the womb, spends most of the rest of her life seeking to foster the dependence of the child. The dependent child may be compulsively driven by his mothers expectations of him. Education mama, a compulsive mother, often goes to the extreme of sitting in classes for her child when he or she is sick. The individual and the group must know exactly how to behave under any set of circumstances. even before encountering them. Spontaneity is not found among conventional Japanese. They are loath to reveal any feeling that might set them off from their fellows. By subordinating the individual will to the common good, they ensure a collective organism that operates effectively for the good of all individuals. Japan is strongly paternalistic, implying a parent-child relationship between superior and subordinate. This is expressed through policies ensuring lifetime employment, seniority-based promotion, and the provisions of housing, recreation, and shrines through the company. The Japanese believe the leader should be accessible and receptive and should listen carefully to subordinates ideas and suggestions. The Japanese manager and workers have a sense of identity with their work groups, an ethic of cooperativeness, a high dependence on the larger entity, and a strong sensitivity to status. Japanese companies do not function according to the personal abilities or talents of their employees. They move according to human connections. A successful top executive in one company would usually be worthless in another Japanese company. Pirating executives would be meaningless without bringing along all the people that work for them. People rise and fall according to their relationships. They work or refuse to work for the sake of relationship. That is why it is so important to go out drinking and relaxing after work, to establish and solidify and maintain relationships. If coworkers do not know you and like you, you cannot do anything; people act not on the basis of professional responsibility, but on the basis of how they feel. They work hard with and cooperate fully with people they like; they do the minimum for people they do not like. The company trip (shain ryok) reveals the ideals of Japanese life. All the other events in the Japanese business year tend to be formal and to follow the same pattern: drink, eat, drink, play games, sing karoke. The company trip, by contrast, serves to reinforce for the staff the idea that they form a family, perhaps more of a family than the one back home. One reason that Japanese tour in groups is that they have done so at each stage of their lives. It begins with the school (shugaku ryokothe study trip). Such excursions are enjoyed many times during the typical Japanese education. The company operates as an extended family; it employs the entire person instead of just the labor and takes great interest in its employees well-being both inside and outside of work. The company is a place for its employees to participate in social activities. Personal success and company success become interconnected. Motivation also arises from a perceived sense of collective social responsibility and obligations to groups inside and outside the company.

WA Wa (harmony, calmness, a reconciling of conflict) is a value derived from the first article of ancient Japans only constitution: Among a variety of virtues, take harmony and deem it the most valuable. Concern above all else exists to maintain good personal relations (wa) first and then solve problems later. The solution to the problem is often dependent on preserving a good relationship with the person responsible. The person responsible is not simply an individual, but also a member and a representative of a group and a system; it is this group harmony that has priority over all others. The Japanese value system includes an absolute obsession to avoid bringing shame to themselves, to their families, to their company, to their immediate work group, or to Japan itself. Nothing must ever be done that will cause disgrace and tarnish the reputation of oneself or of others. A culture of shame implies a society in which the esteem of others and the evaluation by ones group are the criteria for ones behavior. Duty comes first; putting ones personal feelings above ones duties is viewed with contempt. Wa is so predominant that business relationships and dealings tend to take place between friends: It is the ultimate who-you-know society. The Japanese do not like to deal with strangers. The pursuit of harmony can create some illogical consequences: Agreement can be more important than what has been agreed to. Japanese leaders begin to lead only after they have found out where their followers want to go. The best solution is one that all can support even if a somewhat divisive one might have yielded better results. Sometimes a leader is chosen because he is mediocre and everyone can agree on him rather than because he has any inherent leadership abilities. Wa is so pervasive that it shapes business relationships. Mitsubishi announced a $600 VCR that automatically edits out commercials when it tapes most movies broadcast on television (Japanese consumers use VCRs more to tape movies than to time-shift, which is the predominant usage for Americans). In the beginning, sales were brisk. However, Tokyo Broadcasting System shortly thereafter began to mix its broadcast signals with electronic chaff that would confuse the machines, making it impossible for them to tell the difference between commercials and movies. As a result of the response from the network and the Advertisers Council, and with the purpose of maintaining industrial harmony, the machines were withdrawn, despite consumer wishes and sales volume potential. Its relationships with its peers were more important than its customers desires. Japanese motivation comes through group harmony and consensus; motivation also comes from reputation and company success. Japanese recognition comes through identification with the group with individuals motivated

by rewards shared among the group, such as bonuses, social services, and fringe benefits available to group members. The greatest threat is formal or informal exclusion from the group. The Japanese objective in performance reviews is to ensure that the employee is functioning in harmony within the group: Every member of the group is evaluated on how the group performs, on its contribution to other groups and to the company in general. Although Japanese companies up until recently rarely fired employees, group pressure may force an individual to resign or ask for a transfer. Members of a group must cooperate with and trust each other. One must sometimes subordinate the truth to maintain group harmony. The groups survival is keyed to long-term behavior, and hence, once accepted, it is for life. Without a group one is literally lost. The power of the group is immense, since as soon as he or she is rejected by a group, an individual loses his or her social identity. Promotion of group harmony means ones individuality and originality must be subdued. The Japanese say Deru kugi wa utareru (The nail that sticks out will be pounded down), meaning that being different is frowned on and therefore to be avoided whenever possible. A Japanese managers occupation (accountant or salesman) is typically less important than his group membership (Toyota or Honda); it is the opposite in the United States. Within a Japanese organization, an individuals rank is normally more important than his name, and an official might even introduce himself merely by his title. A job in Japan is not merely a contractual arrangement for pay, but also a means of identification with a larger entity giving the employees a satisfying sense of being part of something big and significant and bringing them a sense of security, pride, and loyalty to the firm. The attitude of employees is that they regard themselves first and foremost as members of the clan rather than as individuals having certain skills only connected to the company by a contractual link and being narrowly constrained to a particular set of functions. Japanese employees are not so constrained. They can and will do any task necessary for clan survival. Japanese staff are, therefore, ready for any efforts to ensure company viability rather than meeting only personal and professional goals. These values of obedience, loyalty, commitment, and harmony derive from Confucian traditions. These values have greatly influenced the Japanese culture and its work environment. The outcome of these values is the internal unity and teamwork seen in Japanese firms. Corporate success and company goals are achieved through group effort and not through the exceptional activities of individuals. Ideally there are no production heroes in a large company. There are, instead, persons whose work groups, teams, or departments have improved their productivity and gone beyond quotas. Sacrificing ones personal life for the good of the company is expected. This often results in giving up accrued vacation time or controlling ones inclination to confront others for the sake of maintaining harmony. Japanese managers are generally conservative and risk averse. Traditionally, Japanese managers have not been rewarded for successes as much they have been penalized for failures, the epitome of the bureaucratic approach to management. This is probably why Japan is a highly regulated society. Most of the regulations involves entry barriers or price controls. The mining, construction, finance, utilities, transportation, communications, and agriculture industries are almost completely regulated. The reasonto secure fair competition, protecting of established firms through creation of oligopoly conditions. Japans government has a much more intrusive role. Fierce competition between companies exists, but is expected to remain within the context of harmony and national interest. The creation of an industrial or national consensus is deemed far preferable to a situation in which firms engage in such brutal behavior as unabashed competition. Cooperation between government and industry is viewed as natural. As long as cooperation does not lead to gross violations of accepted rules of conduct within the society, it is considered to be an important part of the function of government. The government, therefore, is a sort of guardian or godfather for industry, with the companies and the public acting as the governments godsons accepting this relationship as necessary for the national interest of Japan. The Japanese quest for freedom for individuals is subordinate to the far greater emphasis on order and harmony that prevails throughout the society. Order and harmony take precedence in Japanese organizations: individual behavior not only within, but even outside the organization is specified in great detail. A high level of conformity to the specified pattern of behavior is expected in everything from punctuality to the exchanging of greetings to the seating and speaking order. Even after work hours, employees are expected to conform to stands of public conduct consistent with their membership and position within the organization. One is willing to totally submerge ones private life to the totality of the company; one exists, not for ones family or for ones own purposes, but foremost for the good of the company and country. Konosuke Matsushita is widely regarded in Japan as the supreme master of the way of wa. Matsushita codified his wa approach to management in seven objectives: National service through industry harmony cooperation struggle for betterment courtesy and humility adjustment and assimilation gratitude

What the Ten Commandments are to many Westerners, these seven objectives are to the Japanese. Professor Paul Herbig Japanese Marketing Lecture Series Lecture #11: The Japanese International Marketing Strategy ROADS TO INTERNATIONALIZATION The Japanese have traditionally followed one of three possible roads in their pursuit of global market expansion. The most prevalent route is moving from Japan to developing countries to developed countries. The strategy here is to build up the Japanese home market by making products that replace those imported from the West; then, by expanding domestic market share, economies of scale are gained. This is enabled by government protection, import restrictions, import duties, and foreign investment restrictions. Southeast Asia, which typically has less competition, has often been used as a base for building volume and sharpening marketing capabilities. With such marketing experience gained, cost improvements realized from such volume, and continuous improvement of product quality, the Japanese are ready to enter the markets of more advanced countries. Here the Japanese companies tend to focus on specific geographic areas and market segments ignored by local producers so as to gain product and customer knowledge in order to build acceptance and capture market share. This has been the route used for the steel, automobile, petrochemical, consumer electronics, digital watch, and camera industries. The second path has been to secure the Japanese home market and move into developed countries and then into developing countries. In particular, Japanese companies using this route seek a developed country similar to the United States as a testing ground and a trial markets for their products. Australia is typical. Since Japan lacks natural resources, land is scare, and labor is skilled and loyal, Japanese companies tend to focus on industries that require high skills, are highly labor intensive, and require only small quantities of natural resourcesindustries that have strong economies of scale and strong experience curve effects. The Japanese corporate strategy is to enter the market with a low-priced, improved product; capture a large market share; and in the process bring down manufacturing costs to allow real learning curve effects to take place as well as margins to be generated. The companies then move into other developed countries as demand grows. In the American market, Japanese companies use price and distribution to penetrate the marketplace, relying first on becoming an original equipment manufacturer (OEM) or obtaining private-label business from American manufacturers or distributors; the resulting products are priced 10 to 20 percent lower than those of comparable local producers. This was the strategy used in such high-tech industries such as computers and semiconductors. The third route to international success is producing products to sell in developed countries instead of the home market. These are products for which the home market demand is not developed or is too small to serve, including VCRs, color television sets, and sewing machines. Kao, Japans leading producer of soaps, detergents, and personal care products, historically considered its foreign subsidiaries as delivery pipelines for the companys standardized products to be exported from its Japanese plants. Typically, though, Japans own home market is the mainspring of its industrial dynamo; Japan has a huge homogeneous market, composed of middle-class consumers that eagerly absorbs new products, that provides the basis for scale economies, and that is the primary market for most Japanese manufacturers. Most manufacturers feel most comfortable producing for and selling to the domestic market. For many manufacturers, exports constitute the secondary market, not the market of choice. For a Japanese company to develop a global market network, it necessarily must work through the five stages in the process of becoming internationalized: 1. Utilize sogo shosha or local distributors. 2. As the company gains a foothold, replace local distributors with its own overseas sales branches and distribution networks. 3. Begin local production in less developed countries. 4. Start local production in developed countries using local labor and raw materials as necessary to avoid local protectionism. 5. Increase the global market by establishing plants (by acquiring companies, buying factories, or starting plants from scratch) around the world and deciding what to produce where for which markets. Japanese companies are fanatical about organizing teams to study competitors and consumer preferences. They have no hesitancy to hire the best American industry specialists to help manage their country-entry strategies into the United States (or local specialists for whatever country they are pursuing). They typically use the Japanese domestic market for product development and testing before entering the United States marketplace. The experience in the Japanese market provides insight into customer preferences, product deficiencies, and effective marketing strategies. Japans market-entry strategy involves segmenting the market, targeting a segment that the competition is not adequately servicing, designing a product for that market segment, entering with a low price, offering high quality and service, developing a strong distribution system, and backing the product with heavy promotion and advertisinga market-entry strategy in classic marketing textbook fashion. The Japanese typically carefully analyze overseas market opportunities through exhaustive market feasibility studies before entering any market. They select those attractive opportunities that match the economic goals of the Japanese corporation and develop products that the customers want or need. The market-entry points and the timing of the entry are chosen with the objective of obtaining a strong initial share of the market. Once an initial foothold is gained, the strategy then shifts to market penetration tactics that will broaden the customer base, continuing to expand market share. This has been the preferred strategy over the last forty years. The global marketing strategy tends to be to enter a market a well-defined product with high-volume sales potential, typically at the cheaper, less-glamorous end of the product line, one that is often overlooked and not well-served by local manufacturers since it typically provides low margins, and then offer new product features or low-priced,

stripped down versions of existing products at a substantial cost saving. Japanese companies emphasize quality and service. If necessary, they will use low bids to get the business, offer middlemen higher commissions to push products, encourage joint promotional efforts, and support their products with heavy regional advertising. Once a beachhead has been secured, the Japanese increase share for their product and move up to the middle and upper ranges of the product line, while maintaining consumer satisfaction through low prices and high quality. The Japanese need to sell a great deal; therefore, they seek market share at any price. They export huge quantities at low prices. As soon as one company drops its prices, all others will do the same. They secure market share by flooding markets and engaging in price wars and often are suspected of dumping.

MATSUSHITA Matsushita provides a classic example of internationalization. It has 150 plants in thirty-eight countries. Over one-half of its sales come from overseas business. Foreign factories supply two-thirds of all goods sold abroad. Many of these foreign factories have full- fledged R&D labs with the authority to redesign any product or component from the ground up. Its founder, Konosuke Matsushita, said, When you go abroad, dont eat another persons pie. Matsushitas lessons for going global are: Be a good corporate citizen in every country, respecting cultures, customs, and languages. Give overseas operations your best manufacturing technology. Keep the expatriate headcount down and groom local managers to take over. Let the plants set their own rules, fine tuning manufacturing processes to match skills of workers. Develop local R&D to tailor products to local markets. Encourage competition among overseas outposts and with plants back home. CROSS-CULTURAL ANALYSES Cross-cultural marketing strategy analyses comparing Japanese and Western firms have been consistent in their findings regarding Japanese marketing and business practices. The Japanese companies have a stronger competitive drive than most Western companies and pursue market share, aggressive growth, and market domination strategies to a greater extent. They tend to be more adept at exploiting strategic windowsopportunities created by new market segments, changes in technology, or new distribution channels. They prefer market adaptation rather than innovation. They are not technological pioneers and are risk averse. Redesign, upgrading, and rapid commercialization of innovations made elsewhere appear to be their common priorities. They search for new or emerging market niches and do not attack the market leaders head on, but rather spot emerging segments not yet prioritized. They pursue a follower, not a leader, strategy. Japanese companies tend to pursue more aggressive marketing-mix tactics, which usually involve low prices; rapid product line extensions; and high expenditures on advertising, promotion, and dealer incentives. Japanese companies concentrate on long-term profits and gaining market share. Western managers, however, are usually oriented toward short-term profits and productivity improvements and are often willing to lose market share to boost profit performance. Japanese subsidiaries have extremely high market share objectives, and they are willing to make longterm sacrifices to achieve their objectives. The Japanese typically see profit not as the central objective, but rather as the result of satisfying the aspirations of customers and achieving market share. They view customer service as their major differential advantage. Their product policy emphasizes their superior quality compared to their competition. The Japanese often view other Japanese companies as their only major competitors. They are most concerned about the new products and the quality levels being developed by their competition. They perceive superior quality and reliability as key competitive advantages. In fact, much of the actual competition results from the bitter rivalry between Japanese companies, which fight one another for market share. Without really knowing it or intending it, they manage to expand largely by driving weaker local firms out of the market altogether. Market dominance is characteristically their central objective. Japanese firms and their managers are more committed to a market than Western managers. They increase market share by winning over competitors customers. The Japanese tend to have smaller, simpler business units organized around a single product line or market, with clear marketing plans aimed at building long-term market positions and focused on quality, service, and continuous incremental innovation. What usually occurs in the West is that local companies retreat into the small high-tech premium niche markets (American) or stick with the low-value-added bottom end of the market (British). The Japanese end up capturing the mass market and move upward into the premium segments. By withdrawing, Westerners have provided the Japanese a foothold in the market from which to build experience, cash flow, and distribution capabilities and have allowed them to create a base from which they can move into the upper market niches. The primary Japanese vision has been the civilian application of technology; improved methods of production and process innovation are the dominant concerns. This is usually technology acquired from abroad. Companies have been encouraged by the government to find ways to more rapidly absorb and add to the imported technological knowledge to improve efficiency and product quality. Technological self-sufficiency appears to be the key phrase for the Japanese. They tend to look at an emerging technology or market area from the perspective of vulnerability rather than risk. The question, to them, becomes how vulnerable a firm is if it does not enter a new technology rather than what the risks are of entering it. Its system of decision making imposes a predisposition to enter a new technology in order to keep up with or gain an advantage on competitors. The Japanese approach a research project from the point of view of multiple applications. It is undertaken not because it will solve a particular problem, but because it may contribute to solving a number of seemingly unrelated problems. By way of contrast, Americans are typically more narrowly focused. After they begin in their home market, the Japanese then examine developed countries. If markets there are found to have considerably less competition, they attempt to build volume and sharpen marketing capabilities. Japanese companies focus on specific geographic areas and market segments ignored by American producers in order to gain

product and customer knowledge from which to build acceptance and capture market share. They do a careful analysis of the competition to find a niche in the industry where larger competitors seldom concentrate their efforts. These holes provide opportunity gaps, usually at the low end since American firms traditionally have emphasized higher-value products with higher profit margins. ECONOMIC RATIONALE In order for Japan to survive, it must import almost all of its raw materials, process them, and export finished products. These factors have forced the Japanese to seek and penetrate international market segments for their survival. The Japanese have focused many of their efforts on seeking international product acceptance, achieving a solid market share with those products, and continuing to gain experience in competing within international markets. The Japanese have built and are running exceedingly successful businesses; yet their basic business strategy not only violates everything a Western executive knows, but also is incompatible with the economists theories of economic behavior and microeconomics. Nonetheless, the business strategy of a Japanese enterprise, while indeed different, is not irrational. It optimizes in perfectly rational fashion the specific structural realities in which Japanese businesses operate, especially those of banking and capital markets and those of wage systems and wage structures. Measured as a percentage of sales, Japanese business enterprises, especially large business, perform at a much lower rate of profitability than Western enterprises in similar lines of businesses. Profit in reality does not matter much to the business enterprise. The profit that matters to the economy is what the banks return. The Japanese exploit markets by using a market share pricing strategy; a low entry price is used to build up market share and establish a dominant market position in the long run. SELECTING INDUSTRIES AND MARKETS The Japanese government and companies both play a large role in selecting the markets that Japanese companies will enter. They work together to identify attractive global market opportunities that may exist for the companies. The government and companies work as partners with respect to industry direction, technology development, and export trade. One main element in Japan's industrial strategy is the selection of a "targeted" industry. MITI is responsible for the selection and support mobilization of the "targeted" industry because it then becomes a high priority area for Japan's national resource commitment. Many factors help shape and influence this selection process. MITI examines the timing, the technological condition of the industry, and the economic parameters of the industry. Japanese firms carefully look at the "targeted" industries evolution. These firms look for industries where market leaders are underfinanced or complacent and their customers are dissatisfied. The Japanese analyze the industries market segments, searching for those that exhibit strong economies of scale and strong experience curve effects. Their strategy is to enter this market segment with a lower-priced product that has improved features, capture a large market share, and during this process lower their manufacturing costs still further. During this industry analysis, selection, and planning phase, the Japanese look for product market sectors that will allow product market development and not just the capture of the existing market share. The Japanese have been highly successful at developing new product concepts and modifying existing products that are matched to substantial pockets of unmet demand. The major strategic advantage lies in knowing the environment thoroughly, seizing the initiative, and forestalling the enemy at every point. One particularly popular samurai tactic was to injure the corners, strike at the corners. If the corners are overthrown, so goes the tactic, the spirit of the whole body will be overthrown. Then one should follow up the attack when the corners have fallen. This strategy has been continuously played out in industry after industry: automobiles, semiconductors, consumer electronics, motorcycles, copiers, and earth- moving equipment. The Japanese are masters of this continuous policy of looking for differences, geographical or otherwise, in the total market and then exploiting of these differences. The objective is to create competitive gaps through strategies that will either cause brand switching to occur, especially in non-growth markets, or increase market potential in industries with untapped growth opportunities. When the Japanese enter a market behind the innovators, their strategy has been not to attack the leader head on, but to spot emerging segments not yet prioritized by the leaders. The 35 mm camera is an excellent example of this type of market strategy. The market for that camera was dominated by two German companies, Rollei and Leica. The Japanese did not enter the professional market these two companies dominated, but simplified the product, lowered the price, and rapidly took the growing amateur camera market. After the Japanese were successful in capturing this market, they rolled back into the professional market segment and then used their newly won scale and experience advantage to sweep aside their German competitors at the top end of the market. As typical of strategy as it is for the Japanese, it tends to surprise many an industry leader. The Japanese do not target industries that are strong and serving their existing market segment well. They choose to market to product sectors where they feel the existing industries are unable or unwilling to respond vigorously to their market entry. The Japanese also look for existing industries that will withdraw their entire market sectors if they enter. This is a strong competitive strategy they use to their advantage. When attacked by Japanese competitors, the American and British companies frequently withdrew from the mass, volume market. The American companies tend to rationalize their withdrawal from these markets by focusing on niche strategies. The Japanese used the volume markets they withdrew from to build experience, cash flow, and distribution capabilities that were then utilized to penetrate the few remaining niches held by the American companies. Japan's attack strategy on niche markets has proven to be very successful. When they enter a niche market, they upgrade their products from the low end in order to stretch their product to the upper end of the market, while not abandoning the low end. While many American and British companies focused on small-volume, higher-margin segments when attacked by Japanese competitors, these were not sustainable for a long period of time against those same Japanese competitors. When Japanese companies have exported products, they test them out in Southeast Asia and a few American cities (particularly Los Angeles) to learn how to better market them abroad. When the situation looks risky, they take one of two paths: They ask trading companies to do the overseas marketing on their behalf, or they accept OEM deals under well-known American or European brand names. Eventually, as they learn the market and become more established, they bypass the trading companies, the OEM dealers and the distributors and insist on own-brand marketing.

ENTERING A MARKET When the Japanese decide to enter a market, they spend several months analyzing the feasibility of the market. Their study teams evaluate the market and then determine an appropriate strategy for market entry. When entering an American market, the Japanese hire American professionals (consultants, executives, and industry specialists) to help determine the appropriate market-entry strategy. Within any market they enter, the Japanese frequently choose a local, rather than a Japanese director, to help develop and oversee their marketing effort. After a market-entry strategy has been determined, the Japanese focus on clear objectives and plans for that market segment. They are oriented toward long-term market objectives and strongly commit their efforts to achieve success within that market. The Japanese focus remains on products that will suit that chosen market. Japanese organizations are highly committed to success within those markets, and this translates into perceived security and confidence among their employees. They create highly flexible organizations, which provide a framework for innovation, teamwork, and mutual problem solving. One common market-entry strategy is to bring out a smaller version of an existing product. Xerox saw its share of the American copier market drop from 80 percent in 1976 to 13 percent by 1982 because of a smaller version of its copier offered by the Japanese. American manufacturers traditionally tend to encourage larger products because their profits are greater on larger-sized products. Japanese companies tend to enter market segments at the low-price end and then move upward into the higher-value -added segments. They offer new product features on existing products within the market segment and sometimes offer fewer product features at a substantial cost savings to the consumer in order to gain market share. Another market-entry strategy is to sell their own product to a private brander, and, after it has achieved a market share, they introduce their own brand of the same product. Often it is a product that is of higher quality and has more features and a better design. Many times the Japanese will simply price the same product lower than the private brand. Their emphasis on, and reputation for, high-quality and reliable products has become a marketing tool they have successfully used in the international markets since 1980. When entering a new market, they can capitalize on this reputation and actually produce a higher-quality product than is being produced for the market. Since the Japanese use more automated production methods and implement more quality assurance systems, this is an extremely strong marketing strategy and tool. Even though the Japanese produce high-quality products, they also provide excellent service centers for their products to help ensure customer satisfaction. The Japanese locate these service centers within the markets they enter so that if a problem arises with a product, it can be quickly repaired to ensure their reputation for quality and exceptional customer service remains intact. After the Japanese develop an excellent product and establish service centers, they place a tremendous emphasis on integrating distribution into the marketing mix. They integrate distribution into the marketing mix by developing markets region by region, and lining up strong distributors in each market. Along with strong distribution, they back their products with strong advertising and promotions to help bring the products to the consumers attention and differentiate the products from those of their competitors. Japanese companies tend to enter foreign markets one after the other in quick succession, using low price, high quality, heavy advertising, and shrewd knowledge of customers and competitors gathered prior to penetrating the market. The market intelligence forces of a trading company transmit back to headquarters the information that such and such a segment in Country X looks promising. The local JETRO office also sends a similar report. These signals will be received by several Japanese firms concurrently. First, they open a type of forward listening post and call it a liaison office. This office will usually consist of two to three men who will be responsible for communicating details of the market culture and its dynamics back to the headquarters in Japan. Each keiretsu member tends to establish a separate liaison office about the same time. Entry, therefore, tends to be simultaneous. The rapid successive entries of Japanese companies, all suddenly vying for one particular market segment and battling each other without mercy for market share there, often lead to the trampling of the local companies. All competitors tend to follow, since if one company has gone completely through the decision process, convincing the chain of command that it is a right and fruitful decision, then its rivals will consider it a necessary step and thus a matter of pride to initiate the same action. This lemming-like approach goes back to the vulnerability of losing market share and losing status and face as a result back in Japan. JAPAN AS AN INTERNATIONAL PLAYER Japan has also systematically avoided rules of international free trade. Foreign goods that rivaled Japanese products were kept out of the home market by either discriminatory tariffs or a variety of non-tariff obstacles. Only after it has bought foreign expertise, given its manufacturers special incentives to catch up, and built up economies of scale and experience, does it favor free trade; its usual strategy is to dump goods abroad, while keeping them highly priced in the home market. A survey completed in 1990 by the U.S. Federal Trade Commission of a range of internationally traded goods found the prices of imported goods to be 80 percent higher, on average, in Japanese stores than in their country of origin; foreigners, though, paid an average of only 20 percent more for imported Japanese goods in their own stores. According to Securities Data Co., the Japanese were the managers on sixty-three new equity and bond issues in the United States in 1992; by way of contrast, American brokers in Japan managed but one deal in 1992. Non-Japanese firms underwrote only 2.6 percent of all Japanese bonds issued in 1992, and even less of equitiesjust another example of maintaining the Japanese status quo by keeping Japanese markets Japanese dominated. The procedures an exporter must go through are typically not transparent, not open, and not based on criteria known to all who are affected. Japan's national industrial strategy has always distinguished between export and domestic industries. Resources and policies were applied to maximize performance in export industries. Domestic industries, those without foreign markets or competitors, were never a priority. Many domestic industries exhibit dismal records of productivity and performance. For example, the U.S. Postal Service delivers twice as many items per employee as the Japanese Postal Service. Amtrak reports six times more passenger and freight miles per employee than the Japanese National Railway.

The American residential construction industry is several times more productive than its Japanese counterpart. Other extreme productivity gaps appear in wholesale and retail distribution, health care, food, and lodging. Once the markets are truly opened, the inefficiencies of the Japanese domestic marketplace will become apparent. The Japanese trade surplus is the result of encouraging firms to export large quantities of mass produced industrial products, while keeping foreign products and corporations out of Japan. The Japanese form of capitalism is not capitalism as is described in the West. The Japanese form of capitalism is more that of a controlled economy. Dependence on and submission to government control are achieved by administrative guidance. A thorough reform of barriers to market entry would lift the average Japanese familys real income by 18 percent overnight and create a million new jobs. Professor Paul Herbig Japanese Marketing Lecture Series Lecture #12: Keiretsu HISTORY OF THE KEIRETSU The keiretsu is rooted in the ancient relationship between feudal landlords, or daimyo, and their samurai. Ancient Japan was divided into small feudal fiefdoms called han. Each han was ruled by one manthe daimyowho lived in a castle town surrounded by the agricultural land that provided his tax base and power. Members of the daimyo's extended family, related through marriage or adoption, were entitled to wear the family crest. Below the family were his most trusted retainerssamurai, who served the household. On the bottom were the commoners, including farmers, artisans, and merchants in that order. They were viewed as expendable resources, born to serve the daimyo and his family. Samurai were expected to show unwavering loyalty to their daimyo. The common people were also bound to their han, most not being allowed even to travel to other fiefs. Today the largest Japanese corporations (viewed as contemporary fiefs) may be considered modern hansthey act and are treated as if nothing has changed over time. The parent company is the daimyo, the supreme power, the apex of a pyramid in which production flows from the bottom up and rewards from the top downa vertical hierarchy. In the pyramid are layers of subcontractors whose only function is to produce a small quantity of goods for the company just above them in the pyramid. No matter how bad times may get, companies can never leave their industrial group to seek employment elsewhere. If they tried, no one would hire them. This provides obvious benefits to the parent companies in that it provides a group of highly skilled and motivated captive workers. The Japanese obsession with market share also has traditional roots. In the han, prestige was based more on the number of retainers or the amount of land a lord had or the amount of rice one had stored away than on such a petty thing as moneysomething that only primitive merchants might covet. The keiretsu has its origins in the Meiji era. The Meiji government, having launched a variety of enterprises ranging from mining and shipbuilding to the manufacturing of cement, paper, and glass, had sold most of its commercial ventures to private businesses at firesale prices by the end of the nineteenth century. This resulted in the select group of family-controlled industrial and financial enterprises known as the zaibatsu. Zaibatsu officials moved easily in and out of government positions and bonded with politicians and the military, often through intermarriage. The larger zaibatsu in prewar Japan owned significant interests in as many as ninety different companies. These thirty or so were giant trading conglomerates and, in fact, ran most of preWorld War II Japanese industry. Between August 1946 and August 1947, eighty-three companies were designated as holding companies by the American occupation forces, and, in 1947, ten families controlling these and other companies were designated as zaibatsu families. Most of their shares were transferred to the Holding Companies Liquidation Commission. Shares were then offered to the general public. By March 1950, individual holdings reached nearly 70 percent, with no individual allowed to acquire more than 1 percent of any company. A January 1948 law banned all members of the ten zaibatsu families and high-ranking directors of 240 zaibatsu-related companies from assuming directorships of related companies for ten years. The Antimonopoly Law of 1947 imposed a 5 percent ceiling on bank holdings in the stock of any single company (which was ultimately raised to 10 percent in 1953). Intercorporate shareholding was also virtually prohibited via the same law, but it was repealed in 1949. By 1949, 69 percent of the shares in the ten largest zaibatsu were held by individuals. The fall of China and the Korean War made Communism a far greater threat to the United States than Japan. Fears of Communism in Japan changed the plans of the occupation authorities. The zaibatsu structure was seen as providing an organizational framework that could quickly contribute to initiating and sustaining economic rehabilitation. The zaibatsu dissolution program was virtually abandoned in 1949. By the mid-1950s, the old zaibatsu began to reassemble and were actively encouraged by the Japanese government for two primary reasons: First, interlocking ownerships and close buyer-supplier relationships would help keep out foreign imports and investment; second, the government was concerned with concentrating on scarce industries deemed critical to Japans long-term economic security. It was felt that the groups, with their strong bank backing and diversified risk, could be directed more easily by the government into strategic industries. Mutual shareholding increased tremendously during the 1950s and 1960s. By the end of 1968, 30 percent of the total outstanding stock was held by financial institutions. Shareholdings by other business corporations had risen to nearly 25 percent. By this time, the companies had takeover threats from abroad, which had never loomed before. So they began accumulating each others shares, in some cases by exchanging stock in cashless transactions. They went on a final buying binge in the early 1970s, since the government was opening the economy to increased foreign investment, raising the scary prospect of foreign takeovers. By the time foreign companies were allowed to buy Japanese firms, most of the target opportunities had been ensconced in the cocoon of stable shareholdings. Since that time the original companies have bought back nearly 75 percent of their shares. While the zaibatsu went through some difficult times following the war, they have returned in recent decades under the name of keiretsu. The keiretsu system during the 1980s and into the 1990s has begun to go global with significant consequences for the world economy as well as the keiretsu itself: "These same gigantic economic networks have put down roots (in the United States) and are growing like kudzu all over the country". The Japanese economy relies on

collegial groups that are based on various relationships created within and between companies, giving rise to a phenomenon of dependence induced by mutual reliance among persons. The key difference between Japan and the West is that the government, too, is a member of this collegial group and does not have an adversary relationship with other participants in the market.

THE KEIRETSU SYSTEM The keiretsu system has been one of the driving forces behind Japan's industrial success. It involves companies owning pieces of each other and working together to develop better products, better methods, and lower prices for the benefit of all members. This cooperative subsystem operates within the context of a competitive system. Due to the interlocking ownership, keiretsu members do not need to sacrifice the long-term corporate goals in favor of short-term profits. One of the major criticisms of this system has been the concentration of tremendous economic power in the hands of a few executives. Besides being bound by ownership, keiretsu associations involve joint ventures, interlocking directorates, intragroup financing, long-term business relationships, and social and historical links. Because approximately three-fourths of their shares are held by other corporations (which are deemed family members), short-term pressures are minimal. Group harmony, or wa, is promoted at all corporate levels, even to the extent of having group magazines and newsletters. Most large Japanese firms maintain the same sorts of relationships with groups of stable shareholders, closely knit suppliers and customers, and a main bank that stands ready to provide emergency financial help if necessary. This can enhance productivity, but such relationships have inhibited fair competition among firms in Japan. Japanese companies routinely pool and share information. This behavior probably has its roots in traditional rural village life where planting, irrigation, and the harvesting of rice are activities that have to be shared. Ad-hoc keiretsu missions and study groups are continuously formed to provide feedback to the standing committees and more permanent bodies. Another characteristic is the central role played by major keiretsu institutions, the general trading companies and banks. This role encompasses a special organizing function and leads in bringing the group's firms together in joint ventures, both domestically and overseas. The position of the keiretsu bank is particularly strategic. It is the nucleus of a keiretsu financial institution, and, in terms of pooling resources, it maintains a control power based on the provision of funds and shareownership and provides guidance to corporate investment behavior and opportunities. Keiretsu cohesion drives toward accomplishing a general objective. Such a drive exhibits a keen sense of industrial competitiveness along with concurrent industrial policy objectives in the form of a tense race with a keiretsu counterpart. The concept of the keiretsu is that it functions as a nexus of relationships. The network is built to accommodate certain patterns in the flow of resources that will enable development and a level of competitiveness of keiretsu enterprises. Keiretsu companies have clubs where their CEOs (for example, the presidents of the thirty or so major Mitsubishi group of companies or the Sumitomo group of companies) meet regularly to exchange business views and ideas, examine new opportunities, and help troubled member companies. The kinyo-kai, lunch meetings on the second Friday of each month, are popular in generating business strategies. These meetings in a relaxed environment provide open channels of communication, which create trust and encourage deal making. Each company holds minority shares in the others. They are dependent on the other member companies for up to 20 percent of their supplies and sales. This keeps competition intense within the market and with each other. Member firms enjoy the financial safety net that encourages long-term investment and high risk taking. They work together to create a family of companies that depend not on formal controls, but only on mutual interesta characteristic ingrained in Japanese heritage. The keiretsu can demonstrate great power in an industry by excluding non-family firms, allowing one company to set prices and control contracts at another. Table 1 lists the major keiretsu groups as well as all the interlocking companies associated with the Mitsui group. Note that the Mitsui keiretsu has an associated company in virtually every major industry in Japan. The other keiretsu groups are also structured this way. The keiretsu system combines horizontal scale, diversified production of related systems, vertical technical coordination, and market discipline. Hence, each sector concentrates on guaranteeing stability and economies of scale, while preserving internal rivalry. Japanese producers have access to stable capital flows through both their parent companies and their banks in order to insulate themselves from short-term financial pressures, thus allowing them to participate in considerably risky long-term R&D. Keiretsu may not be overtly illegal, but they do discriminate against imports, since members look to purchase from other keiretsu members. The consortium of keiretsu members usually leads to an exclusion of foreign competitors from the Japanese market. These associations tend to deny foreign businesses the acquisition of companies that could serve as a method of market entry. The keiretsu believe in wan setto shugi: that each keiretsu should have a company in each major industry. Thus, six to ten well-backed competitors exist in most major industries in Japan. As a result, if a company introduces a successful product in a new field, soon others will also compete in the same market. This often leads to kato kyoso, excessive competition, which tends to result in overinvestment in capital equipment and invites government intervention through managed investment, leading to a cartel-controlled pricing structure. Under this cartel scenario, prices are usually raised to artificially high levels so as to allow the companies to make up the profits they would have made during the market share accumulation era. These high prices are further evidence of the producer power that controls the economy of Japan.

-------------------------------------------------------------------------------Table 1 Keiretsu

Major Keiretsu: Mitsui Mitsubishi Sumitomo Fuyo Sanwa Da-Ichi Industries and companies associated with Mitsui keiretsu: Segment Associated Company Commercial Banking Mitsui Bank Trust Banking Mitsui Trust & Banking Life Insurance Mitsui Mutual Life Insurance Non-life Insurance Taisho Marine & Fire Insurance Trading Mitsui & Co. Coal Mining Hokkaido Colliery Construction Mitsui Construction Sanki Engineering Food and Beverages Nippon Flour Mills Textiles Toray Industries Pulp and Paper Oji Paper Chemicals Toatsu Chemicals Mitsui Petrochemicals Glass and Cement Onoda Cement Steel Japan Steel Works Non-ferrous Metals Mitsui Mining & Smelting Electric Machinery Toshiba Transportation Mitsui Engineering & Shipbuilding Toyota Department Stores Mitsukoshi Real Estate Mitsui Real Estate Development Distribution Mitsui O.S.K. Lines Mitsui Warehouse

Member firms try to keep as many business relationships as possible among themselves and help each other cope with business fluctuations by employing redundant personnel, and by providing financial and any other assistance necessary. Membership in a keiretsu enables firms to achieve more stable performance, steady growth of productive capacity, and less fluctuation in profit than experienced by non-keiretsu firms. This stability encourages investment in new technologies and helps to keep out foreign products and investment; often the keiretsu firms buy only from each other and work jointly on research projects. For example, if you are part of the Mitsubishi keiretsu, you drink Kirin beer, bank with Mitsubishi Bank, buy securities from Nikko and insurance from Meiji Mutual Life, drive a Mitsubishi car and insure it through Tokio Marine and Fire. Nonetheless, there is a price the keiretsu pays for stability, since profits tend to be lower for group members than non-group members. TYPES OF KEIRETSU: HORIZONTAL, VERTICAL, AND DISTRIBUTIONAL A keiretsu may be one of three types: (1) horizontal (financial keiretsu )a collection of major companies from several industries typically including a major bank, other financial institutions, and a giant trading company; (2) vertical (sometimes called production keiretsu)a large manufacturing business dictator controlling affiliated suppliers and distributors; and (3) the distributional ryutsuwhere a manufacturer owns or controls its own distribution channel including wholesalers and retail outlets. The three distinct patterns are not exclusive. A keiretsu formed through horizontal ties accommodates enterprises that are being created through vertical integration and perhaps distributes through its own distributional keiretsu. Separately, enterprises that are of the third type, but comparatively independent, are often inclined to establish certain links with one horizontally held industrial group or the other. Thus, linkages among Japanese firms represent an economic effort that is both strategic and tactical. Horizontal Keiretsu Approximately 70 percent of the outstanding stock of the six horizontal keiretsu is held by affiliated Japanese financial institutions or corporations (mostly member companies), so takeover is unlikely. They are controlled by the shahokai the presidents council or member companies. They meet regularly to discuss mutually beneficial joint ventures and the possibility of creating new member companies to fill industry and product gaps. They are not contractually

bounded, but are tightly associated in a mutually beneficial economic way. Horizontal keiretsu span many diverse industries and are generally centered around a major bank and trading company. They may have as many as forty-five core companies. Member companies share their knowledge and a mechanism to allocate investment in strategic industries. The five largest include Mitsubishi (28), Dai-Ichi Kangyo (47), Fuyo (29), Mitsui (24) (shown in Table 12.1), and Sumitomo (20). They account for 10 percent of the companies on the Tokyo Stock Exchange and include more than half of Japan's largest 100 companies. They employ nearly 10 percent of the work force and account for one-sixth of Japan's sales and profits. Sumitomo Bank has substantial stock positions in nineteen core Sumitomo companies. Since each keiretsu has a bank, commercial bank borrowing has become a more important source of investment capital for the typical Japanese company than the sale of equity. Heavy dependence on bank debt has made interest payments a major fixed cost for most Japanese corporations, and rapid sales growth is one of the best methods to reduce the burden of such fixed costs. The keiretsu structure provides several advantages, including blocking out foreign competitors, lowering the cost of capital, ensuring markets and loyal suppliers, providing lower prices and increasing information, giving preferential access to buying departments, allowing early use of technology, getting knowledge of international opportunities from banks and sogo shoshas, and providing access to consortium projects. However, this system also diminishes the role of stockholders and the value of stock and dividends. In the United States, horizontal keiretsu have been blamed for the $10 billion auto parts trade deficit with Japan because of their closed business practices. Horizontal keiretsu are associated with a significant reduction in imports, but have no effect on exports. They tend to inhibit entry rather than improving competitiveness. Vertical Keiretsu Vertical keiretsu are exemplified by Toyota Motor Corporation and its set of contractors, where there exists a web of interlocking long-term relationships between the large manufacturer and its main suppliers. Once admitted to the keiretsu system, a supplier of Toyota knows it will not lose the giant company's business in the near future. This confidence and stability create mutual trust, thereby encouraging the supplier to be reliable, share information, participate in joint development projects, and so on. Suppliers, in essence, invest in the relationship with Toyota. These linked suppliers followed the parent company to the United States, and today they deliver in the United States the same as they do in Japan. This subcontracting system hinged on contracting companies creates a division of labor not found in the West; Toyota has only 60,000 employees, but it has 600 first-string subcontractors, which then deal with hundreds of other suppliers. Japan has over 800,000 small and medium-sized manufacturing companies that increasingly find themselves the captives of larger companies. By 1980, two of every three companies were classified as subcontractors of larger firms. Subcontractors and suppliers, those in the second and third tiers, do not have the protection of lifetime employment (which is typically until age fifty-five). The parent firm helps the subcontractor with supplies, technical assistance, and investments in machinery. It will not usually turn to cheaper subcontractors. But the lower-tier firm must accept its role as shock absorber in periods of economic downturnmeaning that they must be willing to accept lower prices (usually mandated by the parent), larger inventories, and hand-me-down personnel from the parent company. Many smaller companies have gone bankrupt due to the constant squeeze from their parent companies. The parent companies, however, remain healthy, which is the purpose of the system. The system is regulated to preserve the status quo, to protect the big banks and keiretsu from competitionmaking it difficult for entrepreneurs, but easy for big companies, to launch new businesses. Small to medium-sized companies, chu-sho kigyo, comprise the majority of firms in Japanese industry and are the foundation of the Japanese economy. When a subcontractor accepts its first contract, probably from a small subsidiary of one of the giant companies, it gives up many freedoms. It is told what to produce, when to sell it, and what price it will get on delivery. If the company that placed the order feels a profit squeeze, it can order the subcontractor to reduce its final price. If hard times continue, the larger company can demand another cut. If the subcontractor loses money on each unit it produces and already has cut expenses and streamlined production, the parent company could require the subcontractor to buy a new piece of equipment to increase productivity even if the subcontractor does not need the equipment. If it refuses, the flow of orders from the parent companies would dry up overnightand its business would be gon. The subcontractor is expected to be loyal to its parent company at all costs and is forbidden to accept orders from any other company even when times are slow and equipment remains idle. Many of the suppliers are wholly or jointly owned, meaning the parent company can dictate conditions. The others are so heavily dependent on orders that they voluntarily accept the parents conditions. Distributors are kept in line because of their substantial debts, and since they only sell the goods of one producer, they would be ruined if supplies ceased. The core company can keep its prices lower by forcing suppliers to lower their prices; subcontractors can be forced to adjust their activities to the parent company's need, and distributors can be made to sell at the producer's fixed prices and pressured into meeting sales quotas. During the appreciation of the yen from 1985 to 1987, big firms pretended to tighten their belts. Real savings were accomplished by repeatedly ordering their smaller subcontractors to cut prices. While the larger companies stayed in business, many of the smaller ones went bankrupt. Parent companies expect keiretsu suppliers to help design their components and constantly improve them; price is subject to frequent negotiations. The below-the-surfacekeiretsu companies, chu-sho kigyo, conduct most of the research and pass the results up to the larger companies. These subcontractors also supply most of the components to the larger manufacturers. They are the first to suffer dire consequences as well. They are the ones that must cut their profits in times of lower revenues for the larger companies (dai kigyo) and lay off workers in times of depressed sales. The subcontractors (shitauke) must remain loyal to the superior keiretsu members and buyers for life. They are told what to produce, when to produce it, when to deliver it, and how much they will be paid for their product or service. If the superior company requests the smaller company to buy a new and expensive piece of equipment, it is purchased regardless of whether there is a perceived need for it. The upside of this relationship is that the larger companies often make certain the smaller suppliers will remain in business, but with minimal profit. The vertical keiretsu are associated with a significant reduction in imports and a positive significant effect on exports. Some negative impact of vertical keiretsu on imports results not from improved efficiency, but from their discrimination against outsiders. The keiretsu structure has been a boom to Japanese producers and to the detriment

of Japanese consumers.

Distributional Keiretsu The third category is the distributional keiretsu (ryutsu keiretsuka)characterized by distribution channeling arrangements or integrated marketing networks. This keiretsu involves the manufacturer owning its own wholesale operations and perhaps even retail outlets. Through equity ownership or financial dependence, the manufacturer controls many of its retailers. The distribution relationship becomes an extension of the company itself. Matsushita, Toshiba, Hitachi, Mitsuibishi, Sanyo, Sharp and Sony each have over 5,000 electronics retail outlets, of which only 2,000 are independent. Toyota has over 4,200 sales units. Loyalty to the manufacturer results. Retailers and wholesalers continue selling the manufacturer's productswhether bound by contract as sole agents or simply selling only one maker's products for financial or sentimental reasons. It is also possible for the manufacturer to impose fixed prices at which the goods must be sold. Under most contracts, retailers cannot pass goods along to third parties. Resale price maintenance helps manufacturers boost profits. This is widely employed even if illegal. Given the role of small retail outlets, the Japanese tendency to shop locally, and the tendency of the Japanese consumer to be loyal to his or her community, it is necessary for manufacturers to have extensive and dense networks of retail outlets. The manufacturer has life-and-death power over dealers, who must agree to any and all demands of the manufacturer. What chances does an outsider have in this arrangement? If one of these companies produces competing goods or has close associations with a manufacturer that does, it is obviously less interested. Chain stores fill their own needs, leaving only lesser niches open. The distributional keiretsu sells manufacturer goods and not those of its competitors. Given the large number of captive outlets, the limited number remaining leave only limited access to the market. Table 2 provides the characteristics of the distributional keiretsu : -------------------------------------------------------------------------------Table 2: Benefits and Weaknesses of Keiretsu Weaknesses: Exclusive dealers are restricted or prohibited from selling the products of other manufacturers. Territorial restrictions limit geographical area. Single outlet, single account systems require retailers to purchase from designated wholesalers and prohibit wholesalers from selling to any retailers other than designated retailers, thus eliminating competition on the wholesale level. Discriminatory rebates are given. Dealer associations are organized by manufacturers to comprise all dealers that sell the manufacturer's products. This is used as a mechanism to promote cooperation among dealers and to facilitate the manufacturer's ability to impose its marketing policies on its dealers. The manufacturer retains all or part of the proceeds of a sale and repays the dealer only after the lapse of a fixed period of time, providing a rebate or discount to dealer Benefits: Distribution costs are reduced by simplifying marketing channels, allowing bulk shipments, eliminating mixed shipments and rationalizing inventory controls. Distributional keiretsu promote better customer service, with reliance on specialized knowledge and experience; better post- sales service, and better quality control. Information about products and changing wants and needs is communicated more effectively to manufacturers, with quick resulting reactions. -------------------------------------------------------------------------------The aim of distributional keiretsu is to stabilize prices by promoting product differentiation and resale price maintenance. The consequences of the distributional keiretsu are the elimination or reduction of interbrand and intrabrand price competition; the strengthening of barriers against new entrants to the markets; the restriction of dealer independence, with a resulting loss of business enthusiasm, innovation, and rationalization; and the preservation and strengthening of oligopolies. In addition, almost all Japanese producers belong to trade associations, which tend to exclude foreign producers and obstruct foreign imports. The distribution system acts as an entry barrier to foreign businesses. Markets in which household purchases account for a large share of sales have a relatively high import penetration ratio. If the Japanese government and businesses behaved like consumers, imports of manufactured goods might double. In addition, research has found that the foreign manufacturers and exporters are not charging higher prices when selling to Japan. Goods at the retail level, however, are much more expensive. Japanese distributors receive excess profits and are placing unusually high markups on foreign products sold in Japan. Professor Paul Herbig Japanese Marketing lecture series Lecture #13:Sogo Shosha Sogo Shosha Over 8,000 trading companies exist today in Japan, but only a few hundred are engaged in foreign trade. Most are senmonshosha (specialized trading firms); only a few are sogo shosha. Sogo means general and shosha is a trading company; hence the sogo shosha (Japanese general trading companiesGTCs) handle a wide range of products. What

makes these firms unique are their size, scope, information-gathering capabilities, and functional diversity. Traditionally, the domestic wholesalers of Japan, or tonya, specialize in one particular operation. The GTCs supply large volumes of raw materials and distribute goods from large manufacturers to smaller distributors to numerous retailers. A GTC is an economic organization whose functions consist of minimizing the risks involved in transactions through its ability to distribute risks, reducing transaction costs via its ability to take advantage of economies of scale, and making efficient use of capital. Sogo shosha are Japanese traders, existing at the center of Japan's global economic effort and serving as intermediaries for half of their country's exports and two-thirds of their imports. The GTCs handle more than half of Japan's total foreign trade and much of its domestic transactions. The total annual domestic sales of the nine largest sogo shosha amount to 31 percent of Japan's gross domestic product. In 1984, the largest GTC, Mitsubishi Corporation, had total sales exceeding $69 billion, making it the largest company in Japan and the third largest in the world. Its profits, though, were only $190 million, thus producing a dismal 0.274 percent return. In 1988, Mitsui had $150 billion in sales, employed 12,000 people worldwide, and had equity investments in 620 companies in Japan and 320 abroad. This GTC accounted for 5 percent of the Japanese gross domestic product. Collectively the sogo shosha are the largest purchasers of American exports in the world, as well as accounting for 10 percent of total overseas sales and 4 percent of world trade. Table 1 indicates the size and global influence of the sogo shosha. The top nine companiesMitsubishi, Mitsui, Marubeni, C. Itoh, Sumitomo Shoji, Nissho-Iwai, Tomen, Kanematsu-Gosho, and Nichimen Jitsugyomaintain approximately 1,110 offices in over 200 cities around the world and employ more than 20,000 highly-trained specialists who each average more than fifteen years of trading experience.

Table 1 Size and Influence of Sogo Shosha The Worlds Top Ten Corporations in Sales Revenues (1993) Rank Company Sales ($ Billions) 1 Itochu 180 2 Sumitomo Corp.* 168.3 3 Mitsubishi Corp.* 166.1 4 Marubeni* 161.8 5 Mitsui & Company* 160.2 6 Exxon 117 7 General Motors 113 8 Nissho-Iwai* 105.6 9 Ford Motor 100 10 Toyota Motor 94.9 * denotes Sogo Shosha

-------------------------------------------------------------------------------WHAT ARE THE SOGO SHOSHA ? The sogo shosha have three basic functions: seek export opportunities, secure necessary imported materials, and acquire technology for industrial development. Traditionally and still today, they are concentrated in high-volume, lowmargin commodities. They handle the importing, exporting, and trading of over 20,000 itemsincluding metals, machinery, energy, chemicals, textiles, foodstuffs, and general merchandise. The sogo shosha are actively involved in raw materials extraction, creation, and discovery, through multiple stages of production, fabrication, and distribution, downstream to the end user. Table 2 provides a list of the activities they perform. Barter and counterpurchase opportunities are made possible by their ability to accept other commodities in lieu of hard currency. Although labeled as general trading companies, the sogo shosha are involved in numerous activities beyond those of exporting and importing. The Sogo shosha now account for about 10 percent of world export trade. They search all over the world, using their international offices to meet the needs of their customers. Possessing the power to create substantial amounts of credit, they have created a global network of offices, providing an infrastructure to control market reach abroad. They eliminate a formidable entry barrier to foreign trade for small, struggling manufacturing firms that are too financially and managerially anemic to open their own overseas sales offices or to independently export. Their operations also provides a communication network to link their domestic and foreign businesses. Their basic functions are to supply items to their markets more efficiently and effectively, to expand the market for their suppliers through increased

efficiency and stability, and to cooperate in the maintenance of production. They act as market intermediaries for the domestic and international distribution of Japanese-manufactured goods. They possess foreign networks that can only function well when they are closely linked to the domestic distribution channels of diverse commodities and products. They serve as an information system to their keiretsu and bank. In the early days of Japan's industrialization, GTCs served as the nation's eyes and ears, identified new products and technologies for Japan, and provided market information for exporters. They tend to have highly-trained managers, showed financial strength, and relied heavily on debt sources.

-------------------------------------------------------------------------------Table 2 Sogo Shosha Activities Benefits: Information Economies of Scale Barter Capital Risk Functions: Project Organizer Market Researcher Commodity Trading House Financier Coordinator Marketing Arm for Keiretsu

-------------------------------------------------------------------------------Japanese GTCs serve a multitude of functions: Financial services (to both buyers and sellers): They extend credit,make loans, provide loan guarantees, and develop venture capital. They can borrow from the most advantageous sources in international capital markets and channel these funds to clients. They can act as a risk buffer by absorbing the financial risks for clients, but securing competence and hence profits in foreign exchange handling and investment fund operations.They act as financial intermediaries between giant commercial banks (particularly keiretsu sister banks). Information services: They provide up-to-date information on clients worldwide. Mitsubishi's 232 offices send in more than 30,000 pieces of information daily. These trading companies act as eyes and ears for its keiretsu,spotting business trends, market gaps, and investment opportunities. Risk reduction services: They offer foreign exchange management, letters of credit, and insurance. They accept all risks and can disperse risks created by changes in merchandise value or in the exchange rate. Some of their essential functions include providing information, transaction, financing, transport, and market development. Organization and coordination services: They take on complex projects and pool capital to share risks. Auxiliary services: They offer documentation, freight forwarding, and customs information. Services are provided at a reduced cost and have greater capital efficiency due to economies of scale. Smaller firms, which cannot afford their own market information network, can link up with a sogo shosha network. The client company can enjoy the economies of scale offered by the sogo shosha, which can spread its fixed costs over many transactions. Sogo shosha can also reduce political risks by creating portfolio diversity, can provide foreign exchange exposure, have built-in mechanisms to offset exchange losses and gains, and can extend credit to finance both the purchase and the sale of goods. Human resources: They hire and train highly capable employees. Financial resources: They amass huge amounts of capital. They often borrow heavily and make small loans to numerous clients. Global commercial network: As many as 150 overseas offices give them extended global reach. Communications systems: Their communications and intelligence systems rival those of the CIA and the old KGB in their effectiveness. By internally accumulating the relevant territorial information concerning business opportunities, clients, distribution contacts, trading procedures, and finances, sogo shosha have built this communication channel to be a leading intelligence-monitoring system. Capital formation: They provide incentive capital from outside the manufacturing sector, particularly in support of small and medium-sized firms. Opportunity to barter goods and services internally: A large internal market permits them the opportunity to barter goods and services among themselves or with sister firms. MARKETING FUNCTIONS OF THE SOGO SHOSHA In 1889, the Mitsubishi Corporation, a sogo shosha, was created as the marketing arm of the Mitsubishi Group. When the sogo shosha were first organized, they mainly handled paperwork for imports and exports and provided

transportation and storage services. But as their operations expanded, they began to increase their marketing activities. Traditionally, though, Japanese manufacturers have preferred a clear separation between manufacturing and marketingleaving the marketing function to trading firms. Japanese manufacturing firms, which are starting to prefer to control their own marketing operations, are more often concentrating their efforts on both the manufacturing and the marketing ends. Will manufacturers continue to hand over international marketing responsibilities to the trading companies? The answer is probably no. In the 1980s and even today, many of the marketing functions are being questioned by the manufacturers. Thus, the more important the market is, the sooner the manufacturer turns away from the GTC (e.g., C. Itoh handles auto marketing for Toyota in Saudi Arabia, a small market, but not in the United States where Toyota handles its own marketing); also, the more specific and involved the marketing requirements are, the quicker the manufacturer replaces the GTC. WHO ARE THE SOGO SHOSHA ? GTCs are large traders and supply and sales intermediaries, not manufacturers or financial institutions, although they are giant financial intermediaries for purposes of credit extensions. They provide four important financial services to clients. First, they supply up-to-date information to clients about global markets. They give domestic manufacturer customers information necessary for inventory control, production planning, and capital investment, including information on market demand, product trends, and price movements. Second, they supply information to potential exporters concerning distribution channels, the credit of potential distributors, risk data, foreign regulations and barriers, and export permits. In addition to providing economic and business information, they convey political, demographic and sociocultural data. Third, they offer auxiliary services related to paperwork, insurance, warehousing, transportation economies, cost reduction, organization and coordination, and capital efficiency (firms can borrow more cheaply from GTCs than from banks due to GTCs huge borrowings at preferred rates). These services provide more efficient use of capital for small firms. Instead of having substantial capital tied up in financing sales and distribution, a small manufacturing firm can invest most of its capital in plant and equipment to expand production and gain additional market share. Finally, they offer suppliers primary services, a vast array of intermediary services (e.g., trade law expertise, cultural and linguistic advice, distribution), and sales networks and exporting for many small and medium-sized manufacturers. Activities began to change during the 1980s from activities fees and commissions to risk equity ventures. This was due to direct exporting by large manufacturers, eliminating sogo shosha, as well as by the building of international networks by big international banks. New areas of participation that are emerging include utilizing more third-country associations (i.e., offshore trade where neither buyer nor seller is a Japanese company), acting as intermediaries for firms in two foreign countries, participating more in high-risk overseas mega-projects offering package deals to foreign governments for one-stop shopping, and participating more in product areas requiring sophisticated distribution. The sogo shosha base their livelihood on free world trade and deal primarily in Japan's import promotion mission overseas. In the postwar period, they were primarily involved in export functions and the securing of stable long-term suppliers of raw materials such as iron ore, coal, copper, and nickel from abroad. They have recently become more involved in the importing of foreignmade goods into Japan and the selling of offshore trade. The growth of the sogo shosha has been largely due to their willingness to expand into other areas. Recently, acknowledging Japan's growing consumer affluence, they have expanded into the development and distribution of consumer goods, housing construction, market consulting, and engineering. They are also actively trying to participate in new and technologically intensive industries. Advantages of the sogo shosha include the vast array of trade services provided to manufacturers at a lower cost than otherwise possible. This provides small and medium-sized manufacturers with established channels to conduct international marketing operations. Client companies also benefit from raw materials purchasing in bulk. Another advantage is evident in this anecdote: Receiving a request from a Brazilian textile manufacturer for polyester fibers, a large GTC approached a major American chemical company. The chemical firm was willing to supply the fibers but was short of ethylene glycol. The GTC asked a French firm to supply the necessary ethylene glycol but was informed that they could do so only if the trading firm could provide them with benzene. The GTC then obtained the benzene for the French manufacturer, who then supplied the glycol for the American chemical firm, who was able to provide the Brazilian textile maker with polyester fibers. The transaction involved four countries and five different trading company offices but was concluded in only one week. The sogo shosha avert most risks whenever possible. They avoid commodity price fluctuations by matching sales and purchase contracts, tend to strictly regulate foreign exchange holdings to minimize the risk of currency fluctuations, make extensive use of export insurance, sell goods at small margin, and act as agents for a slight commission. Typically, their net profit is approximately 0.1 percent. Thus, they must sell in volume to survive. Unfortunately, they tend to be heavily in debt with as much debt as ten times the amount of capital available. Traders establish only one trading subsidiary per country. They promote sales of Japanese products to local and third-country markets, procure goods for export to Japan, and develop intelligence networks. They also have an important role in Japanese foreign policy: tsunagi yunyu hoshikitie over or connect the import system. The trading companies help connect the manufacturers with their markets. When a large domestic producer bought an advanced foreign technology and decided to mass produce a new product, the GTCs competed to import the new product and develop a domestic market. When the product went into mass production, the GTCs ceased importing the product and switched to procuring the product from domestic producers for export. All sogo shosha have close ties with the industrial groupings of Japan, the keiretsu. They have a ready, loyal, and dependable customer and supplier base. They have sophisticated communications and information systems at their disposal. Their high reputations make them sought after as employers among elite Japanese university graduates. The sogo shosha is certainly an unique business enterprise; they are traders, developers, merchant bankers, shippers, marketers, and distributors all rolled into one. They have survived for over a century because of their abil

THE FUTURE OF SOGO SHOSHA What is the future of the sogo shosha? Will they be like mammals and adapt or like dinosaurs and become extinct, unable to adapt to changing economic environments? During the past fifteen years, the trading companies' gross profit margins have continued to decline; customers are driving harder bargains. Several arguments exist both for and against their survival. Non-keiretsu companies such as Honda, Sony, and Toyota have evolved into successful multinationals, setting up their own direct export sales networks and bypassing the trading companies export networks. The trading companies handle fewer of Japan's exports. Manufacturers have been thrust into direct marketing, masking own purchases, gathering supplies, and marketing their own products rather than doing so through the GTCs. The sogo shosha lack the technological capability to provide necessary customer service and sales engineering. Once manufacturers learn to operate their own subsidiaries abroad, they will find it increasingly unnecessary to rely on the assistance of the sogo shosha. This must be countered by the sogo shosha's ability to procure commodities and to find markets for smaller Japanese clients, for manufacturing subsidiaries in developing countries, and for large-scale resource development projects, which have also enhanced their bargaining power. More of their larger customers provide for themselves the marketing, financial, and distribution services they once bought from the trading companies. As the sogo shosha succeed in helping their customers grow, they are putting themselves out of business. This is not unusual. It is typical in the West for manufacturing companies to play increasingly important roles in trade activity and for intermediaries to have less important roles as firms grows. The sogo shosha have been unable to expand independently of Japan. Because of the large share of trade controlled by GTCs, growth potential inside of Japan is limited. For decades, the sogo shosha's foreign-to-foreign trade level has hovered at about 10 percent. The sogo shosha must improve their direct involvement in foreign markets. They have already expanded their role as international business matchmakers, getting involved in third- nation or offshore deals in which neither the buyer nor the seller is Japanese. They can expand foreign-to-foreign trading by investing. They are establishing business bases in key foreign countries. The sogo shosha are also expanding through joint ventures, mergers, and acquisitions. Limits exist, however, due to the sogo shoshas inherent ethnocentric behavior and ceilings that limit promotional opportunities for foreign nationals working for the GTCs. The sogo shosha are no longer financially unable to carry insolvent small- to medium-sized clients. The primary growth of the sogo shosha during the 1950s and 1960s occurred by channeling funds to the small and medium-sized firms that had been generally shunned by Japanese banks. In addition, they created many small- to medium-sized manufacturing firms in Japan when they needed to spin off products best produced by outside subsidiaries. Small firms were hurt; banks are currently willing to lend more to themin some instances incurring more bad debt. The sogo shosha can now establish their own credits with financial markets outside of Japan. The sogo shosha have declined from internal weaknesses. Will the current strategy of increasing diversification into many non-trading activities cause them to lose their unique managerial strengths by dilution? Where inexperienced managers are used, the answer is likely to be affirmative. Capable traders exist but few experienced managers of foreign firms and projects are available. Other national trading companies have arisen. South Korean trading companies have become substantial in scope and size in recent years and have contributed significantly to the economic development of Korea. Companies from Brazil and Hong Kong have also done so, but to a more limited extent. Even in Europe some trading companies operate efficiently. Other large, multiproduct trading companies exist: Kesco in Finland; Beijerinvest and KR in Sweden; CFBally in Switzerland, Acklands and Provingo, H Russel, Wajax, and Westburne International in Canada; Jardine Matheson in Hong Kong; and Bousteadco and Inchcape in Singapore. However, the largest of these is much smaller than the smallest of the big nine sogo shosha. An establishment of a quasi-sogo shosha is being planned by countries affiliated with the Association of Southeast Asian nations (ASEAN) as part of their development process, following the success of Japanese and Korean counterparts. In Thailand, SCT Company Ltd., Asoke International Trading Company Ltd., and C.P. International Company exist. Problems exist in the lack of business expertise, and the weak ties which currently exist between manufacturers and trading companies. Due to the huge Japanese trade surplus, the GTCs' role as providers for Japan's industrial growth is outdated. Ever present and so real are risky third-world business, high inventories of low-priced commodities, dangerous foreign exchange positions, and non-operating profits. Between the huge debt load and the zaitaeku (financial maneuvers), can they survive? GTCs are now becoming sophisticated in the ways of financial transactions. They use top credit ratings to acquire low cost funds that are loaned. They have become adept at financing and coordinating megaprojects in the Third World. They know how to manage trade risks as well as asset risks. They are knowledgeable about countertrade and widely use it. Trading companies excel in bulk goods and commodities. GTCs are able to handle transactions at low cost through handling standardized products in large lots. Economies of scale in trading can only be achieved through access to world markets. Products unsuited for trading companies include those involving sophisticated technology and those requiring after-sales service (including consumer durable goods and motor vehicles). Thus, this shift towards hightechnology exports could well curtail the role of general trading companies. Size may become a liability as well as being an advantage for sogo shosha. Because of their sheer size and financial power, GTCs can dominate markets. As nationalism becomes rampant and reactions to the continued high Japanese trade surpluses occur, few countries will tolerate the dominance of the GTCs. As a result, the sogo shosha will face greater competition in international trade from manufacturers, smaller specialized Japanese trading companies, and foreign companies. The number of sogo shosha will likely decline even further in coming years. The smaller firms will probably find special niches and leave the ranks of the sogo shosha. Risk has always been a hallmark of trading companies. In the 1920s, a number of large trading companies such as Suzuki, Mogi, and Takada went bankrupt. Thirty years ago, most of the Senba Eight and many steel distributors disappeared from trading. Risky operations, financial difficulties, or market obstacles will cause some to merge, be acquired, or disappear. Survivors will be compelled to place greater emphasis on non-trading companies. Even today, they have taken on the appearance of conglomerates; however, trading still is the linchpin of their activities.

The evolution of non-Japanese trading companies suggests future directions for the sogo shosha. Table 3 shows the likely trends:

-------------------------------------------------------------------------------Table 3: Future Trends The number of import-oriented trading companies will probably increase. Trading companies will probably continue to invest in production facilities throughout the world. Smaller trading companies will continue to gravitate towards greater specialization and niches, where GTCs find it difficult to compete. Trading companies will become more international, more global with more offices, and increased power will be given to affiliates and subsidiaries abroad. The information-gathering and -processing capacity of GTCs will continue to expand, and greater depth of analysis is likely to be added. Offshore trading is likely to continue to expand rapidly, thus permitting GTCs a more active role in trade promotion in more nations. Key points for sogo shosha to continue to succeed include: It is hard to succeed if dealing only with exports. The Japanese expanded their business through imports of raw materials for domestic businesses and exports of manufactured goods. They must respond to new inventions or development plans. They must participate in manufacturing industries through investment. Internationalization requires establishing overseas branches and dispatching staff overseas. Governmental support is necessary to define division of roles between the public and private sectors.

-------------------------------------------------------------------------------CONCLUSIONS Sogo shosha have three major and closely related functions: (1) They minimize or reduce risks inevitable in both domestic and international trade, including fluctuations in demand and exchange rates. These risks can be reduced by distributing them over several transactions. The more commodities that are traded and sold, the more widely the risks can be distributed. This is certainly possible due to their global operations. They can deal in both importing and exporting so they can buy and sell in local currencies. (2) They have the ability to take advantage of economies of scale. They have the information, contracts, and transportation services. (3) They make efficient use of capital, a function based on their ability to reduce risks and to take advantage of economies of scale. Reduced risks and affordable investment capital are not otherwise available to single traders. The distinct advantages of the sogo shosha lie in their territorial knowledge of both domestic and international markets, economies of scale, financing services made available to its clients, and the large Japanese internal market. Their global trading skills are unmatched in todays world economy. Over the years, the sogo shosha have evolved in response to constantly changing business conditions. Trading companies seem to thrive when change is rampant; however, when the situation is static, other companies begin to encroach on trading company functions, and there is less need for trading companies services. While trading remains at the core of their activities, they are expanding their role as organizers of international partnerships to better meet the challenges of today's rapidly changing global economy. In the future, we will increasingly see trading companies play the role of catalyst in new global business alliances and partnerships. The sogo shosha can play a valuable role by helping small and medium-sized firms that lack the necessary global connections to tap global markets. In this role, they play the traditional intermediary. As the West has shown, though, intermediaries are typically used by small and medium-sized firms or by those serving market niches. Events have played themselves out in Japan as in the West, with the manufacturers, having grown past a critical size, handling the functions the GTCs once did for them. This will only continue as the need for firms to control their own international destiny continues. The sogo shosha will be forced into several specific roles. They will continue to be commodity brokers, a role they have played for Japan throughout the past century, but the role will be expanded within the global economy beyond Japan to any other country that may need their services. They will not merely secure and trade commodities or bulk goods, but will also be active in the financing, design, construction, and management of major projects involving these products. The second role will be as intermediaries for small and medium-sized firms. By occupying the marketing and distribution role (including the critical logistics function) for these smaller firms, they will allow firms to concentrate on product design and manufacturing. The additional financing function will still be needed. As they have already started, they will expand this function beyond Japan to third-party trading. As global intermediaries, they can succeed. A third potential role exists that is similar to their current role as a general trading company. With the rise of countertrade activities within the world (some experts indicate one-third to one-half of world trade is non-cash based), an entity with their trading expertise, size, and world contacts can continue to prosper by easily handling these complex countertrade deals. However, growing protectionism abroad is looming; increasing displays of nationalism among developing nations are apparent. The greater likelihood of restrictions imposed by host governments could put a damper on the sogo shosha's global existence. They know how to handle global management and control, plan on a global basis, manage overseas affiliates, develop global methods of financing and investment, and establish global organization. A change must occur in Japanese-centered and home office-oriented overseas management systems. Officials from Japanese head offices typically monopolize all top management positions. Local nationals find promotional opportunities to be minimal in Japanese firms. As economic realities demand the reduced stationing of Japanese officials, Japanese nationals must yield to host country nationals. Host country employees want advancement to top management levels. Unless

changed, serious nationalist agitation in developing (and industrialized) countries will occur over this point. The original GTC was well suited to the Japanese environment of the first 100 years of the Meiji by carrying out the middleman function between Japan and the West. By using its familiarity with Western markets to provide finance and marketing expertise to Japanese firms who wished to develop trading links with the West, the sogo shosha prospered. However, with the ability to market directly between firms increasing drastically, perhaps the traditional sogo shosha are mutating due to factors beyond their control (global economy) and are becoming more like Western trading companies. That is, they are diversifying by moving into distribution, manufacturing, and the service functions such as finance, real estate and insurance. This is the new look of the sogo shosha in the twenty-first century. Japan is unique in that it is geographically small and yet so powerful in terms of both its economy and its worldwide trade. It is the perfect demonstration of how a nation poor in resources can become very wealthy and successful. Japans world trade is greatly enhanced by that awesome tool for trade, their global trading companies or sogo shosha. These are unique not only because of their worldwide presence through their hundreds of offices and commercial and industrial agreements, but also because of the closely interwoven, world-class financial institutions that are a key element of each sogo shosha. Negotiations Japanese Style

In negotiations with the Japanese, the word negotiate and its usual translation kosho have different meanings. Kosho has nuances of fighting, conflict, strategy (senryaku), and verbal debate (iiau), whereas Western-style negotiation lacks these overtones and usually suggests discussion, concession, and conference (March, 1989). Negotiation between Japanese is like that between father and son. The status relationship is explicit and important. The son (seller) carefully explains his situation and asks for as much as possible because he will have no chance the bicker once the father (buyer) decides. The son (seller) accepts the decision because it would hurt the relationship to argue and because he trusts the father (buyer) to care for his needs. Intercultural negotiations consists of four major processes:

non-task sounding (rapport) task-related exchange of information persuasion, compromise concessions and agreement

The strategies, tactics, time spent in each phase, emphasis, and importance of each phase differ among cultures. For example, the cultural tendency of the United States is to concentrate on the persuasion and compromise phase while minimizing the non-task (rapport building) phase. For many Asian cultures, Japan among them, the exact opposite priorities take place. In this cross-cultural clash, much confusion and little success typically results.

JAPANESE NEGOTIATION PROCESS

The Japanese negotiation process is based on the importance of maintaining harmony in relationships. Norms are established concerning obligations to others, benevolence, and the importance of others attitudes. The Japanese see negotiation as a fluid irrational process, calling for diligent preparation. Instead of addressing issues directly and openly stating positions and counterproposals, they prefer to infer the other parties assessment of the situation. The Japanese often repeat previously stated positions, using highly ambiguous language, and appear to be inconsistent. The goal of this process is a just, fair, and proper deal and a long-term harmonious relationship. To a Japanese businessman, a business negotiation is a time to develop a business relationship with the goal of long-term mutual benefit. The economic issues are the context, not the content, of the talks. Once the relationship is established, the other details can be settled quickly. In Japan, personal relationships are always subsumed within the context of the business relationshipfriendship first and business second. The Japanese typically negotiate in teams made up of experts in relevant fields. The negotiating team usually consists of five males, with one member serving as the symbolic head. The first individual introduces the parties initially and facilitates the signing ceremony. The other four slots are typically filled by operational staff, middle managers, the CEO, and a mediator. The qualities admired and sought in Japanese negotiators include commitment, persistence, ability to gain respect, credibility, good listening skills, pragmatism, and a broad perspective. A successful negotiation reflects the efforts of the entire Japanese team. The senior negotiator sits on one side in the middle of his team rather than at the head of the table. The top Japanese executive is seated farthest from the door. Those with authority to make a deal sit to the leaders immediate side, with those with lesser roles at the two ends. Japanese negotiations have an air of formal politeness, conservative conduct, and good manners. Proper business

etiquette must be observed at all times. Table 1 provides a synopsis of Japanese negotiating characteristics. The Japanese tend to look at negotiations as war, a macho challenge. This behavior goes back to the high level of masculinity within the culture; the Japanese concept of masculinity includes achievement, heroism, assertiveness, and material success. They believe in the rightness of their initial position. The Japanese, when pressed, will fully explain their position to persuade the other side of the rightness of the Japanese position.

Table 1 Japanese Negotiating Style Characteristics

Considerable period for rapport until harmony is established

Extensive exchange of information, typically one-sided with the Japanese receiving in-depth explanation, clarification, justification, and evaluation.

Come to the negotiating table with consensus on a mutually favorable offer that they perceive to be in the longterm interest of both parties.

Minimize confrontation at the negotiating table; believes in persuasion behind the scenes.

Many members usually present

The Japanese dress conservativelythey always prefer dark business suits. To be dressed casually during negotiations with the Japanese would, therefore, be inappropriate. The Japanese do not believe in using first names unless in the context of the very best of personal relationships. In Japan, honorifics, title, and status are extremely important; one addresses his or her counterparts by their proper title. Japanese bargainers bring with them a carefully considered agenda. The Japanese are more flexible towards about the order of topics, but much less flexible about the choice of topics. Before action is taken, much time is spent with relevant department heads defining the question, seeking their approval, and gathering sufficient information for a plan. The Japanese come to a negotiation with a hard-won time-consuming intraorganizational consensus already established, which cannot be easily changed at the bargaining table, no matter how small or seemingly irrelevant the change. To the Japanese, the Americans in their give and take appear insincere and unprepared, as they do not appear to have a firm position. The Japanese are as emotional as any other people, but they direct that emotion toward others and tend not to display it on a personal basis. The Japanese value emotions, but hide them. Showing emotion is considered in bad taste and poor conduct for any Japanese, let alone a Japanese businessman. The Japanese proverbs No aru taka wa tsume wo kakusu (An able hawk hides his talons) and Tanki wa sonki (A short temper means a lost spirit) illustrate their feelings on showing emotion. Arguments and overt expressions of frustration or anger are considered detrimental to the spirit of friendship that should surround any interpersonal interaction; these are considered major character flaws and not appropriate behavior. A formal display of emotion means a loss of respect/face. Winning at the bargaining tale is unacceptable if it involves loss of face (kao) for either party. The need to save face and not be a failure in the negotiating process is a paramount consideration. Risk avoidance (kiken kaihi) is a key principle in Japanese negotiations. Confrontational negotiating techniques are seen as impolite and disrespectful and will not lead to a relationship of trust. The Japanese are deliberately vague on specific issues in the early stages of a negotiation so that any later reversal will not result in loss of face. An outright rejection of a proposal would result in the loss of face.

The Japanese, because of their circular, polychronic sense of time, stress end results and are less concerned about how long the process takes to get there; they are thus less concerned about adhering to time schedules, instead preferring to focus on the end result. Time is not as important to a Japanese person as it is to a Westerner. Not being hasty is a sign of wisdom and sincerity. The Japanese value high quality over immediate gain, and they wait patiently for the best possible result. The Japanese prefer to follow an indirect, harmonious style when dealing with others. Gobetweens help move the process along, and interpersonal harmony is considered more important than confrontation. The Japanese view time as a continuum and are long-term oriented; they are conservative and patient. Delays do not necessarily mean a hesitancy on the part of the Japanese; delays could also mean an intense studying of the proposal as a consequence of soliciting approval from all company departments that will be affected by the outcome of the negotiation. With the Japanese, one would want to schedule many sessions with a great deal of time between each (weeks or even a month) in order to allow the ringi to operate. The Japanese often use little verbal activity, nod frequently, use silence, and even close their eyes while others are speaking (in Zen Buddhist fashion, this helps them concentrate). Silence to a Japanese means one is projecting a favorable impression and is thinking deeply about the problem. When at an impasse in negotiation, the typical Japanese response is keeping silent, withdrawing, or changing the subject. The Japanese more influenced by what is not said. The Japanese interpersonal communication style includes less eye contract, fewer negative facial expressions, and more periods of silence.

Relationship Building The first stage, non-task sounding, includes all those activities that might be described as establishing a rapport or getting to know one another, but does not include information related to the business of the meeting. The Japanese negotiation process usually starts with an introduction from a reference, a go-between, a shokai-sha (thirdparty introducer), who has arranged the initial meeting. It is preferred that the shokaisha have a strong relationship with the buyer and thus be influential; the buyer does not want to damage the harmony and relationship with the shokaisha by rejecting the proposal. He usually attends the first meeting as well as the last meeting, the signing ceremony. Before the first meeting, he is a prime source of information for both parties. In case of an impasse in the talks between the two sides (either during the negotiations or afterward during the normal conduct of business), he is often asked to become involved to settle their differences, to become a chukaisha (mediator). At the first business meeting, the highest level of protocol is used for important strangers or those who must be shown a high degree of respect. Japanese executives spend substantial time and effort in non-task sounding so problems do not develop later. The Japanese believe that once the relationship has been established, further negotiations will proceed more smoothly and quickly. This rapport-building effort often includes elaborate entertainment. (This is typically an all-male effort, as the business world is still very much an all-male club, and the Japanese rarely bring wives or family members to a business gathering.) The large kosai-hi (entertainment expenses) typical of business dealings in Japan exceeds that spent by the Japanese government for defense (corporate wining and dining is 1.2 percent of GDP versus approximately 1 percent spend on defense). Three levels of executives are typically involvedtop level executives, middle managers, and operational staff. The executive meetings are held in relaxed and comfortable accommodations such as restaurants and hotels; the Japanese executives are making judgments about the others integrity, reliability, commitment, and humility. The top executives are brought into the negotiations to sign the agreement only after all the issues have been settled and agreed on by lower-level managers. The use of top executives communicates commitment and importance. Middle managers are there to bless intermediate agreements; operational staff executives are there to negotiate. During this stage of business introduction, the Japanese attempt to discover the others positions in the company and their mission. Every member of the negotiating team must meet and feel comfortable with every member of the other sides negotiating team. Information specific to the issue under negotiation is not considered in the beginning; rather, the parties seek to get to know each other. In addition to entertainment, this stage may include gift giving. The Japanese believe that if a harmonious relationship can be established at the beginning of the negotiating process, conflicts can be avoided later on. Considerable time and expense are thus devoted to getting to know each other. Americans negotiate a contract, the Japanese a relationship. In Japan, as in many other cultures, the written word is primarily used to satisfy legalities. In the view of the Japanese, emotion and personal relations are more important than cold facts in business relations. The key issue is, Can I get along with these men and their company and do I want to sell (or buy) their products? It is not, Can I make money on this deal? The Japanese are particularly interested in the sincerity of those they are negotiating with. They are typically unwilling to do business with someone who they think may prove to be arrogant or unpleasant, or who they think does not like them as individuals, as a company, or as a nation: I do not do business with a man who does not like us! The Japanese do not separate personal feelings from business relationships. If the Japanese feel that their relationships are not yet anchored and may drift, they will stall and hesitate to do business until they are comfortable with the other party. When two Japanese companies are creating a

new relationship, they are accepting each other inside their respective groups. Status, though, is always present. A buyer says otaku (your company) while a seller says on sha (your great company). Status relations dictate not only what can be said, but how it is said. Rarely is an attorney present during the initial part of the negotiation or thereafter. Lawyers do not enjoy as much prestige in Japan as they do in the United States. In Japan, lawyers are seen as people who complicate personal relationships, get in the way of reaching basic understandings and of allowing the parties to get to know each other better, and in general obstruct the development of necessary cooperative business relationships. A long-term business relationship between two parties in Japan is expected to be built on the principles of mutual trust, friendship, and cooperation rather than on legalistic grounds, which a lawyer would tend to emphasize. The Japanese regard the introduction of an attorney into a business negotiation as an unfriendly act, a sign of distrust, or an implied threat of litigation, since lawyers are traditionally only used for that specific purpose in Japan. This naturally bodes ill for the negotiation. Bringing a lawyer to a first meeting with a Japanese company is often the kiss of death to an agreement. In business transactions, a contract is secondary to harmonious relationships; Japanese negotiators prefer conciliation and mediation over litigation. The Japanese are cautious in their interpersonal communication styles. Cautiousness signifies, in the Japanese culture, patience, dependability, and sincerity. Too much logical reasoning is often considered threatening, confrontational, and argumentative to a Japanese. The Japanese tend to base their understanding of people on intuition and a considerable amount of emotionality. They have a tendency to avoid logical argument in order to achieve a sense of understanding. The United States is an objective society versus Japans polyocular society: The Japanese take the view that all phenomena can be seen from multiple points of view, and the more angles, the more whole and comprehensive. Prior to Westernization, the Japanese had no word for objectivity. The word now is kyakkanteki, the guests point of view; shukanteki is the hosts point of view.

Information Exchange The most important stage to a Japanese negotiator is the information-gathering stage. During this stage, the negotiators consider the information exchanged regarding the parties needs and preferences or the parties subjective expected utilities of the various alternatives open to the participants. Only after those on the buying side feel that they have established a trustworthy relationship will business be brought up. Japanese negotiators are concerned with understanding the other sides point of view. Exchanging information and asking for more information are constants with the Japanese. A complete understanding is imperative to the Japanese; they ask endless questions to identify the needs and preferences of both parties while offering little information and ambiguous responses so as to attempt to understand the situation and associated details of the others bargaining position. The reasons for needs and preferences are critical data for Japanese, who seek to place information within an interpretive context. The Japanese, however, tend to provide relatively little information. It is important for the Japanese to be polite and to communicate the tatemae without giving offense, while holding back the possibly offensive but informative honne. They present their needs and preferences in a tactful manner. Japanese firms operate through group consensus decision-making. Each phase of the discussion process may generate more questions that must be answered. The emphasis is on exchanging extensive detailed information. A primary bargaining strategy of the Japanese is to ask questions to put the opponent on the defensive. Many times the initial meeting is merely used to gather information, which is then fed back to their superiors and peers for deliberation and a carefully prepared response. The Japanese strongly believe it is folly to make an offer until one knows what the other side wants. This explains the slow start, the lack of an initial proposal, the emphasis on information gathering, and the long drawn-out preliminary groundwork that is usually encountered when negotiating in Japan. The Japanese need detailed information to build the foundation for whatever decision they intend to put forward. No one is blamed or rebuked for shortcomings in the deal or for the failure of the venture or the negotiations, as all concerned managers participated in the negotiating and final decision making. For the Japanese firm, this exchange of information is the main part of the negotiation. A complete understanding is essential. The Japanese ask endless questions and expect long explanations, while offering little information and ambiguous responses. Sellers present in detail all of the background, and only toward the end is the actual request/proposal made. The information flows mainly from seller to buyer. Several people on the same side may ask for the same information or explanation; everyone must be convinced, not just the key decision maker. No Japanese negotiator, especially the boss, feels qualified to speak for the group before a consensus has been reached. Oftentimes the team on the other side of the table is not composed of the final decision makers. The Japanese frequently use the tactic of concealing their top man by positioning him on the fringe of his team; he is inconspicuous and initially makes no contribution, while a junior member acts as spokesman. The Japanese team leader might only be marginally technically competent in the specific subject matter under negotiation, but still he is the undisputed head; his credentials for leadership include seniority and often a degree from the right school. He may have been chosen because he represents the company consensus, which was achieved before the negotiations started. His symbolic authority is high, and great deference is given him by his team. Thus, one cannot assume the makeup of the opponents negotiating team is identical to that of ones own team. The Japanese negotiating team will usually be a large group. To avoid being intimidated by sheer numbers, the other side must be prepared to bring sufficient staff to provide numerical balance (including sufficient technical experts). Intimidation is not the primary reasons for the large number (information transfer is) but the results are just the same.

The concept of discussing problems in a systematic, sequential, orderly manner is promoted by Americans, while the Japanese prefer haragei, to talk around a subject in order to get a holistic view. Only after this is accomplished will they go into details. The Japanese like to talk about practical solutions, resolving matters on a case by case basis. They allow the solution to precede the principle. The Japanese prefer avoiding any area in which an agreement cannot be easily reached. Instead, they tend to move to another topic in its place. To Americans, this often appears like the Japanese are trying to elude the issue. To an American, an unsolved issue is a point of contention; this, not any general principle, must first be dealt with before the agreement as a whole can be considered. To the Japanese, those very same traits indicate lack of confidence in ones convictions and insincerity. Instead, terms such as thoughtful, cooperative, considerate, and respectful express positives in the Japanese culture. The Japanese stress areas of agreement and try to avoid contention. They attempt to conduct real negotiations away from the formal negotiating hall, using formal sessions to announce agreements reached elsewhere. Often the real negotiation is between the lowest-level bargainers, who have established a rapport, a relationship of trust with the equivalent operational-level managers on the other side. This is often done after hours, usually in one of the many bars and restaurants in Tokyo.

Persuasion and Compromise The persuasion and compromise stage of negotiations focuses on efforts to modify the views of other parties and sway them through the use of various persuasive tactics. Americans see persuasion as a kind of conquest whereas the Japanese look on it as a meeting of the minds. The Japanese verb to persuade (fukumeru) also means to include. Any persuasion will be conducted behind the scenes, not during a formal negotiating meeting. For Japanese managers, persuasion as victory is secondary to the process of matching interests. Persuasion is typically used to compromise on certain conditions so that the two sides can close a deal. In Japan, there is not a clear separation of information seeking and persuasion. The two stages tend to blend together as each side more clearly defines and refines its needs and preferences. So much time is spent as this task-related exchange of information that little is left to discuss during the persuasion stage. Maintaining harmony, avoiding loss of face and gaining the agreement of all involved are most important. For Japanese, it is more important to maintain the harmony n the relationship than to be frank and open. The Japanese believe that little persuasion should be necessary if the parties have taken the time to understand each other thoroughly. Since the Japanese have spent a high percentage on their time on the first two phases, Japanese negotiators often do not feel the need to allocate much time to persuasion. The first position is rarely overstated, though sometimes fuzzy. The Japanese like to regard their position as reasonable for both sides. The first proposal is carefully drafted and reasonable, reflecting the Japanese predilection for well-informed, best solutions and consensus building. The Japanese tend to offer a proposal that approximates their needs and then resist adjusting it. They offer what they feel is correct, proper, and reasonable. The Japanese tend not to ask for much more than they expect to get. If the initial trust building was carried out successfully, cost may not be bargained on at all. This has inherent within it numerous weaknesses. Japanese negotiators develop defensive arguments with no consideration of persuading or selling or converting the other side. Nor do they usually consider what the other side might be thinking or offering, nor what their anticipated strategies should be, nor what concession strategies might be appropriate. Japanese negotiators often find themselves with no contingency or fallback plans, few officially authorized concessions, and an absence of clear policies on some questions. The Japanese tend to listen to persuasive arguments and respond with silence, which means simply that they are considering the arguments presented. They react negatively to open disagreement and aggression. Japanese avoid confrontations and respond the threats by changing the subject, silence, or withdrawal. The primary persuasive tactics in Japanese business negotiations appear to be the volunteering of more information and the use of silence. Most decisions are discussed informally, behind the scenesa continuation of the process of establishing rapport.

Often members of the Japanese group will excuse themselves during a negotiating session by saying that they must caucus; they must obtain consensus both within the team and within the company. Japanese bargainers never make a concession without first taking a break; issues and arguments are considered away from the pressure of the negotiation table. The Japanese typically look with horror on the confrontation and debate that can take place and would prefer to work informally, behind the scenes, so neither party will lose face. The Japanese see the negotiation as a ritualistic enactment of a predetermined agreement in which intuition, experience, and emotional sensitivity are valued. The Japanese concentrate on relationship-based issues. The sincerity and good intentions established are relevant to the harmonious outcome of the negotiation. The Japanese are not very argumentative, not extroverted or persuasive in the American sense. They prefer to be quiet when right, respectful, and patient. Modesty and self-restraints are highly valued in their culture. They do not criticize in public, but seek harmony among all. The Japanese prefer to avoid formal negotiations, since to them negotiations are a form of social conflict and avoiding social conflict is penultimate in that society. The Japanese, in their pursuit of harmony and avoidance of conflict, often do not seek eye contact; this is not a virtue to Americans. On the other side of the table, the Japanese view the American stare as rude and as aggressive, improper behavior. When challenged, Japanese executives will not argue or even discuss the point; they typically will remain silent. In Japan, only a few persuasive tactics are appropriate: questions, self-disclosures, positive influence tactics, silence, a change of subject, recesses and delays, concessions, and commitments. The repertoire of persuasive tactics available to bargainers in Japan is prescribed by status/power relationships. Buyers (who are superior) can say things to sellers that sellers would not even consider saying to buyers. Aggressive influence tactics can only be used by negotiators in higher-power status positions and are only communicated through the low-level informal communications channels.

Concessions and Agreement The concessions and agreement stage of a negotiation is the culmination of the negotiating process at which an agreement is reached, which often is the summation of a series of concessions or smaller agreements. To reach an agreement that is mutually acceptable, each side frequently must give up some things; therefore, concessions by both sides are usually necessary to reach an agreement. The Japanese believe that nothing is settled until everything is settled, which is why they typically provide concessions only at the end. They expect that these will lead immediately to the conclusion of the agreementa holistic approach to decision making. The Japanese do not make any concessions until all issues and interests have been exposed and fully discussed. Usually any concessions are not decided on at the negotiation table because of the nature of consensus decision making; negotiators must check with the home office before making any concessions to be sure that everyone agrees on the concessions made. The Japanese believe that at this stage they should understand the other sides position and how it relates to their own so that they are in a position to decide what concessions are needed to reach a final agreement. The Japanese favor written agreements that are brief and identify basic principles. They listen politely to everyone in their group before making a group decision. However, once a concession is made, it is usually considered immutable and unchangeable by the Japanese. Professor Paul Herbig Japanese Marketing Lecture Series Lecture #16: Japanese Marketing Strategy

* MISSION STATEMENT

The Japanese business philosophy can be best viewed from an examination of Japanese companies mission statements. As the mission statement typically provides the rationale for the companys existence, it provides major insights into the cultural priorities of the typical Japanese company. Mitsui describes its purpose as follows, emphasizing the order: to contribute to Japanese society, to serve the greater glory of Japan; to realize profit for the company so as to promote the welfare and happiness of its employees; and

to foster and strengthen the spirit of Mitsui for the future as that spirit is set forth in the company motto: Ten, Chi, Jin (heaven, earth, human beings). The satisfaction of shareholders is but a means to those ends. Kaos business philosophy is simple, but explicit: Each product must be useful to society; it must use innovative technology; it must offer consumers value; we must be confident we really understand the market and consumers; and finally each new product must be compatible with the trade. At Kao, not atypical for a Japanese company, the technical and marketing groups dominate due to the company success in developing new products and selling them in the very competitive Japanese marketplace. This dominance is reflected in the companys published credo, which describes technology as the very spring of corporate life. The corporate philosophy is to strive for the development of the worlds highest level, unique technology aimed at the perfection of the marketing technology. Shiseido, Japans largest cosmetics manufacturer, derives its names from a passage in a classic Chinese book on Confucianism praising the virtues of the earth from which all things come. As such, Shiseido has a lasting commitment to a quest for the apex of excellence, both material and spiritual. Yoshiharu Fukuhara, CEO, believes that the value of brand names should be judged by both visible and invisible elementssuch as a firms traditional values and philosophy. Zen teachings Beyond a mountain, another mountain is to be seen, How many mountains there may be; Among the sea waves, no way seen, but in every direction, free way hopeemphasizes the spirit of challenge for Japan Airlines (JAL). According to the mission statement for Nikko Hotels, At Nikko hotels, our guests always find: dedicated employees, attentive service, quality facilities, together in harmony. Matshushitas corporate philosophy is that the company remains responsible for its products until the ultimate customer stops using it. In its philosophy lies nothing about contractual commitments or limited liability; there is an acceptance of a long-term responsibility to the customer once the customer has given his patronage. The Matsushita company song sung every morning says: We trust our strength together in harmony, finding happiness. On May 5, 1932, on the fourteenth anniversary of Matsushitas founding, the founder, Konosuke Matsushita announced a 250-year plan for his company, broken up into ten 25-year segments. The business philosophy proposes that the purpose of an enterprise is to contribute to society by supplying goods of high quality at low prices in ample quantity and that profit comes in compensation for contribution to society. The company has an obligation to contribute to the welfare of the communities in which it operates. He created the Seven Spirits of Matsushita: service through industry, fairness, harmony, cooperation, struggle for progress, courtesy and humility, adjustment and assimilation, and gratitude. Japanese corporations firmly believe that in going for growth and share, profits will eventually follow. The Japanese corporation is high on strategic intent, clarity of purpose and united employees. This can be seen by the strategies and slogans of such companies as Canon, to Beat Xerox, and Fujitsu, to Beat IBM. Komatsus slogan Cat Maru (Encircle Caterpillar) decrees that its entire existence is a war-like campaign to cut off, encircle, and then eliminate Caterpillar, not merely its major competitor, but also its lifelong nemesis. Komatsu uses Caterpillar as a benchmark for its own performance, so Cat becomes the yardstick by which Komatsu measures its success. Cat also becomes a competitive target. Komatsu has a representative living in Peoria whose only assignment is to notify headquarters in Osaka of anything going on at Cat.

Table 1:

Other examples of Japanese mission statements

1. A large dentifrice company: The corporation develops through the founders spirit; Contributes to peoples health through quality goods; Serves the public with honesty, fairness, and kindness; Promotes peoples welfare, a happier life, and an enriched Fosters mutual respect and mutual friendship. 2. A medium-sized pharmaceutical company: The primary goals are to contribute to human and social welfare all over the world, fight against disease and at lower cost, seek the maximum happiness of people, and promote human love through the following: culture;

Follow the natural law of the universe; Promote stronger organizational ties and peoples unity and cooperation; Belief is stronger than anything else; Remember that business depends on human beings; Combined efforts are mightier; Competition brings progress; Appreciate your job; Those who do not reflect make no progress; Connect your company with your family; Respect modesty and simplicity;

3. A large Pharmaceutical company: First of all, serve the public; then seek: Harmony and cooperation; Sincere efforts and continuous trial; Modesty and simplicity; Politeness and respectability.

Other sample values are shown in Table 2. Group harmony, long-term relationships, quality, customer service, contributions to society, and coexistence are definite ingredients for success in any Japanese company. Note that Sony by comparison has a very entrepreneurial and global culture; it alone of all the companies listed have senior non-Japanese companies. This may explain why Sony has been more successful in global markets and particularly in the United States than other, more traditional Japanese companies (this could explain the Beta disaster and Sonys latest announcement of a proposed, new digital VCR standard in advance of the rest of the pack).

Table 2 Sample Japanese Corporate Values

Mitsui Corporate Values: Group Harmony Long-Term Relationship High Quality Cooperation Conservation Matsushita Corporate Values: Policy Orientation Customer Satisfaction Contribution to Society

Coexistence Co-Prosperity Mitsubishi Corporate Values: Fair Play in Business Employee Orientation High Morale Concern for Individuals NonRisk Taking Sony Corporate Values: Liberalism Internationalism Positive Toward Change Risk Taking Challenges Zealousness

MARKET DEVELOPMENT

The Japanese establish themselves in a market and then begin to focus their attention on market and product development. This strategy allows them to achieve competitive leadership within the market. They search for ways to continuously upgrade and improve their product's performance, style, quality, and features. This enables the Japanese company to offer its customers newer and better products than its competition is typically able to offer. Even though the Japanese are aware that product innovation is their key for long-term survival and profitability within their market segment, they initially use aggressive pricing strategies to help secure their market share. When their product is not clearly superior to the existing product in the market, they "buy time" by using a lower pricing strategy to gain market share as they develop and begin to market a product that is superior to those of their competitors. In any industrial or retail sector in Japan, ten to twelve competitors typically battle it out for market share. Most Japanese companies see other Japanese companies as their primary competitors. Displayed in many stores are rows upon rows of different products from different manufacturers, each priced closely to the othes but each offering a slightly different feature that vendors hope will attract customers. The Japanese do not test market. They rush to market with the final product and let the market decide on winners and losers. This unique Japanese technique simultaneously being intensively competitive, yet being protected against foreign (nonJapanese) producersprovides quite interesting results. Japanese firms are quite adept at what is called product coveringrushing out instant imitations. The rival manufacturers rush to produce their own versions just in case the pioneers should prove to be a best seller. Japanese companies also use product churning extensively. Whereas Western firms use the rifle approach in market studies, testing the market constantly and revising the product each time until it exactly meets the customers needs before launching it, Japanese companies tend to use the shotgun approach to market development. New product ideas are tested not through market research, but by selling the first production batch and letting the

market decide directly the winners and losers. Massive amounts of products are thrown at the market, and those that stick become the winners and are mass produced. Thus, flooding the market with new products is important in Japan because firms are determined not to lose access to scarce and often rigid dealer and distribution networks. This is not as important overseas. Tarnishing ones corporate reputation with a poor product is also of less concern in Japan because many new versions are aimed at a core of sophisticated consumers who will try anything new. Abroad, outside of Japan, new products have to be chosen and developed more carefully, since a single dud can damage a carefully nurtured image. Isolated from their markets, Japanese manufacturers find it is safest to offer as wide a range of products as possible and certainly as wide as those of the competition. The presumption exists that being in a particular industry means doing what other companies in that industry do. This is cultural baggage left over from the rice culture mentality: In rice villages, a farmer is wise to copy his neighbors, but hunters and herders are only successful if they find their own particular niches. Market penetration is a much more important pricing objective than quick profit-taking with a skimming approach. Entry into a market is viewed as a long-term investment. Individual markets are seen not as profit centers, but as pieces in one large global puzzle. By generating sufficient funds at home and in some selected country markets where their share positions are strong, Japanese companies can sustain the lower returns from low-price penetration strategies in newer markets over a relatively long period of time (cross-subsidization). One major source of Japanese innovations and their commercial success lies in the nature of user-producer interaction. This includes a sequential and dense communication between a demanding user and a producer. This is especially true between a user and a capital goods supplier. Designers list every market expectation they can identify, drawn from salespeople, market research, and customer interviews. Each general feature is broken down into more specific requirements and then into even more exact specifications. Each requirement is ranked in order of importance, and the completed list adds up to products of true quality because they represent what consumers really want. On the other dimension of the matrix, designers list every conceivable product characteristic, and then the developers assign a degree of correlation between market need and the product characteristic. This then allows the designers to build foolproof guidelines for the most appropriate product. Japanese companies have been willing to take substantial cuts in profitability to build or maintain their position in the American marketplace. The Japanese have moved inexorably from less defensive tactics like paying low wages to more aggressive ones like global brands. They have moved away from standardized world products to market-specific products. Via flexible manufacturing technologies, they search for loose bricks or windows of opportunity. The Japanese excel in using the niche approach or sukima strategy (referring to the small opening that remains when a sliding door does not quite fit its frame). They carefully analyze the competition to find a niche of the industry where larger competitors seldom concentrate their efforts. By entering through a chink in the armor, existing competitors do not take notice and do not defend their product line strongly. From this foot in the door entry, further inroads come naturally. Japanese use pricing aggressively in gaining and holding market share. Exporters absorb significant costs, which impact profits in their home currency in order to maintain and even expand market share in their export market. Import prices start low and generally stay low. The Japanese treat price as a key element in the marketing mix. An aggressive penetration pricing strategy is directed toward gaining and holding market share. Marketing arrangements such as colluding on price, curbing excessive competition, setting limits on competition, and offering advertising discounts that would be illegal in the United States are legal tactics extensively used in Japan.

Market Share Marketing in a Japanese firm tends to be obsessed because of four major factors: market share, a productionbased economies-of-scale mentality, a strike at the corners" niche strategy, and a follow-the-leader mandate. The use of these particular factors can be traced back to traditions in ancient Japan during the samurai period. In ancient Japan, prestige was based more on the number of retainers or the amount of land a lord had (i.e., market share equivalent) than on such a paltry thing as money, which only vulgar merchants coveted.

The Japanese exploit markets by using a penetration (market share) pricing strategya low entry price helps build up market share and establish a long-run dominant market position. Market penetration was a much more important pricing objective than quick profit-taking with a skimming approach. Market share, not profitabilitywhich is the popular American motivator, is the primary concept in Japan. In Japan, it is typically regarded as unsound to sell shares of companies to the general public. Incorporation is grudgingly accepted, but control remains totally vested in the family head; the shares owned by other members of the family are held in what is, in effect, a family voting trust. As for non-family members holding shares, they are not allowed any voice in management. Therefore, Japanese industry is financed primarily by what legally are bank loans in the form of short-term indebtedness but economically they are equity investments in the business. A Japanese business must earn enough money to pay the interest on the bank loans. As long as the interest on these loans is paid, the bank is satisfied. The Japanese business executive has high costs of capital, and his most rational business objective is, therefore, to minimize the cost of capital. Maximizing profit makes no sense to him; there is no benefit to his company (and with little chance for stock options, there is no direct benefit to the manager). Therefore, Japanese business strategy focuses on profit only to the extent to which it satisfies a minimum requirement. The strategy also tends to be propagated as a direct result of the lifetime employment system, which affords automatic increases with seniority and job security until retirement. Thus, labor for the Japanese becomes a fixed expense, not a variable one as seen in the West. If wages increase automatically with length of service and independently of job or skill, and if employees have to be kept on the payroll until retirement, then increasing volume is the only way to increase productivity rapidly. Failing to do so leads to loss of competitive position. The business that can expand faster than its competitors has a tremendous advantage in labor costs (since all marginal labor will be at the entry [lowest salary] level). However, the business that cannot increase its volume adequately finds itself losing productivity. Therefore, the rationale for the Japanese strategy is to encourage volume, which leads to market share, and to de-emphasize short-term profitability in favor of long-term share. Profits can be obtained either by increasing the margin or by increasing the quantity sold even with smaller margins. Managers pull out the stops to increase sales even with modest profits with an eye toward much bigger profits later on. Once a company has conquered market share and the surviving oligopoly organizes into a cartel, it can raise prices and live happily ever after. That is, at least, what happens in Japanbut very few other places. When operating overseas, Japanese firms usually maintain the goal of pursuing market share rather than profits. Most local companies cannot do this because not economically logical in their eyes. As long as Japanese corporations have adequate financial backing (and they usually do, being a part of a larger keiretsu family), they are odds-on favorites to win. A Japanese company puts emphasis on market share and rank within an industry as the primary factors in strategic planning. Its primary concern is how it stands against the competition in terms of market share and position. It is this desire to retain corporate face by not allowing the companys standing in the industry to decline that often causes Japanese firms in the same industry to act in lockstep. If one firm takes an action, all its rivals will consider that it must surely be a necessary step and thus a matter of survival for the competition to take the same action. Thus, they all seem to do the same thing at more or less the same time. The Japanese companys fondest dream is to be thought of as an ichi-ryu gaisha or number one company. Once it has achieved this pinnacle of success, it can attract the finest talent of the Japanese universities and become involved in many government-sponsored projects. The profit motive, therefore, is also subordinated to the need for prestige. Market share versus profitability: Which is a better measure of success? The advantages of market share are several: Market share measures what has been put into a relationship, while profitability measures what has been taken out; market share faces outward to the society, while profitability faces inward toward the owners; in market share calculations, the customers are ends in themselves with reconcilable aims; in profit calculations, customers are means to the companys ends, persons to be served only if there is a percentage in it for the company. Market share is also a better gateway to learning. The greater the volume is and the greater is the variety of customers needs that are satisfied, the faster the organization learns to improve quality and lower its costs. One has to satisfy ones market prior to the realization of profits. Any profits are but a consequence of satisfying customers first. Profits follow readily from customer satisfaction, but the reverse is not always true. A narrow, yet profitable, niche gives few such opportunities. Those who would win a learning race need the largest possible share of the market from which to learn. Market share strategies are extremely dangerous when all competitors use them. They can bankrupt each other in short order and create a market in which no one is making a living. Market share strategies really pay off when a competitor is trying to maximize profits because the cost squeeze causes profits to disappear for the profit maximizer, while market share increases if each tries to match the others price cuts. In such a scenario, Americans are likely to see themselves as failing and withdraw from a market, while Japanese companies are more likely to see themselves as succeeding according to their prime value of satisfying more customers, and hence stay in the market. A market share strategy is also more resilient than a profit-maximizing one, since with the former you have a larger number of customers on your side with a genuine interest in your survival and they are more likely to tell you in great detail when you go wrong, to attempt to right your course. They also will give you ample opportunity to redeem yourself. Going for market share and using that increased volume to reduce costs and prices is a strategy that discourages other entrants into the marketplace. Potential competitors see your large share, low costs, and slim margins and tend to leave you alone. Market share or customer satisfaction is also a quicker signaling system. Any changes in the environment show up first in shifting customer needs, but may start to affect profits only later. Those concerned only with profits may realize it too late and respond too slowly. Listening to customers needs

can facilitate long-term strategies. Oligopolistic industries in the developed countries, particularly the United States, have always been popular targets due to the market size, sluggishness of competitive response, market reaction time, and pricing sensitivity. Japanese firms become the price-quality leaders and then squeeze competitors profit margins through low-cost pricing policies. They can and do accept losses in the early years, as they view it as an investment in long-run market development. This can be accomplished because Japanese industry is supported or owned by banks or other financial institutions with a much lower cost of capital. Japanese companies are assisted and protected against foreign competition by the Japanese government via duties, import restrictions and investment restrictions. The core company can keep its prices lower by pushing the pain downward, forcing suppliers to reduce their prices; subcontractors can be forced to adjust their activities to the parent company's need; and distributors can be made to sell at the producers fixed prices and pressured into meeting a sales quota. Japanese companies place market share above return on investment (ROI) and capital gains for shareholders. American companies rank these priorities in reverse order. Holding a share of the market, even in a mature industry, ranks at the top of Japanese corporate objectives. This is due to lifetime employment and high debt-to-equity financing. These two facets force Japanese companies to seek ever-expanding market shares. The overwhelming emphasis on market share and position in the market acts to the detriment of profitability and serves to focus the company on peripheral matters. Honda and Yamaha held a classic market share battle from 1980 to 1984. In 1980, each had 35 percent of the motorcycle market in Japan. Yamaha had the gumption to announce in 1982 that Yamaha would be the domestic leader in motorcycles within one year and the world leader within two. Yamaha took the offensive in 1981 with sixty new product introductions. Honda was incensed and adopted the motto: Yamaha wo tsubusu (We will crush, squash, slaughter Yamaha). During the next eighteen months, Honda made 113 improvements (versus Yamahas 37), introduced 81 new models, increased promotional funds, and made massive price cuts. A full-scale marketing counteroffensive on pricing, distribution, and advertising was launched by Honda. During that same period, Yamahas market share decreased from 37 to 23 percent, and eventually the Yamaha president was forced to resign. Yamaha conceded in 1984 after both sides had lost tons of money. Yamaha President Eguchi announced publicly, We want to end the H-Y war. It is our fault. Of course there will be competition in the future, but it will be based on mutual recognition of our respective positions. Professor Paul Herbig Japanese Marketing Lecture Series Lecture #11: The Japanese International Marketing Strategy

ROADS TO INTERNATIONALIZATION

The Japanese have traditionally followed one of three possible roads in their pursuit of global market expansion. The most prevalent route is moving from Japan to developing countries to developed countries. The strategy here is to build up the Japanese home market by making products that replace those imported from the West; then, by expanding domestic market share, economies of scale are gained. This is enabled by government protection, import restrictions, import duties, and foreign investment restrictions. Southeast Asia, which typically has less competition, has often been used as a base for building volume and sharpening marketing capabilities. With such marketing experience gained, cost improvements realized from such volume, and continuous improvement of product quality, the Japanese are ready to enter the markets of more advanced countries. Here the Japanese companies tend to focus on specific geographic areas and market segments ignored by local producers so as to gain product and customer knowledge in order to build acceptance and capture market share. This has been the route used for the steel, automobile, petrochemical, consumer electronics, digital watch, and camera industries. The second path has been to secure the Japanese home market and move into developed countries and then into developing countries. In particular, Japanese companies using this route seek a developed country similar to the United States as a testing ground and a trial markets for their products. Australia is typical. Since Japan lacks natural resources, land is scare, and labor is skilled and loyal, Japanese companies tend to focus on industries that require high skills, are highly labor intensive, and require only small quantities of natural resourcesindustries that have strong economies of scale and strong experience curve effects. The Japanese corporate strategy is to enter the market with a low-priced, improved product; capture a large market share; and in the process bring down manufacturing costs to allow real learning curve effects to take place as well as margins to be generated. The companies then move into other developed countries as demand grows. In the American market, Japanese companies use price and distribution to penetrate the marketplace, relying first on becoming an original equipment manufacturer (OEM) or obtaining private-label business from American manufacturers or distributors; the resulting products are priced 10 to 20 percent lower than those of comparable local producers. This was the strategy used in such high-tech industries such as computers and semiconductors. The third route to international success is producing products to sell in developed countries instead of the home market. These are products for which the home market demand is not developed or is too small to serve,

including VCRs, color television sets, and sewing machines. Kao, Japans leading producer of soaps, detergents, and personal care products, historically considered its foreign subsidiaries as delivery pipelines for the companys standardized products to be exported from its Japanese plants. Typically, though, Japans own home market is the mainspring of its industrial dynamo; Japan has a huge homogeneous market, composed of middle-class consumers that eagerly absorbs new products, that provides the basis for scale economies, and that is the primary market for most Japanese manufacturers. Most manufacturers feel most comfortable producing for and selling to the domestic market. For many manufacturers, exports constitute the secondary market, not the market of choice. For a Japanese company to develop a global market network, it necessarily must work through the five stages in the process of becoming internationalized: 1. Utilize sogo shosha or local distributors. 2. As the company gains a foothold, replace local distributors with its own overseas sales branches and distribution networks. 3. Begin local production in less developed countries. 4. Start local production in developed countries using local local protectionism. labor and raw materials as necessary to avoid

5. Increase the global market by establishing plants (by acquiring companies, buying factories, or starting plants from scratch) around the world and deciding what to produce where for which markets.

Japanese companies are fanatical about organizing teams to study competitors and consumer preferences. They have no hesitancy to hire the best American industry specialists to help manage their country-entry strategies into the United States (or local specialists for whatever country they are pursuing). They typically use the Japanese domestic market for product development and testing before entering the United States marketplace. The experience in the Japanese market provides insight into customer preferences, product deficiencies, and effective marketing strategies. Japans market-entry strategy involves segmenting the market, targeting a segment that the competition is not adequately servicing, designing a product for that market segment, entering with a low price, offering high quality and service, developing a strong distribution system, and backing the product with heavy promotion and advertisinga market-entry strategy in classic marketing textbook fashion. The Japanese typically carefully analyze overseas market opportunities through exhaustive market feasibility studies before entering any market. They select those attractive opportunities that match the economic goals of the Japanese corporation and develop products that the customers want or need. The market-entry points and the timing of the entry are chosen with the objective of obtaining a strong initial share of the market. Once an initial foothold is gained, the strategy then shifts to market penetration tactics that will broaden the customer base, continuing to expand market share. This has been the preferred strategy over the last forty years. The global marketing strategy tends to be to enter a market a well-defined product with high-volume sales potential, typically at the cheaper, less-glamorous end of the product line, one that is often overlooked and not wellserved by local manufacturers since it typically provides low margins, and then offer new product features or lowpriced, stripped down versions of existing products at a substantial cost saving. Japanese companies emphasize quality and service. If necessary, they will use low bids to get the business, offer middlemen higher commissions to push products, encourage joint promotional efforts, and support their products with heavy regional advertising. Once a beachhead has been secured, the Japanese increase share for their product and move up to the middle and upper ranges of the product line, while maintaining consumer satisfaction through low prices and high quality. The Japanese need to sell a great deal; therefore, they seek market share at any price. They export huge quantities at low prices. As soon as one company drops its prices, all others will do the same. They secure market share by flooding markets and engaging in price wars and often are suspected of dumping.

MATSUSHITA Matsushita provides a classic example of internationalization. It has 150 plants in thirty-eight countries. Over onehalf of its sales come from overseas business. Foreign factories supply two-thirds of all goods sold abroad. Many of these foreign factories have full- fledged R&D labs with the authority to redesign any product or component from the ground up. Its founder, Konosuke Matsushita, said, When you go abroad, dont eat another persons pie. Matsushitas lessons for going global are:

Be a good corporate citizen in every country,

respecting cultures, customs, and languages.

Give overseas operations your best manufacturing technology. Keep the expatriate headcount down and groom local managers to take over. Let the plants set their own rules, fine tuning manufacturing processes to match skills of workers. Develop local R&D to tailor products to local markets.

Encourage competition among overseas outposts and with plants back home.

CROSS-CULTURAL ANALYSES Cross-cultural marketing strategy analyses comparing Japanese and Western firms have been consistent in their findings regarding Japanese marketing and business practices. The Japanese companies have a stronger competitive drive than most Western companies and pursue market share, aggressive growth, and market domination strategies to a greater extent. They tend to be more adept at exploiting strategic windowsopportunities created by new market segments, changes in technology, or new distribution channels. They prefer market adaptation rather than innovation. They are not technological pioneers and are risk averse. Redesign, upgrading, and rapid commercialization of innovations made elsewhere appear to be their common priorities. They search for new or emerging market niches and do not attack the market leaders head on, but rather spot emerging segments not yet prioritized. They pursue a follower, not a leader, strategy. Japanese companies tend to pursue more aggressive marketing-mix tactics, which usually involve low prices; rapid product line extensions; and high expenditures on advertising, promotion, and dealer incentives. Japanese companies concentrate on long-term profits and gaining market share. Western managers, however, are usually oriented toward short-term profits and productivity improvements and are often willing to lose market share to boost profit performance. Japanese subsidiaries have extremely high market share objectives, and they are willing to make long-term sacrifices to achieve their objectives. The Japanese typically see profit not as the central objective, but rather as the result of satisfying the aspirations of customers and achieving market share. They view customer service as their major differential advantage. Their product policy emphasizes their superior quality compared to their competition. The Japanese often view other Japanese companies as their only major competitors. They are most concerned about the new products and the quality levels being developed by their competition. They perceive superior quality and reliability as key competitive advantages. In fact, much of the actual competition results from the bitter rivalry between Japanese companies, which fight one another for market share. Without really knowing it or intending it, they manage to expand largely by driving weaker local firms out of the market altogether. Market dominance is characteristically their central objective. Japanese firms and their managers are more committed to a market than Western managers. They increase market share by winning over competitors customers. The Japanese tend to have smaller, simpler business units organized around a single product line or market, with clear marketing plans aimed at building long-term market positions and focused on quality, service, and continuous incremental innovation. What usually occurs in the West is that local companies retreat into the small high-tech premium niche markets (American) or stick with the low-valueadded bottom end of the market (British). The Japanese end up capturing the mass market and move upward into the premium segments. By withdrawing, Westerners have provided the Japanese a foothold in the market from which to build experience, cash flow, and distribution capabilities and have allowed them to create a base from which they can move into the upper market niches. The primary Japanese vision has been the civilian application of technology; improved methods of production and process innovation are the dominant concerns. This is usually technology acquired from abroad. Companies have been encouraged by the government to find ways to more rapidly absorb and add to the imported technological knowledge to improve efficiency and product quality. Technological self-sufficiency appears to be the key phrase for the Japanese. They tend to look at an emerging technology or market area from the perspective of vulnerability rather than risk. The question, to them, becomes how vulnerable a firm is if it does not enter a new technology rather than what the risks are of entering it. Its system of decision making imposes a predisposition to enter a new technology in order to keep up with or gain an advantage on competitors. The Japanese approach a research project from the point of view of multiple applications. It is undertaken not because it will solve a particular problem, but because it may contribute to solving a number of seemingly unrelated problems. By way of contrast, Americans are typically more narrowly focused. After they begin in their home market, the Japanese then examine developed countries. If markets there are found to have considerably less competition, they attempt to build volume and sharpen marketing capabilities. Japanese companies focus on specific geographic areas and market segments ignored by American producers in order to gain product and customer knowledge from which to build acceptance and capture market share. They do a careful analysis of the competition to find a niche in the industry where larger competitors seldom concentrate their efforts. These holes provide opportunity gaps, usually at the low end since American firms traditionally have emphasized

higher-value products with higher profit margins.

ECONOMIC RATIONALE In order for Japan to survive, it must import almost all of its raw materials, process them, and export finished products. These factors have forced the Japanese to seek and penetrate international market segments for their survival. The Japanese have focused many of their efforts on seeking international product acceptance, achieving a solid market share with those products, and continuing to gain experience in competing within international markets. The Japanese have built and are running exceedingly successful businesses; yet their basic business strategy not only violates everything a Western executive knows, but also is incompatible with the economists theories of economic behavior and microeconomics. Nonetheless, the business strategy of a Japanese enterprise, while indeed different, is not irrational. It optimizes in perfectly rational fashion the specific structural realities in which Japanese businesses operate, especially those of banking and capital markets and those of wage systems and wage structures. Measured as a percentage of sales, Japanese business enterprises, especially large business, perform at a much lower rate of profitability than Western enterprises in similar lines of businesses. Profit in reality does not matter much to the business enterprise. The profit that matters to the economy is what the banks return. The Japanese exploit markets by using a market share pricing strategy; a low entry price is used to build up market share and establish a dominant market position in the long run.

SELECTING INDUSTRIES AND MARKETS The Japanese government and companies both play a large role in selecting the markets that Japanese companies will enter. They work together to identify attractive global market opportunities that may exist for the companies. The government and companies work as partners with respect to industry direction, technology development, and export trade. One main element in Japan's industrial strategy is the selection of a "targeted" industry. MITI is responsible for the selection and support mobilization of the "targeted" industry because it then becomes a high priority area for Japan's national resource commitment. Many factors help shape and influence this selection process. MITI examines the timing, the technological condition of the industry, and the economic parameters of the industry. Japanese firms carefully look at the "targeted" industries evolution. These firms look for industries where market leaders are underfinanced or complacent and their customers are dissatisfied. The Japanese analyze the industries market segments, searching for those that exhibit strong economies of scale and strong experience curve effects. Their strategy is to enter this market segment with a lower-priced product that has improved features, capture a large market share, and during this process lower their manufacturing costs still further. During this industry analysis, selection, and planning phase, the Japanese look for product market sectors that will allow product market development and not just the capture of the existing market share. The Japanese have been highly successful at developing new product concepts and modifying existing products that are matched to substantial pockets of unmet demand. The major strategic advantage lies in knowing the environment thoroughly, seizing the initiative, and forestalling the enemy at every point. One particularly popular samurai tactic was to injure the corners, strike at the corners. If the corners are overthrown, so goes the tactic, the spirit of the whole body will be overthrown. Then one should follow up the attack when the corners have fallen. This strategy has been continuously played out in industry after industry: automobiles, semiconductors, consumer electronics, motorcycles, copiers, and earth- moving equipment. The Japanese are masters of this continuous policy of looking for differences, geographical or otherwise, in the total market and then exploiting of these differences. The objective is to create competitive gaps through strategies that will either cause brand switching to occur, especially in non-growth markets, or increase market potential in industries with untapped growth opportunities. When the Japanese enter a market behind the innovators, their strategy has been not to attack the leader head on, but to spot emerging segments not yet prioritized by the leaders. The 35 mm camera is an excellent example of this type of market strategy. The market for that camera was dominated by two German companies, Rollei and Leica. The Japanese did not enter the professional market these two companies dominated, but simplified the product, lowered the price, and rapidly took the growing amateur camera market. After the Japanese were successful in capturing this market, they rolled back into the professional market segment and then used their newly won scale and experience advantage to sweep aside their German competitors at the top end of the market. As typical of strategy as it is for the Japanese, it tends to surprise many an industry leader. The Japanese do not target industries that are strong and serving their existing market segment well. They choose to market to product sectors where they feel the existing industries are unable or unwilling to respond vigorously to their market entry. The Japanese also look for existing industries that will withdraw their entire market

sectors if they enter. This is a strong competitive strategy they use to their advantage. When attacked by Japanese competitors, the American and British companies frequently withdrew from the mass, volume market. The American companies tend to rationalize their withdrawal from these markets by focusing on niche strategies. The Japanese used the volume markets they withdrew from to build experience, cash flow, and distribution capabilities that were then utilized to penetrate the few remaining niches held by the American companies. Japan's attack strategy on niche markets has proven to be very successful. When they enter a niche market, they upgrade their products from the low end in order to stretch their product to the upper end of the market, while not abandoning the low end. While many American and British companies focused on small-volume, higher-margin segments when attacked by Japanese competitors, these were not sustainable for a long period of time against those same Japanese competitors. When Japanese companies have exported products, they test them out in Southeast Asia and a few American cities (particularly Los Angeles) to learn how to better market them abroad. When the situation looks risky, they take one of two paths: They ask trading companies to do the overseas marketing on their behalf, or they accept OEM deals under well-known American or European brand names. Eventually, as they learn the market and become more established, they bypass the trading companies, the OEM dealers and the distributors and insist on own-brand marketing.

ENTERING A MARKET When the Japanese decide to enter a market, they spend several months analyzing the feasibility of the market. Their study teams evaluate the market and then determine an appropriate strategy for market entry. When entering an American market, the Japanese hire American professionals (consultants, executives, and industry specialists) to help determine the appropriate market-entry strategy. Within any market they enter, the Japanese frequently choose a local, rather than a Japanese director, to help develop and oversee their marketing effort. After a market-entry strategy has been determined, the Japanese focus on clear objectives and plans for that market segment. They are oriented toward long-term market objectives and strongly commit their efforts to achieve success within that market. The Japanese focus remains on products that will suit that chosen market. Japanese organizations are highly committed to success within those markets, and this translates into perceived security and confidence among their employees. They create highly flexible organizations, which provide a framework for innovation, teamwork, and mutual problem solving. One common market-entry strategy is to bring out a smaller version of an existing product. Xerox saw its share of the American copier market drop from 80 percent in 1976 to 13 percent by 1982 because of a smaller version of its copier offered by the Japanese. American manufacturers traditionally tend to encourage larger products because their profits are greater on larger-sized products. Japanese companies tend to enter market segments at the low-price end and then move upward into the higher-value -added segments. They offer new product features on existing products within the market segment and sometimes offer fewer product features at a substantial cost savings to the consumer in order to gain market share. Another market-entry strategy is to sell their own product to a private brander, and, after it has achieved a market share, they introduce their own brand of the same product. Often it is a product that is of higher quality and has more features and a better design. Many times the Japanese will simply price the same product lower than the private brand. Their emphasis on, and reputation for, high-quality and reliable products has become a marketing tool they have successfully used in the international markets since 1980. When entering a new market, they can capitalize on this reputation and actually produce a higher-quality product than is being produced for the market. Since the Japanese use more automated production methods and implement more quality assurance systems, this is an extremely strong marketing strategy and tool. Even though the Japanese produce high-quality products, they also provide excellent service centers for their products to help ensure customer satisfaction. The Japanese locate these service centers within the markets they enter so that if a problem arises with a product, it can be quickly repaired to ensure their reputation for quality and exceptional customer service remains intact. After the Japanese develop an excellent product and establish service centers, they place a tremendous emphasis on integrating distribution into the marketing mix. They integrate distribution into the marketing mix by developing markets region by region, and lining up strong distributors in each market. Along with strong distribution, they back their products with strong advertising and promotions to help bring the products to the consumers attention and differentiate the products from those of their competitors. Japanese companies tend to enter foreign markets one after the other in quick succession, using low price, high quality, heavy advertising, and shrewd knowledge of customers and competitors gathered prior to penetrating the market. The market intelligence forces of a trading company transmit back to headquarters the information that such and such a segment in Country X looks promising. The local JETRO office also sends a similar report. These signals will be received by several Japanese firms concurrently. First, they open a type of forward listening post and call it a liaison office. This office will usually consist of two to three men who will be responsible for communicating details of the market culture and its dynamics back to the headquarters in Japan. Each keiretsu member tends to establish a separate liaison office about the same time. Entry, therefore, tends to be simultaneous. The rapid successive entries of

Japanese companies, all suddenly vying for one particular market segment and battling each other without mercy for market share there, often lead to the trampling of the local companies. All competitors tend to follow, since if one company has gone completely through the decision process, convincing the chain of command that it is a right and fruitful decision, then its rivals will consider it a necessary step and thus a matter of pride to initiate the same action. This lemming-like approach goes back to the vulnerability of losing market share and losing status and face as a result back in Japan.

JAPAN AS AN INTERNATIONAL PLAYER Japan has also systematically avoided rules of international free trade. Foreign goods that rivaled Japanese products were kept out of the home market by either discriminatory tariffs or a variety of non-tariff obstacles. Only after it has bought foreign expertise, given its manufacturers special incentives to catch up, and built up economies of scale and experience, does it favor free trade; its usual strategy is to dump goods abroad, while keeping them highly priced in the home market. A survey completed in 1990 by the U.S. Federal Trade Commission of a range of internationally traded goods found the prices of imported goods to be 80 percent higher, on average, in Japanese stores than in their country of origin; foreigners, though, paid an average of only 20 percent more for imported Japanese goods in their own stores. According to Securities Data Co., the Japanese were the managers on sixty-three new equity and bond issues in the United States in 1992; by way of contrast, American brokers in Japan managed but one deal in 1992. NonJapanese firms underwrote only 2.6 percent of all Japanese bonds issued in 1992, and even less of equitiesjust another example of maintaining the Japanese status quo by keeping Japanese markets Japanese dominated. The procedures an exporter must go through are typically not transparent, not open, and not based on criteria known to all who are affected. Japan's national industrial strategy has always distinguished between export and domestic industries. Resources and policies were applied to maximize performance in export industries. Domestic industries, those without foreign markets or competitors, were never a priority. Many domestic industries exhibit dismal records of productivity and performance. For example, the U.S. Postal Service delivers twice as many items per employee as the Japanese Postal Service. Amtrak reports six times more passenger and freight miles per employee than the Japanese National Railway. The American residential construction industry is several times more productive than its Japanese counterpart. Other extreme productivity gaps appear in wholesale and retail distribution, health care, food, and lodging. Once the markets are truly opened, the inefficiencies of the Japanese domestic marketplace will become apparent. The Japanese trade surplus is the result of encouraging firms to export large quantities of mass produced industrial products, while keeping foreign products and corporations out of Japan. The Japanese form of capitalism is not capitalism as is described in the West. The Japanese form of capitalism is more that of a controlled economy. Dependence on and submission to government control are achieved by administrative guidance. A thorough reform of barriers to market entry would lift the average Japanese familys real income by 18 percent overnight and create a million new jobs. Professor Paul Herbig Japanese Marketing Lecture Series Lecture #1: Development of the marketing concept in Japan

DEVELOPMENT OF MARKETING IN JAPAN

How did Japan's marketing strategies develop? The six stages in the evolution and development of Japanese marketing are premarketing, marketing awareness and interest, marketing acceptance, marketing expansion, global marketing, and market maturity. After the Second World War, Japan's main focus was on creating adequate supplies to satisfy its consumers needs. This was the premarketing stage (19461953) for Japan as it began to transfer technology from developed countries and focus its efforts on improving the poor image of its products. Statistical processes and marketing research and surveys were introduced by Dr. Edward Deming during this period. The second stage (19531964) was Japan's marketing awareness and interest phase. Japan's executives and academicians began to use marketing and management approaches as a discipline. The Japan Productivity Center and the Japan Marketing Association were established, and the first marketing research agency and periodical appeared. As its economic climate became more favorable, Japan saw its first consumption revolution, and it increased its liberalization of trade. The three sacred treasures of the Japanese consumer in the fifties were the

television, electric washing machine and refrigerator (Interesting aside, to this day most Japanese households still do not have an electric dryer because of the high cost of electricity). During this stage, the Japanese translated several American marketing books, and they summarized the sections on marketing management, principles, research, sales promotion and product policy. In 1953, the first Japanese marketing book was published by Tsuyoshi Hamano, and in 1963, the first marketing course was taught at a Japanese university. From 1964 to 1969 Japan had the third stagemarketing acceptance and diffusion. During this period, affluence and mass consumption spread among Japanese consumers, which further emphasized the need for and acceptance of marketing approaches. The Japanese manufacturers began to cultivate the international markets and to diversify their own domestic product lines. In the 1970s, Japan underwent the fourth stage, market expansion and the extension of its marketing domain. Japanese marketing thought became concerned with social issues and responsibilities during this period of market expansion. Japanese marketers began to emphasize productivity and efficiency for their productss, and continued their effort to expand their markets by exporting products from these highly productive manufacturers. The 1980s were the stage of global marketing when Japan began to focus its marketing strategies and strategic planning on international markets. As a result, Japan has became a global marketing success. This international focus has became one of the most important factors that has shaped Japan's marketing mix and has prepared it to become a strong global force within the world markets. The 1990s have been the sixth and current stage, that of a mature marketing philosophy, a holistic consumer society, the whole individual. Table 1 shows the stages in the development of marketing in Japan. Most of the early Japanese marketing concepts originated in the United States. The Japanese have taken these concepts and have blended them with their values and beliefs to attain their own unique marketing philosophy. This philosophy involves studying the nuances of the markets they tend to penetrate to find out exactly what consumers want. After consumer desires are determined, a product is designed to fit these desires, and the product is positioned in the market for a substantial amount of time. The result of applying the marketing philosophy has been not the Americanization of Japanese business methods and approaches, but the Japanization of American marketing, the modification and adaptation of selected American marketing constructs, ideas, and practices to adjust them to the Japanese culture, which remains intact. As compared to American marketers and American marketing principles, Japanese marketers tend to be more intuitive, subjective, and communications and human relations oriented. In Japan, responsibilities for marketing are in the hands of a broader but less sophisticated and less technically trained group of managers. Marketing is not solely the responsibility of the marketing department; all other departments accept the companys philosophy, the logic of the marketing concept, and its approach to business, as they are directly involved in applying it throughout the organization. Less reliance exists on formal and conceptual aspects of formulating marketing goals and strategies and more emphasis on implementation and human relations than are found in American companies. Japanese companies are more adept at exploiting strategic windows, opportunities created by new market segments, changes in technology and new distribution channels. This has been strongly encouraged by the Ministry for International Trade and Industry (MITI) and endorsed by Japanese companies, which emphasize fast market adaptation rather than innovation. The redesign, upgrading, and rapid commercialization of innovations made elsewhere appear to be Japans common priority. Its very low level of defense spending has allowed Japan to put its best technical resources not toward military applications (as in the United States) but toward commercial applications.

Table 1 Development of Marketing in Japan

Stage 1: Premarketing: 19461953 Emphasis on Basic Needs and Manufacturing Pursuit of Technology at any Cost

Access to Necessities of Life

Stage 2: Marketing Awareness:

19531964

Beginnings of Marketing Research Rapid Economic Growth Emphasis on Product Planning

Stage 3: Acceptance of Marketing: 19641969 Affluence and Consumption Advertising Product Diversification Importance of Status

Stage 4: Market Expansion: 1970s Environmental and Social Issues Quality of Life Concerns Expansion of Exports Productivity and Efficiency Emphasis

Stage 5: Global Marketing: 1980s Mature and Saturated Domestic Markets International Focus Trade Surpluses Market Share Dominance

Stage 6: Market Maturity: 1990s Consumerism Expanding Competition in Home Markets Modernization of Marketing Methods Efficiency in Product and Marketing Segments

STRATEGY AND COMPETIVENES

Competition in Japan is not between individuals, but between groups; in this regard it is extremely fierce. The Japanese are integrated mentally, based on the principle of interdependence, owing to both formal and informal human relations. What motivates members is not an economic contract. They have a tacit agreement to cooperate interdependently. They feel strongly that they belong to the community and come to have a sense of solidarity only when they work at the same job site or in the same company. In Japan, the employees of a company have formed a team, which acts as a united body to compete with teams from other companies; successful companies distribute the profit gained to all members of the team in the form of a bonus. And the national spirit also is strong, with employees of companies constituting a national team of Japanese industry to compete with their foreign rivals as a single united body. Table 2 compares strategic orientation for Japanese and American companies.

Table 2 Traditional Strategic Approaches

Strategic Element Employee Attitude Risk/Reward Innovation Manufacturing Focus Product Objective Product Introduction Business Focus

In Japan Team/Cooperate Learn from Failures

In the United States Individual/Competition Punish Failures

Incremental Improvements Breakthroughs Process Quality/Utility Sustain Market Share/Customer Product Performance/Novelty First to Market Profit/Shareholder

Reasons for the high degree of Japanese competitiveness include

a high degree of vertical integration; a broad product line strategy heavily oriented toward basic undifferentiated products; the devotion of considerable resources to overseas fact-finding data base development, and systematic analysis of literature; great insight and imagination to push new technologies far limits thought possible by their competitors; a strong design-manufacturing-marketing links; missions, foreign scientific, technical, and business beyond the

a strong market intelligence network; near-cost or below-cost pricing strategies; an excess cash flow from mature sectors to high-growth sectors; the selection by MITI of knowledge-based industries for nurturing; the promotion of organizational learning, skill development, horizontal flow of information and better organizational communications ` systems through flexible new product teams with overlapping stages of commercialization, job rotation, extensive operator-engineer communications at the shop-floor level, and use of interdisciplinary teams consisting of production/marketing/research and development (R&D)/engineering personnel for technology transfer; intensive world technology trend scanning; the continuous upgrading of facilities with low cost and high objectives. quality as its

Marketing Conclusions

In Japan, it is not good enough to simply build a better mousetrap. You must produce the device with features desired by consumers. Then you must make sure that it continues to function properly. This is why customer service along with product quality and after-sales service are the triple pillars of marketing and selling in Japan. Most Japanese businesses are in touch with their markets. Tremendous attention is paid to research on what customers want. Japanese consumers have constantly complained that foreign businesses do not take the time to inquire about what Japanese customers want. Non-Japanese companies do not seem to have second thoughts about either shipping clothing that does not fit the typical Japanese physique or attempting to sell appliances that have incorrect voltages or are too large for Japanese living spaces. On the other hand, Japanese manufacturers tend to be well attuned to their own customers' particular needs. (For instance, Japanese machine-tool producers found that their American customers used the machine tools more than their Japanese customers. Due to higher labor costs, American firms used the machines more intensively and could not afford downtime for maintenance. Therefore, Japanese producers modified both their products and their service programs to sell to the American market.) From an American vantage point, one shortcoming of the Japanese is that they overly stress market share, where the selling emphasis is on volume. A Japanese company is not driven by profit maximization. A manager who increases market share while reducing profit would be preferred to one who makes more money out of fewer sales. The Japanese look to sell in large quantities, seeking market share at any price. They export large quantities at low prices. As soon as one company drops its prices, all others tend to follow (the herd instinct). They secure market share by flooding markets and initiating price wars, and they often are accused of dumping. The Japanese strategy follows a pattern of rapid growth in a protected and highly competitive Japanese market where firms battle for market share; then there are steady improvements in costs and quality among the leading Japanese companies, followed by an export drive by the domestic winners from Japan's maturing industry. This strategy involves expansion, greater market share and increased sales. To accomplish these ends, the Japanese companies will do almost anything (e.g., cutting prices, offering rebates). Breaking even or absorbing losses can be momentarily tolerated. But some loss of economies of scale ultimately results, causing substantial losses. In Japan, this sort of competition continues until only a few producers dominate the market, the market matures, and market shares stabilize. Then, usually through collusion, the surviving companies mutually boost prices and start reaping higher profits. This form of business strategy is usually not feasible in foreign markets with stricter antitrust laws or stronger domestic competition. When the potential for profits is dismal at home in Japan and negligible abroad, second thoughts about this strategy occur. Professor Paul Herbig Japanese Marketing Lecture Series

Lecture #18:DIRECT MARKETING

Direct Mail Sales Direct mail is a marketing technique that has been growing in popularity in the United States, but not as rapidly in Japan. One reason for this discrepancy is that the Japanese feel printed material is too impersonal and hence not sincere. If printed material is going to be used, they prefer communications written out in longhand by someone who has fine penmanship (another example of their love of form over function). They will often not open direct mail if their name and address are not attractively handwritten or beautifully printed. The Japanese favor face-to-face communications so response rates for direct mail are half those found in the United States. Direct mail marketing accounts for less than 1 percent of all Japanese retail sales compared with 17 or 18 percent in the United States. Sophisticated direct mail techniques are less accepted and used less often. Japan is still a decade or more behind the United States in the sophistication of its direct mail techniques. Few database companies exist and fewer still offer quality lists. However, over 4,000 direct mail marketing companies now exist in Japan and the field is expected to grow as more Japanese consumers change their lifestyles and become aware of the convenience of direct mail. The mail order business has expanded rapidly in Japan, with annual growth rates in the 1990s of over 17 percent. Still, mail order sales are just 1.3 percent of total retail sales, less than one-third of comparable American numbers (4.8 percent). The average Japanese consumer receives 166 pieces of mail a year versus nearly four times as many for Americans. The Japanese spend more, return less, and buy more often than Americans. Direct mail order sales can only grow as lifestyle changes occur and convenience becomes important as time available for shopping decreases, especially with the growing number of working women. The largest mail order company in Japan is Cecile, which markets womens apparel, followed by Fuji Sankei Living Service, which is a general merchandiser, and Fukutake Shoten, an educational publisher. According to a survey by the Japan Direct Marketing Association, the products most successfully marketed by mail in Japan are fashion accessories (shoes and handbags); jewelry and precious metals; watches, glasses, cameras, and optical instruments; ladies wear; and furniture and interior goods. Most products range in price from $40 to $225. Catalog sales are beginning to take off in Japan. By ordering directly, consumers can eliminate the convoluted retail system with its many middlemen driving prices up. The increase in catalog sales reflects status seeking as well as cost consciousness. L.L. Bean Internationals sales increased 73 percent in 1993 to over $100 million. The company has even opened two retail stores in Tokyo to help popularize its products. Catalogs and order forms in Japanese with explanation of how to order and deal with overseas delivery ease the difficulties of Japanese consumers not well versed in direct mail ordering. The direct mail business is expected to increase from $12 billion a year to nearly $50 billion a year by end of decade. Direct mail is one answer to overcoming the structural trade barrier of the Japanese distribution system. Several major challenges are inhibiting the growth curve of direct mail in Japan. These include extremely high postal rates (80 yen to mail a domestic first-class letter, almost four times those found in the United States; airmail from the United States or Hong Kong to Japan is only 50 yen; a Japanese marketer could send direct-mail pieces to Japanese households from the United States cheaper than he could from Japan, except the Japanese government has made it illegal for Japanese companies to mail such materials into Japan from other countries), restrictive postal regulations (Japan has compartmentalized the distinctions between personalized mail and advertising; the term business executive or head of household as an addressee means the post office will treat the letter as personal mail and charge the higher postage rate), and the fact that list management is still in its infancy compared to the West (only 20 percent of all lists are computerized, and the remainder are on cards; many are not language standardized). Many Japanese companies are reluctant to share lists, especially with potential competitors. When lists are available and can be rented, direct mail vendors will tend to pay anywhere from $.22 to $.75 per name, three to five times as much as in the United States. Lists are often dirty; that is, they include a high number of incorrect, duplicate or out-of-date addresses. Most national lists are either compiled from paid subscriber publications or based on specific types of mail-order purchasers; many, though, are compiled from government and trade association directories, which means that people on the lists are not proven responders to direct mail offers and the addresses are often not up to date. Japan does not have a standard industrial classification (SIC) system like the United States or Europe, so refined segmentation by industry is difficult to find among national lists. Procuring lists from Japanese owners is difficult, since the Japanese tend to not share information openly with strangers. Many publications are hesitant to rent their subscriber lists. Japanese consumers typically desire to meticulously inspect a product before deciding to buy it and demand a higher level of service. Nevertheless, because the Japanese receive relatively few direct mail pieces, direct mail is a unique medium. Added to the increased penetration of credit cards, this is a viable promotional tool in Japan. Telemarketing is a relatively new phenomenon in Japan. The 800-number concept was only introduced in 1986 and is expensive, with merchants charged at the same rate as for commercial calls. The toll-free service (for

consumers), when first implemented was rather expensive, even with rate reductions implemented later, it is not a bargain. Telemarketing has traditionally not been well accepted in Japan, since the Japanese tend to resent strangers calling their home at any time. It is more successful in business-to-business marketing than in consumer marketing.

Door-to-Door Sales

Direct marketing is divided about 55 percent mail and 45 percent door-to-door. Japan is the largest and most competitive market in the world for direct sellers, representing more than half of the global volume with total sales of $34 billion in 1992. Door-to-door selling is popular in Japan, especially the home party approach, which involves gathering friends and relatives. Amway is a remarkable success in direct marketing in the Japanese market. It has set up its own network of warehouses and a direct sales force. Amway also set up its own distribution system, which uses independent distributors. Amway distributes over 125 consumer products, ranging from home care products to housewares to nutrition products. However, since the Japanese rarely invite strangers to their houses, this eliminates the familiar sales plan for home distributors as is typical for Amway. So Amways alternative successful approach was to hold sales parties in local coffee shops instead. One advantage Amway has is that the Japanese rely strongly on the recommendations and experiences of friends and relatives; word of mouth and opinion leaders aid Amway in both selling and recruiting, thus playing to its strengths. Amway relies heavily on personal relationships with friends, neighbors, and relatives; this works only when the product is of good quality and earns quick acceptance. Only good products sell because distributors will not compromise personal relationships just to sell products. The ability to work for themselves has attracted would-be entrepreneurs and refugees from Japanese big businesses. The attraction is the ability to earn according to how you perform, not according to ones age or seniority. In contrast to the United States, where many Amway distributors are retired, the majority of Japanese distributors (2.5 million in 1994) are in their twenties and thirties. In Japan, where ones jinmyaku (network of human contacts) is everything, network marketing such as that used by Amway thrives. Amways culture encourages group meetings and pep rallies, which only mesh more so with the Japanese culture. As a result of such effort and devotion, Amway sales in Japan has exceeded $1. 5 billion ( with double-digit increases for over a decade), more than one-quarter of the companys worldwide sales are derived from Japan, nearly equaling that received in the United States (with net income approaching $200 million). Amways direct distribution system bypasses the complex and multi-layered Japanese system, another advantage well suited to success in Japan. Tupperware has also had great success in Japan in selling its products in the traditional Tupperware way.

SERVICE DEMANDS Social mores cause customers to demand excellence in service and product quality and to have the upper hand in any business interaction. Japanese customers feel it is their right to be treated as the central figure in any transaction, to receive careful, respectful service. Sellers are expected to go whatever extra mile is required to ensure that customers are satisfied and that the product or service is giving the performance promised. Sellers or suppliers must accept their subordinate, service-oriented role in the transaction. As such, the salesperson is exceptionally motivated to see that nothing he or she says could offend the buyer. In Japan, no matter how unique ones product, no matter how large and insurmountable ones market share, when a customer has a problem, then the seller solves it. When something goes wrong, everyone in the vendors shop should be concerned, even to the point of the sellers president visiting the customers headquarters to apologize. This shows respect and loyalty and cements add-on business. Selling in Japan, means providing absolutely devoted service to the customer without regard to cost, doing what it takes any time of day or night. This philosophy is propagated by the cultural heritage in which the vendor (merchant) (salesperson) occupied the lowest rung on the social ladder. As a result, the Japanese customer gets superior service, although paying for it in other ways. The sales function in Japan is intimately mixed with the service function. Free service is usually expected on products. For example, with orders for heavy machinery, the supplier is responsible for installation, operator training, maintenance, and service long after

the warranty expires. Indeed, many suppliers have automatic checkup inspections for their machinery. This may continue for up to twenty years after purchase. This ongoing inspection serves to cement the relationship as well as to ensure proper performance. In Japan, service for a product is provided without strings attached. This is derived from the notion that the product is supposed to work even after the initial warranty period, and, at the very least, minor problems are to be taken care of without additional payment. There is usually no additional charge for a warranty. In order to accommodate Japanese guests, Hilton International launched its Wa No Kutsurogi service brand in Tokyo. This translates to Comfort and Service, the Japanese Way and consists of distinctive features and amenities, such as Oriental restaurants on the premises and green tea service, targeted to both business and leisure travelers. Studies have indicated that the key requirements of Japanese travelers are to feel secure and comfortable, to be able to maximize limited time overseas, and to stay in hotels that maintain high standards of cleanliness and have a smart appearance. To achieve the level of personalized service the Japanese market demands often requires considerable staffing. Japanese service tends to be quite labor intensive: Hotel Okura in Tokyo has 1,600 full-time staffers for 880 rooms (nearly a 2:1 ratio), whereas New Yorks Helmsley Palace has about 1,000 people for 1,008 rooms (a 1:1 ratio). Much of the service level delivered in Japan is made possible by simply having more service people. One advantage is that although overstaffed by Western standards, Japanese firms are able to mobilize and organize large numbers of people very quickly to work on new or emergency projects, to have reserve capacity. Japanese hotels often do not have the reservation systems and automated checkout service that American travelers take for granted; automatic teller systems are far behind those seen in the United States. In the United States, it is often felt that added customer value does not typically justify the added costs and associated higher prices. Interestingly, Japanese firms in the United States look for ways to reduce labor input rather than increase it. Japanese firms in Japan would prefer to do likewise, but are inhibited by customer expectations and competitive pressures.

SATISFACTION AND SUPPORT Customer satisfaction in Japan is an integral part of Japanese business; repeat business is constantly on the minds of management. Department store personnel, for example, closely inspect every part of a product a customer selects prior to packaging it. If even slight blemishes are found, the product will not be sold to the customer even if he or she is willing to take it, since long-term discontent could result. Dealers are measured by regular surveys of customer satisfaction with both sales and service. These measures are used for employee compensation and development of systems and people. In Japan, customer satisfaction is non-negotiable. The most basic need is meeting one's commitments as advertised and stated. Commitments are personalized and rooted in specific people. The salesperson must attend to most problems personally. For the customer, one person, together with management, represents the supplier firm and is responsible for everything that relates to the sale. Japanese buyers are by nature ambiguous in their actions; they rarely provide feedback to the salesperson and never hint about purchase intentions. This is culturally based, for if one were to provide any hint of commitment, he or she would be obligated to purchase. The typical Japanese housewife will go grocery shopping every day due to lack of storage at home and the fact that many walk or ride a bike to the store which prohibits large purchases. Shopping also exists as a kind of leisure activity for the typical Japanese consumer. More emphasis in Japanese stores is put on the entertainment aspects of in-store atmospherics, while the convenience aspect of shopping tends to be downplayed.

TRAINING The preferred Japanese training method is that of learning by doing. Training is accomplished by working together in a group. The Japanese evaluate their training and testing experience as members of a group. The group will train together, will be evaluated together, and will be tested together; the group discovers the source of the problem and fixes it as a team. Groups are small, designed for functional harmony. They usually will continue informally after hours. The emphasis is on doing, sharing experiences, having intragroup discussion, and role playing; the orientation is highly visual (including slides, videotapes, samples, and actual hands-on demonstrations). Prereading is not highly valued unless special time is allowed for group discussion of the material. Prior to the formal training session, oftentimes the Japanese may conduct a group orientation in order to build group harmony, giving everyone a chance to get acquainted and build team spirit. A sharing of experience and learning is desired. Each person in the group must contribute to the learning environment and become part of the team. Tests of practical skills are more valuable

than written tests on the same material.

THE AFTER MARKET An example of Japanese concern for the after market can be seen in their thoroughness in doing business in the Middle East. As the Mideastern automobile market expanded, so, too, did demand for spare parts, gas station equipment, tires, repair-shop tools, and mechanical services. Japanese motor vehicle manufacturers were quick to see the potential of this market and trained auto mechanics all over the region in the art of auto repair. In one such venture, Toyota, Nissan, and Honda helped Libya set up service shops in forty-four towns and cities. Toyota sent three experts to Libya to give technical advice on building a repair shop in Tripoli, and Libyans went to Japan for training in motor-servicing techniques. Honda also sent auto experts to Libya, while Nissan trained mechanics at its service centers in Athens as well as in Japan. The automakers counted on the service market not only to provide a lucrative sidelight to the main business of selling cars, but also to boost Mideast demand for Japanese vehicles. The region is now Japans second largest market for automobile sales, but still way behind the number one marketthe United States. If Mideast mechanics are trained to service Japanese cars, the reasoning goes, people in the market for a new car are more likely to choose a brand they know they can have repaired locally.

THE PROBLEM OF OVER-SERVICE Japans production sector has been characterized by low cost, lean employment, and high efficiency. The retail/service sector, on the other hand, traditionally has been overstaffed, with high prices and gross inefficiencies. Whereas the productivity gap between the more efficient manufacturing and the less efficient service industry is about fifteen to one in the United States, it is around eighty to one in Japan. The Japan Productivity Center indicated that to reach overall U.S. productivity levels, Japanese manufacturing companies would have to eliminate 39 percent of their head count. Nearly 20 percent of white-collar workers are excess, as many as five to six million redundant workers. Japan suffers a chronic deficit in its service trade. Its share in world service trade is low. A large deficit in shipping reflects Japans heavy dependence on chartered foreign ships. Growing international activities by Japanese firms have heightened the deficit. Payments exceed receipts by a wide margin in technological trade. Finally, the travel and tourism deficit is significant as more and more Japanese take holidays abroad. The service sector has been growing rapidly. Consumer demand for services has exploded as leisure time has increased, greater female employment (working wives) has increased demand for food services, the aging of the population has increased demand for medical services, and the demand for higher education has skyrocketed. On the positive side, Japan is the largest exporter of capital in the world. Tokyo is a leading financial center. The Tokyo Stock Exchange is one of largest in the world. Seven of the largest commercial banks and four of the largest securities companies in the world are Japanese. Countering this is the fact that Japanese manufacturers still get more of their financing, distribution, travel, and advertising services from in-house sources than is common elsewhere. Manufacturers provide the bulk of the nations vocational training. Without the challenge of international competitors, the majority of Japans domestic companies (80 percent of the economy) have become complacent; this is especially true in their service, construction, and food production sectors. Japanese department stores, specialty retail shops, and banks provide service personnel who in the West either have been replaced by customer actions themselves (elevator operators) or simply would be absent (greeters and receptionists). Even if the automated equipment has been installed, human workers may be standing by performing redundant functions. At the gate checking for domestic flights at Haneda Airport, boarding passes are inserted into a machine that retains the airlines portion and returns the passenger stub. This transaction is handled by two workers: the first takes and inserts the pass; the second hands back the stub. Change is occurring. Specialty stores have been growing in importance, particularly in the apparel, household goods, and food sectors. Discount stores are beginning to put pressure on the dominant department stores as urban renewal spawns new spots for young shoppers. Japanese consumers, given a choice between attentive personal service and the lowest possible prices, still favor service, but trade it off against quality. Japans service firms, with high and fixed labor costs, give employees every conceivable form of automation to help them deliver the product. Instead of making meals on the premises, Royal, Skylark, Kyotaru, and other Japanese fast-food chains use point-ofsale ordering computers, on-line networks and just-in-time delivery to serve customers with dishes prepared in vast centralized kitchens. The demands of the Japanese market tend to become excessive when customers insist on their cultural uniqueness and reject foreign products that would meet their needs just as well as their own. The Japanese tendency is to refuse to accept international standards. Jimaeshugi (making as much as possible internally rather than acquiring parts, tools, and capabilities from abroad) is an intimate part of Japanese culture and business practices. In the West, the decision is usually economic; in Japan, it is relationship and civic-oriented. Professor Paul Herbig

Japanese Marketing Lecture Series Lecture Series #20: Collectivism in Japan

COLLECTIVISM Japan is a collectivist society, but also is high on uncertainty avoidance and masculinity and relatively high on power distance. These characteristics suggest a system that seek consensus among group members, but is competitive and has clear distinctions in terms of power; job security is stressed, and jobs are allocated on the basis on gender. Japan is like a group of people on a train. Everyone goes in the same direction. The train cannot stop for one person. In the United States, one travels by automobile, and when you want to stop, you stopvery individualistic. In Japan, no amount of individual sacrifice is too great for the sake of the family or the nation-state. One of the major distinguishing characteristics of Japanese society has been the lack of individualism. In the networks of large numbers of mutual dependents, one cannot conceptually differentiate the self or ego from others. The self merges into the sea of totality of mutual dependence. One always needs to justify his or her existence on the grounds of some type of social unitthe nation, a company, the family. The very existence of the individual is dependent on the existence of some totality. No concept of a private domain exists in Japanese society. This social attitude enables individual members of a private company to see themselves as members of the same clan and motivates management and financial backers to see their company in exactly the same light. This attitude is rooted in Buddhist philosophy and produces a tendency to regard broader human relations in the context of quasi-blood relationships, so that the senior members of a company have a quasi-parental relationship with the other employees. Greater importance is placed on the success of their entire group. Individualism (kojin shugi) was traditionally equated with selfishness and was viewed as a severe character flaw. The Japanese concept for doing something according to ones own style, jikoryu, has negative connotations, while the concept of doing something for the public has the connotation of community well-being. The Japanese people have traditionally shown a willingness to accept discipline, a regimented style, and a lack of individualism. From their very first day in school, Japanese children are taught they are to serve the good of the larger group. They still believe that an individual's willingness to sacrifice for the good of the group is one of the greatest virtues he or she can posses. The collectivist orientation of the people influences all facets of Japanese organizations and remains a strong part of their culture. The concept of loyalty is also a part of the Japanese culture that has been ingrained in the Japanese people for hundreds of years. Their strong sense of loyalty extends beyond loyalty to ones company to family, country, and social groups. The Japanese emphasize the need for group loyalty and cooperation in order to achieve a common cause for the collective good of the entire group. The group is desirable for three reasons. The Japanese are so conscious of their cultural, racial, and linguistic differences that they are afraid of facing the world alone, without the support of a group. Many Japanese tour groups are made up not of strangers, but of work colleagues, association members, and others who already form a group. The tour is a reaffirmation of an established group. Most Japanese go overseas not for a unique experience, but rather to reproduce the experience other Japanese tourists have had. The best group tour is one that is a copy of the tour ones neighbor took the year before. When the Japanese travel, they try to take along a familiar group environment, and they seek out the bits of Japan that have been transplanted overseas, staying in hotels with Japanese management, eating in Japanese restaurants, and traveling with Japanese tour guides and buses. In a Japanese group tour, every minute is accounted for. The tour organizers seem to feel that their charges will worry if they are not told how to spend every spare moment. The collectivist orientation of the Japanese society has been deeply ingrained and a part of their culture for hundreds of years. It continues to be strongly stressed within the family, the work group, and the formal education system in Japan. The Japanese rank as one of the most collectivist societies in the world. Japanese groups are determined largely by school and college affiliations, year of graduation, place of employment, and date of entry into the hiring institution. Other Japanese groups include families, companies, government departments, and even clubs and organizations. In Japan, the group can be exclusionary; the Japanese are group-centrictheir groups exclude everyone, including other Japanese, from the in-group. Non-members, be they Japanese or foreign, are viewed with suspicion. A newcomer without a proper introduction is not fully accepted as a fellow human being by the group. The Japanese are taught from an early age to adjust their own desires to the demands of the group. Gifted individuals are supposed to let the rewards of talent flow back through them anonymously for the benefit of their group. Even speaking about ones self, let alone about ones achievements, is considered inappropriate. This groupism is reflected in the Japanese definition of the word individualism. The original word in the Japanese language has always been in ill repute in Japan, denoting selfishness rather than personal responsibility, isolation from others, and concern with ones own advantage rather than being willing to work for the welfare of others. To be individualistic means that the person gains by weakening the group or in spite of the group. On the other hand, everyone gains when each member seeks to make the group more efficient or works to help the group as a whole, whether it be a team or a company. Non-members are outsiders whose concerns are less important than those of the

own group. The Japanese have sacrificed privacy (individualism) for collective security. The lack of individualism is the price the Japanese had to pay to minimize conflict, a necessity on a small island. Any decision, no matter how trivial, has to be agreed on by the group before it is implemented. Most members become almost family to each other. Companies are often very exclusive and limit advancement within their companies to insiders. Blame for failure is never placed on an individual; rather, it is placed on the group. Management practices give precedence to the personal factors in all decisions and behaviors and attempt to be holistic in the consideration and treatment of employees as well as customers. Everything, therefore, is relative. All employees are forced to share the same set of attitudes and values. Everyone believes that the development of the corporation is a social good and that the accomplishment of the work of the company is a goal of society. If something is for the corporation, this permits one to ignore the expectations of others outside the company and even to break laws. Work is a sufficient excuse to ignore family. Everything is then evaluated in terms of whether it is good or bad for the company community. To be a good employee, one must belong only to the workplace. Japanese staff have a strong identification with their company. If someone makes a mistake, even if it is not you, you feel sorry about it, try to explain it to the boss, and even apologize as if it were your mistake. In Japan, when something goes wrong, the person in charge takes the blame. In the United States, decision making is centralized and responsibility is diffused; in Japan, decision making is diffused and responsibility is concentrated. The level of competitiveness that Japanese individuals may show is often surprising. Even when alone, the Japanese individual knows he has his group behind him, and this group support seems to propel him forward with unbelievable energy. One of the highest goals in life is to be able to contribute to the group against the competition. The Japanese value motivation more than ability as a precursor to success. A good employee is diligent; if diligent, he or she will develop as a person. If he or she develops as person, this will help the company be successful. He or she works hard to cooperate with others and what he or she learns is shared with the group. Individual success is the groups success. In Japanese business organizations, the scope of the job assigned to each individual is not necessarily clearly defined; work is not designed with the individuals job as the basic unit, but rather is farmed out to each section, department, or other unit of the work force. As a result, priority is put on accomplishing the task assigned to the work force rather than on the individual employee who is performing the job. Any rewards that result go, not to the individuals who achieved them, but to the entire group for their combined efforts. One example of cultural differences lies in the importance attached to the group versus that to the individual: In Japan, the impulses and needs of the individual tend to be subordinated to the good of the group; in the United States, any intrusion by the group on the rights of the individual is regarded as unwarranted ( the former is the land of the big WE, the latter is the land of the big I). Compatible with this orientation is a concern in Japan for minimizing differences, preserving harmony, and reinforcing group loyalty; these customs are derived from ancient Japan where a nation short on resources, but long on people, required the participation of all its members in an orderly manner if survival were to resulthence, a strong collectivist tradition evolved. In the United States, the prevailing customs tend to maximize difference, confrontation, and compromise. This individualistic approach may be derived from the frontier days when ones nearest neighbor was miles away and one had to be very driven, self- oriented, and individualistic to survive. The aim of decision making in one is to avoid discord in pursuit of consensus, while in the other it is to promote competition among ideas in pursuit of objective truth. Decisions in Japan tend to be based on mood, but in the United States, they are based on arguments.

Amae The two major aspects of Japanese collectivism are amae and wa. Amae is defined as indulgence or dependence on others; it denotes the connectedness, the complex hierarchical, collective interrelationships that exist in Japan. It is the attitude that nothing of consequence occurs as a result of individual effort, that individuality is expressed only within the context of the group. Wa is the Japanese concept that stresses group harmony (loyalty), trust, sensitivity, and social cohesion. It translates as the search for the existence of mutual cooperation so a groups members can devote their total energies to attaining group goals, submerging their individual (selfish) goals in favor of the groups goals. Amae is conforming to the wishes of others in order to win their approval. In the United States, a mother tends to push independence on her child; in Japan, the mother, once the baby has left the womb, spends most of the rest of her life seeking to foster the dependence of the child. The dependent child may be compulsively driven by his mothers expectations of him. Education mama, a compulsive mother, often goes to the extreme of sitting in classes for her child when he or she is sick. The individual and the group must know exactly how to behave under any set of circumstances. even before encountering them. Spontaneity is not found among conventional Japanese. They are loath to reveal any feeling that might set them off from their fellows. By subordinating the individual will to the common good, they ensure a collective organism that operates effectively for the good of all individuals. Japan is strongly paternalistic, implying a parent-child relationship between superior and subordinate. This is expressed through policies ensuring lifetime employment, seniority-based promotion, and the provisions of housing, recreation, and shrines through the company. The Japanese believe the leader should be accessible and receptive and should listen carefully to subordinates ideas and suggestions. The Japanese manager and workers have a sense of identity with their work groups, an ethic of cooperativeness, a high dependence on the larger entity, and a strong

sensitivity to status. Japanese companies do not function according to the personal abilities or talents of their employees. They move according to human connections. A successful top executive in one company would usually be worthless in another Japanese company. Pirating executives would be meaningless without bringing along all the people that work for them. People rise and fall according to their relationships. They work or refuse to work for the sake of relationship. That is why it is so important to go out drinking and relaxing after work, to establish and solidify and maintain relationships. If coworkers do not know you and like you, you cannot do anything; people act not on the basis of professional responsibility, but on the basis of how they feel. They work hard with and cooperate fully with people they like; they do the minimum for people they do not like. The company trip (shain ryok) reveals the ideals of Japanese life. All the other events in the Japanese business year tend to be formal and to follow the same pattern: drink, eat, drink, play games, sing karoke. The company trip, by contrast, serves to reinforce for the staff the idea that they form a family, perhaps more of a family than the one back home. One reason that Japanese tour in groups is that they have done so at each stage of their lives. It begins with the school (shugaku ryokothe study trip). Such excursions are enjoyed many times during the typical Japanese education. The company operates as an extended family; it employs the entire person instead of just the labor and takes great interest in its employees well-being both inside and outside of work. The company is a place for its employees to participate in social activities. Personal success and company success become interconnected. Motivation also arises from a perceived sense of collective social responsibility and obligations to groups inside and outside the company.

WA Wa (harmony, calmness, a reconciling of conflict) is a value derived from the first article of ancient Japans only constitution: Among a variety of virtues, take harmony and deem it the most valuable. Concern above all else exists to maintain good personal relations (wa) first and then solve problems later. The solution to the problem is often dependent on preserving a good relationship with the person responsible. The person responsible is not simply an individual, but also a member and a representative of a group and a system; it is this group harmony that has priority over all others. The Japanese value system includes an absolute obsession to avoid bringing shame to themselves, to their families, to their company, to their immediate work group, or to Japan itself. Nothing must ever be done that will cause disgrace and tarnish the reputation of oneself or of others. A culture of shame implies a society in which the esteem of others and the evaluation by ones group are the criteria for ones behavior. Duty comes first; putting ones personal feelings above ones duties is viewed with contempt. Wa is so predominant that business relationships and dealings tend to take place between friends: It is the ultimate who-you-know society. The Japanese do not like to deal with strangers. The pursuit of harmony can create some illogical consequences: Agreement can be more important than what has been agreed to. Japanese leaders begin to lead only after they have found out where their followers want to go. The best solution is one that all can support even if a somewhat divisive one might have yielded better results. Sometimes a leader is chosen because he is mediocre and everyone can agree on him rather than because he has any inherent leadership abilities. Wa is so pervasive that it shapes business relationships. Mitsubishi announced a $600 VCR that automatically edits out commercials when it tapes most movies broadcast on television (Japanese consumers use VCRs more to tape movies than to time-shift, which is the predominant usage for Americans). In the beginning, sales were brisk. However, Tokyo Broadcasting System shortly thereafter began to mix its broadcast signals with electronic chaff that would confuse the machines, making it impossible for them to tell the difference between commercials and movies. As a result of the response from the network and the Advertisers Council, and with the purpose of maintaining industrial harmony, the machines were withdrawn, despite consumer wishes and sales volume potential. Its relationships with its peers were more important than its customers desires. Japanese motivation comes through group harmony and consensus; motivation also comes from reputation and company success. Japanese recognition comes through identification with the group with individuals motivated by rewards shared among the group, such as bonuses, social services, and fringe benefits available to group members. The greatest threat is formal or informal exclusion from the group. The Japanese objective in performance reviews is to ensure that the employee is functioning in harmony within the group: Every member of the group is evaluated on how the group performs, on its contribution to other groups and to the company in general. Although Japanese companies up until recently rarely fired employees, group pressure may force an individual to resign or ask for a transfer. Members of a group must cooperate with and trust each other. One must sometimes subordinate the truth to maintain group harmony. The groups survival is keyed to long-term behavior, and hence, once accepted, it is for life. Without a group one is literally lost. The power of the group is immense, since as soon as he or she is rejected by a group, an individual loses his or her social identity. Promotion of group harmony means ones individuality and originality must be subdued. The Japanese say Deru kugi wa utareru (The nail that sticks out will be pounded down), meaning that being different is frowned on and therefore to be avoided whenever possible. A Japanese managers occupation (accountant or salesman) is typically less important than his group membership (Toyota or Honda); it is the opposite in the United States. Within a Japanese organization, an individuals rank is normally more important than his name, and an official might even introduce himself merely by his title. A job in Japan is not merely a contractual arrangement for pay, but also a means of identification with a larger entity

giving the employees a satisfying sense of being part of something big and significant and bringing them a sense of security, pride, and loyalty to the firm. The attitude of employees is that they regard themselves first and foremost as members of the clan rather than as individuals having certain skills only connected to the company by a contractual link and being narrowly constrained to a particular set of functions. Japanese employees are not so constrained. They can and will do any task necessary for clan survival. Japanese staff are, therefore, ready for any efforts to ensure company viability rather than meeting only personal and professional goals. These values of obedience, loyalty, commitment, and harmony derive from Confucian traditions. These values have greatly influenced the Japanese culture and its work environment. The outcome of these values is the internal unity and teamwork seen in Japanese firms. Corporate success and company goals are achieved through group effort and not through the exceptional activities of individuals. Ideally there are no production heroes in a large company. There are, instead, persons whose work groups, teams, or departments have improved their productivity and gone beyond quotas. Sacrificing ones personal life for the good of the company is expected. This often results in giving up accrued vacation time or controlling ones inclination to confront others for the sake of maintaining harmony. Japanese managers are generally conservative and risk averse. Traditionally, Japanese managers have not been rewarded for successes as much they have been penalized for failures, the epitome of the bureaucratic approach to management. This is probably why Japan is a highly regulated society. Most of the regulations involves entry barriers or price controls. The mining, construction, finance, utilities, transportation, communications, and agriculture industries are almost completely regulated. The reasonto secure fair competition, protecting of established firms through creation of oligopoly conditions. Japans government has a much more intrusive role. Fierce competition between companies exists, but is expected to remain within the context of harmony and national interest. The creation of an industrial or national consensus is deemed far preferable to a situation in which firms engage in such brutal behavior as unabashed competition. Cooperation between government and industry is viewed as natural. As long as cooperation does not lead to gross violations of accepted rules of conduct within the society, it is considered to be an important part of the function of government. The government, therefore, is a sort of guardian or godfather for industry, with the companies and the public acting as the governments godsons accepting this relationship as necessary for the national interest of Japan. The Japanese quest for freedom for individuals is subordinate to the far greater emphasis on order and harmony that prevails throughout the society. Order and harmony take precedence in Japanese organizations: individual behavior not only within, but even outside the organization is specified in great detail. A high level of conformity to the specified pattern of behavior is expected in everything from punctuality to the exchanging of greetings to the seating and speaking order. Even after work hours, employees are expected to conform to stands of public conduct consistent with their membership and position within the organization. One is willing to totally submerge ones private life to the totality of the company; one exists, not for ones family or for ones own purposes, but foremost for the good of the company and country. Konosuke Matsushita is widely regarded in Japan as the supreme master of the way of wa. Matsushita codified his wa approach to management in seven objectives: National service through industry harmony cooperation struggle for betterment courtesy and humility adjustment and assimilation gratitude What the Ten Commandments are to many Westerners, these seven objectives are to the Japanese. Professor Paul Herbig Japanese Marketing Lecture Series Lecture #21: Japanese Cultural Traits

STATUS AND HIERARCHY To the Japanese, hierarchy is inseparable from orderliness; a group is not properly organized unless its members are ranked. Obsession with rank is so intense that profit is subordinated to the need for prestige. Even workers on the lowest rung of a leading Japanese firm will feel superior to those on the same level of a lesser firm in the industry even if the former are paid the same or less than the latter. The Japanese language is hierarchical, reflecting the human

relationships of a vertical society, and limits the permissible range of expression according to the status of the speaker. Japanese society is organized and functions according to military tenets: a strong hierarchical structure, an insistence on following the chain of command, daily acknowledgment of differences in rank between individuals, an obsession with loyalty, deep personal attachments, an emphasis on the performance of the group, a willingness to make both individual and group sacrifices to reach a major objective, strong feelings of identity with and loyalty to those with the group (clear-cut lines between insiders and outsiders), and a belief that the organizational objection is the raison detre for existence and strategic ways of thinking. Every social encounter requires knowledge of the relative ranks of the parties to the encounter from the proper form of greeting to the appropriateness of the content of the interaction. The Japanese language is full of connotations of differentiation. The strongest differentiation is age; rank, respect, power, and privilege correlate closely with age in Japan. Women are afforded a lower status as well. Education is the third major differentiation. The Japanese accept the necessity of differentiation and legitimizes it. A Japanese individual does not feel comfortable in any personal relationship that does not include recognition of the relationship between the parties. The system is rigid and hierarchical (the more important the boss, the deeper ones bow to him), and it accords enormous privileges to a male elite. Women are meant to take care of the home, manage the savings, and ensure the childrens after-school education. A mans primary obligations were traditionally (and are still very much today) to his superiors; his secondary obligations were to his subordinates. Few rules governing relationships with equals exist. The Japanese have been conditioned to accept authority, unquestioningly, in nearly every aspect of their lives. In Japan, there is a reluctance to take individual action against what is, for the moment, the established power. The average Japanese person is not a mindless follower, but lives in a culture that honors authority and especially authority in the guise of seniority. A marked parallel exists between aspects of the Japanese management system (such as the senior wage and advancement system, high interjob mobility within each firm, and the intrafirm welfare system) and the autonomous ranking hierarchy characterizing the traditional principle of the samurai. The hierarchy of the firm is accepted, and senior management commands respect. In turn, management accepts its obligation to develop and help the subordinate employees. The emphasis on titles seen in Japan serves to establish an individuals rank within the organization, thus reinforcing the hierarchy and group identity. The importance of hierarchy and status is one of the reasons for the constant exchanging of business cards. The main significance of the exchange is to make clear a mans specific position and group affiliation. Seniority is also measured in minute and seemingly rigid ways. An age difference of merely a year will identify who is senior and who is junior for the rest of their lives. Many relationships may be described in familial terms, and a boss is expected to act as a father figure to his subordinates and expects to receive utmost loyalty from them. Corporate workers are promoted on the basis of seniority, not on individual productivity. These policies decrease the likelihood of individual jealously and competition. Hierarchies appear almost everywhere: There is even a well understood, if not formally acknowledged, hierarchy of higher education institutions in Japan, with Todai (Tokyo University) being foremost, Kyoto second, and so on. Having been accepted to and graduated from the top universities is the price of admission to the elite companies of Japan.

WORK ENVIRONMENT The work environment in a Japanese enterprise resembles that of life in a small and traditional rural community. In the tightly knit web of human relationships, ones position in the organization becomes secure. The organization gives the individual an identity by providing security, a source of income, and a pecking order in the vertical hierarchy. An introduction without the name of the company, the basic unit where ones very existence as an individual is defined in a mutually dependent, human relationship, is without meaning. For a Japanese university graduate, the choice of a place to work is the choice of the type of life he is to lead henceforward. Once employed, his human relationships rarely extend beyond the scope of his company. Quite often, the employees family lives in a house or an apartment provided by the company for a nominal rent; vacations are spent in recreational facilities owned by the company at a nominal cost. Japanese men spend their evenings out drinking with their company colleagues. Such extensive personal involvement in the company village is the major source of loyalty and devotion of Japanese workers to their company. The seniority principle of wage and status determination is also derived from the village heritage. The egalitarian aspect of the seniority system, that an individual is promoted to a certain position as his seniority accumulates, has contributed quite substantially to the strengthening of community among members of the organization. And it also provides a very rigid vertical hierarchical order. Status is influenced by educational background, size of the company, length of service, and finally whether executive level or not. The higher the salary, the more the fringe benefits and the higher the prestige that accrue to the higher status. Japanese managers are motivated by rank, relative values of sales, or market share. This rank consciousness is well demonstrated by their unusually strong interest in the ranking of foreign companies by Fortune magazine.

The Japanese workplace is usually a large hall with many desks in it. Typically, separate offices for workers do not exist. The open-space plan prevalent in most Japanese companies reflects their inner harmony and promotes sharing and group discussion. Visitors are typically not invited into the office of those they are calling on. The higher the position of the caller, the less the chance of the invite because it is considered informal and impolite to ask a caller into the office or to come up to ones desk. Rather, visitors are received in guest rooms or drawing rooms. The Japanese have a vertical and group-oriented society. The factors of sex, age, and education combine to form and determine status within the Japanese society. The Japanese identify themselves by organizations, such as section, division, company or company group (vertical structure), or by groups to which they belong (group structure). Loyalty is exhibited by smaller companies because they realize their business could be taken away and they would be ostracized by the Japanese business world. Loyalty is also present among the larger corporations who support other corporation in their business group. If you belong to the Mitsubishi group, you not only drink Kirin beer to support a member of the group but you bank with Mitsubishi bank, buy securities from Nikko and life insurance from Meiji Mutual Life. Companies outside a particular business group, whether they be Japanese or foreign, have a difficult time introducing their products within the group. Japanese managers tend to give little immediate feedback; a job well done is expected of the workers. Japanese performance appraisals are semi-formal, and a manager usually seeks to counsel an employee only if the employees performance is not in harmony with the group, if the individuals behavior is having a negative impact on the groups functioning. Every April, employees receive a computer printout of their new monthly salary with no explanation or discussion to link this to performance or potential. Many times the Japanese manager will take the employees personal life into consideration when evaluating his or her job performance. The Japanese manager acts as a senior family member to counsel and guide the employee. The manager has the responsibility to ensure each individual within the group is making the necessary contribution to the groups output. The semi-annual bonuses are the main expression of satisfaction; these bonuses are tied in to the companys performance as a whole. Dismissing employees is regarded as improper, going against the socially accepted principle of paternalism, and the last resort before going bankrupt. An employees inadequacy or incompetence is not grounds for dismissal; the employee is simply transferred to a unit where he or she is less likely to do serious damage. The section chief, who is always older, but not necessarily more competent, is in charge of from eight to ten employees; these people form a cohesive team and are matched for temperament and personality as well as capabilities by the personnel department of the organization. New recruits are not hired for specific jobs, but are hired based on the assumption that the labor will be required sometime in the future and that in-house training will provide additional skills as needed. In most Japanese corporations, overseas assignments are awarded to promising candidates twice during their business lives, during which time they usually complete a three to five year assignment. Most candidates for overseas posts have usually worked in the companys export-import or foreign division, so they are familiar with international trade. Intrafirm mobility is encouraged in Japan, but interfirm mobility is small because of the stable and secure nature of the Japanese social structure and the difficulties involved in leaving ones current group to join a new one. The Japanese live to work. The Japanese government recently officially shortened the workweek from fortyeight hours to forty hours and funded the Leisure Research and Development Center to teach its citizens the value of leisure time. Still, many salaryman work long hours and continue to work Saturdays. A Leisure Development Center survey revealed that 40 percent of the respondents said that they wouldnt know what to do with a month off. The National Recreation Association offers a one-year course on how to enjoy life.

OBLIGATIONS The Japanese find themselves bound up in a web of obligations and debts that affect their every action. They are forever in debt to their parents and the debt extends to all who have done them any favors, from teachers to society in general. The Japanese take these debts very seriously and cannot act without considering the implications of their actions for those who are owed. Success for the Japanese individual is viewed as flowing from the kindness and cooperation of many other people. For many centuries, the Japanese were taught not to become involved with others, particularly strangers, because by doing so they might incur obligations and thereby complicate their lives. The legend of forty ronin is a story not of one mans popularity, but of forty men fulfilling a feudal duty, an obligation to their former master. This historically conditioned fear of incurring unnecessary obligations or making others obligated to oneself when they might not wish to be causes the Japanese to not make friends easily or quickly among themselves. Many Japanese tend to avoid even casual acquaintances for fear of being put under some obligation. Most Japanese, however, will go out of their way to seek the acquaintance of Westerners because they know that the foreigners, not being members of their society, are not likely to put them under any undesirable obligations. In Japan, actions speak louder than words; when one gives his or her word, there is an obligation to follow it. Sei-i (sincerity or integrity) is an attribute of the disciplined, trustworthy, and ethical person who is free of passion or ambition and who believes in and carries out the obligations imposed by the Japanese code of behavior.

Women seem to be shamefully exploited in Japanese society. The Confucian adage that a woman should in her youth obey her father, in maturity her husband, and in old age her son still has many hard line followers in Japan. Likewise, the double sexual standard is still accepted conduct for many men in Japan. Women are subordinated to men. Married women often have virtually no social life outside of their family. This may explain the total involvement many mothers have in the success of their sons. Japan is still a mans world, with women confined to a secondary position; this is changing, but still is prevalent. The cultural and linguistic hierarchy in which men are superior to women is still in place. The traditional Japanese view is that a woman should be like waterable to lose herself in her husband. In a marital relationship, peace is more important than justice, harmony sweeter than equality. The average Japanese womans life expectancy is now 82.5 years, the worlds highest, and thirty-two years more than her prewar counterparts life expectancy. The social myth defining Japans ideal female behavior is that a womans sole role is to be a good wife and mother. Todays women bear fewer children, two as compared to five in 1930. Women comprise about 40 percent of the work force and over 50 percent of mothers work outside the home. More than half the working women of Japan are over thirty-five, and the great majority are already married. Women make up only 13 percent of all professional and technical workers, concentrating in the teaching and pharmacy professions. Women comprise less than 10 percent of Japans doctors and have less than 1 percent of non-education managerial positions. While the proportion of women working in Japan has risen steadily, Japanese women still tend to drop out of the labor force while raising their children. During this time, the importance of the housewife is great as she cares for her children, does the daily shopping, and is responsible for maintaining the household. The housewife typically has control of the purse, receiving her husbands paycheck and paying all the bills. She usually provides him with enough pocket money for the week. In many Japanese companies, it is an unwritten custom that the company will hire only young women who are absolutely well mannered, obedient, and unambitious. The women must be sufficiently attractive to serve as an aesthetically pleasing feature of the office. They are only offered menial jobs with low pay (half that of men), and their chances for promotion are slight. They are typically not protected by the lifetime employment system. Most of the time they are required to wear company uniforms. Japanese women are perceived to exist not to serve themselves, but to serve others. A famous Japanese saying that A 24-year-old Japanese woman is like a Christmas cake . . . after the 25th (year), shes not worth as much shows the little value given unmarried women in their late twenties in Japan. The famous Japanese geisha (literally, one who is versed in the arts) portrays the stereotypical female subordinating herself to men . . . a singing, dancing, happy bar hostess, entertaining and enthralling her male companions. Marriage traditionally has concerned not only the personal relationship between a man and a woman, but also that of two families. Young people are apt to be guided by emotion. Parents are more experienced and naturally better prepared to select a suitable mate; they want their children to be happy and secure and will, therefore, make the best choice possible based on economics, not emotion. One of the best ways to win advancement in a company is to get ones superior to take an active role in ones private life; if your boss finds a wife for you, he is naturally going to be more interested in your welfare, especially if he arranges for you to marry a close relative of his.

RELIGION Shintoism, Buddhism, and Confucianism are the three major religions in Japan; each in its own way has heavily influenced the culture. Shintoism (the way of the gods), the state religion of Japan, was originally based on cults having to do with fertility and ritual purity; it celebrates mountains, rock formations, springs, rivers, and islands, and emphasizes ancestor worship. Most homes, especially in rural areas, have at least one Shinto god shelf near the entrance so as to protect the household against the entry of harmful spirits and other types of ill fortune. It is a benign religion, demanding very little of the Japanese. In return for a few votive offerings, an attitude of reverence before its shrines, and regular attendance at festivals (which are anything but solemn), Shintoism imbues them with a calm acceptance of the life and death cycles, an appreciation of the secrets and beauties of nature, and a deep concern for cleanliness and orderliness. When the emperor was returned to power in 1867, Shintoism became a state cult, which not only proclaimed the emperor divine, but also encouraged the Japanese to believe it was their sacred duty to bring enlightenment to the rest of the world and attain their proper place among nations. This contributed to Japanese militarism. Buddhism urges its devotees to work relentlessly to achieve enlightenment. Effort must be exerted in daily life. The organizational philosophies of many Japanese companies rest on the premise that work should be performed with the correct spirit or attitude. Poor performance is most often seen as a spiritual failure. The noble truths of Buddhism state that human suffering is caused by desire and that Nirvana is achieved partly by the absence of desire. The typical Japanese person absorbed the surface tenets of Buddhism (the impermanence of all things and the futility of early ambitions, with a concept of life after death). Little exists in Buddhist tradition to encourage anyone to pursue wealth for its own sake; it instead exhorts the adherent to accept his or her position in the world, to be content with his or her salary, and to have no desire to set up a new business of his or her own. The tendency is to encourage mediation and simplicity. As a result, the Japanese have had a rather austere style of living and typically search for tranquility rather than ostentation. Many Japanese organizations commit considerable resources to the pursuit of

spiritual development by their employees. Traditional Confucian philosophy emphasizes a need for stability and order that occur through obedience, loyalty, commitment, harmony, a sense of responsibility, a respect for discipline, and training. Interpersonal relations were codified, and behavior was carefully prescribed to avoid conflict and preserve harmony. At the core of the culture is the group rather than the individual. Filial piety consists of respecting ones parents, taking good care of them, and acting according to their wishes; the obedience commensurate with being a young brother meant adherence to the wishes of elder brothers and seniors. Filial piety is the cornerstone of the Confucian social ethic, and the parent-child relationship becomes the model for all other relationships. The state is thought of as an enlarged family, as is the company. It is of utmost importance for children to serve, support, and obey parents and to honor ancestors (or their surrogates). The duty of the ruler is to be virtuous, the duty of his advisors to be wise, and the duty of his subjects to revere and obey him. Because of its reverence for hierarchy and order, Confucianism can often act as a barrier to change. Confucian ethics also stress policies for the good of the nation. The major cause of the lack of a consumer movement in a land of high prices and poor living conditions is the willingness of one to sacrifice for the good of the nation. The Confucian ideal of family and society considers hierarchy to be natural and unavoidable. The Japanese culture legitimizes differences. Acceptance of and respect for hierarchy are fundamental to the Confucian strategy for achieving harmony, and no goal is greater than harmony. If people do not observe propriety in all matters, anarchy and disorder will surely follow. The most important requirement for social order and harmony is for each and every individual to be continuously aware of his or her position in society and to act in strict accordance with what society demands of the position. Professor Paul Herbig Japanese Marketing Lecture Series Lecture #10: Culture and Marketing Introduction If any single word can be used to describe the culture of the Japanese, it is rice. The Japanese symbol for rice is the same as the character for food. That one single grain is the centrepiece of the Japanese culture. Rice has dominated Japanese history and civilization. The Japanese climate is warm and humid and its geography characterized by steep mountain ridges enclosing narrow plains. Such terrain is suited not to herding but to paddy-based rice cultivation. Flooded-field cultivation exploits the nutrients carried by waters, so fields can be cultivated year after year, and, though harvest yields are high, it is a labour-intensive process. The field must be levelled so it can be flooded, slopes must be terraced, and channels must be built and maintained. Because of the climate and the well-watered plains, the Japanese were able to develop a wet-rice-growing culture, the continuation and success of which required that they be passive, conservative, and fatalistic, as well as energetic, courageous, self-reliant, tenacious, patient, cooperative, humble, and law-abiding. One could not survive independently of the group. Everyone had to work together. Communal living and work were constantly required and instilled in the Japanese a spirit of cooperation. The Japanese accepted that it was their lot in life to work together diligently. The traditional Japanese citizen is submissive to authority, fears and avoids responsibility, looks upon consumption above and beyond basic needs as a social evil, is inordinately proud and provincial about things Japanese, and views the world at large emotionally and subjectively by valuing beauty and harmony above function and ethics. The older traits that remain more or less intact include extraordinary diligence, ambition, perseverance, and a capacity to endure hardships without becoming cynical and mean. These still exist within the society and culture itself, but many Japanese do not personally follow them. The last value is being (if not has been) squashed by the demands of the free enterprise system. The conceptual basis for the Japanese marketing strategy can be traced back to its origin with the samurai. The Japanese adeptness at market flexibility is cultural in origin; Buddhist thinking emphasizes that nothing is permanent, that life is ever-changing. Samurai warriors in Japan learned several martial arts to prepare for any adversity presented to him, always choosing the best means to attack or defend. The way of the samurai is characterized by total dedication to the objective of victory, with every waking moment dedicated to training, conditioning, and concentration. Self-control, thought of as highly desirable in Japan, demands that a man of virtue not show a negative emotion in his face when shocked or upset by sudden bad news; if successful, he is lauded as tiazen jijaku to shite (perfectly calm and collected) or mayu hitotsu ugokasazu ni (without moving an eyebrow). The idea of an expressionless face in situations of great anxiety was strongly emphasized in the bushido (way of the warrior), which was the guideline for samurai and the ideal of many others. The Japanese have four concepts that are rooted in the socio-cultural characteristics of this group-oriented, collectivist society. The concepts of pseudo harmonism, eclecticism, exceptionism, and non-functionality help the Japanese to adjust the American marketing principles to their own culture. The concept of pseudo harmonism stresses the importance of maintaining harmony while at the same time acknowledging the existence of an underlying current of discord and disagreement. The need for human harmony within decisions is also emphasized by the concept of eclecticism, but it underscores the always implied trade-off of economic costs. Exceptionism stresses the exceptions to policies and procedures that have been established, which permits the ability to change and to remain flexible and adaptable within the markets. Economic non-functionality stresses that

Japanese marketing activities consider human factors rather than merely economic efficiency and business profits even though they acknowledge the importance of the economic factors in the long run. These continuing adjustments to American marketing principles have resulted in a Japanese marketing approach that incorporates the marketing concepts, ideas, and practices that apply to the market they are considering, or are already a part of. CULTURAL TRAITS The Japanese are not a touching society. They handle any unease about being packed into public places by their averting eyes, avoiding eye contact, and drawing within themselves. In Japan, it is considered impolite to show your teeth in public or to sneeze or blow your nose at a business or social gathering. The open mouth is considered very rude. A firm grip suggests aggression; direct eye contact is considered intimidating. Anger is restrained; one does not shout, raise his or her voice in anger, or do exhibit any excessive demonstrative behaviour. Balance in life is a basic Japanese principle; a square solid posture when seated or walking is practiced. Slouching, leaning back, or putting ones feet on a table or stool can be interpreted as showing an I dont care attitude. Crossing the legs at the knees or ankles is the preferred form. The feet are the lowest part of the body and are considered dirty. A customers belongings should not be moved with the feet and should not be put on the ground, because the ground is where you walk around in shoes and when you go home, you take your shoes off because you do not want to mix the outside ground with the inside ground. Japanese guests often receive a separate chair to put their things on. In Japan, style and grace and courteousness are revered. The Japanese culture encourages politeness, good manners, and courteous interchange. Many Japanese say sumimasen (Excuse me) when beginning conversations because they do not like surprises and prefacing a comment with Excuse me helps to maintain group harmony. Apologizing to or thanking the audience is commonplace. This extends to business presentations and written correspondence (thanking the reader for previous efforts). This concern for others is often taken to what in the West would be considered fanatical ends: the Japanese often wear white gauze masks when they think they have a cold and do not wish to pass the cold along to others. Hito no kokoro no ura o yome (read between the lines of another's mind) means one should be sensitive and caring enough to understand others unspoken desires. Written communications must adhere to strict guidelines of modesty, politeness, indirectness, and relationships. The language is indirect and vague; ambiguous terminology is preferred. Sentences frequently are left unfinished so that the other person may conclude them in his or her own mind. Delicate nuances of states of mind and relationships are at risk. Degrees of courtesy and respect must be adhered to. Being a high-context society, the Japanese tend to use many non-verbal signals. They tend to communicate with little eye contact, few facial expressions, and almost no hand gestures. Especially in negative situations, an expressionless face is considered highly desirable. A smile, however, is often used to mask embarrassment or discomfort in certain situations. Smiling covers a gamut of emotions: happiness, anger, confusion, apologies, or sadness. Listening is not only polite, but also a valued business trait. For the Japanese, a common way to show concentration and attentiveness is to close the eyes in contemplation and nod the head slightly, up and down. Silence is acceptable and customary. The Japanese attach great importance to the emotional realities of the particular human circumstances. They tend to avoid absolutes, rely on subtlety and intuition, and consider sensitivity to human feelings all important. They notice small signs of insult or disfavour and take them deeply to heart. Style, the way things are done, is just as important as substance, what is being done. Japan is a nation where there is one and only one right way to do all things. Form comes first and function second. Much of Japanese teaching is concerned almost exclusively with form. The process is more important than the end result. The classic example is the ritualistic tea ceremony. Sado, the way of tea, is so complex that students study and improve themselves over a lifetime to learn how to properly serve tea. The participant receives the tea bowl in the proper manner, turns it appropriately in the hands, drinks the tea slowly and deliberately, and turns the bowl back to its original position in an acceptable manner. Then, after a period of careful observation, an appreciation of the fine craftsmanship of the tea bowl follows. Other examples are flower arranging (kado, the way of flowers) and calligraphy (shodo, the way of calligraphy). The suffix do indicates it is more than a path; it is an absolute truth. Just as important as the business deal is the socialization process required by Japanese managers and businessmen to get to know prospective business clients better, to determine whether or not these people can be trusted in a business relationship. This is most important to the Japanese, since they consider it impolite to distrust anyone and believe that the other party will most naturally live up to the trust placed in him. The Japanese believe that human nature is essentially good and trust that the other persons calculation is correct. The Japanese use tatemae (face or facade, public or social self) to reference the masking of ones own thoughts or intentions, to the self they feel comfortable showing to others. Honne means honest voice, real intentions, private or basic self. These two contrasting principles are used to cloak the truth or reality of any situation that might be inconvenient or embarrassing to acknowledge publicly. In Japan, one does not see what should not be seen the other sex naked in old communal baths, the convention of the invisible stage attendant shifting scenery in the midst of the dramatic action. Failure to observe tatemae or honne to the Japanese is insensitive, selfish, and in bad taste. An example of this is drunkenness, which is an accepted way to relieve personal and professional tension. The excuse I was drunk at the time is universally accepted for all sorts of breaches of conduct (tatemae) and anything you say (honne) cannot be held against you. Little social stigma is attached to being intoxicated. The average size of a tatami mat is 90 centimeters by 180 centimeters (approximately three feet by five feet or fifteen square feet in area). Rooms are measured by the number of mats that can fit in it: A 3-mat room is the smallest room in a typical Japanese house, with 4.5- or 6-mat rooms being common in most apartments. Small as this may sound, it offers flexibility. At night, the room becomes a bedroom as bedding is taken out from the closet. During the day, the bedding is stored away, and a small folding table may be brought out to make the room a living or dining room.

Toasting is quite common. One raises the glass and says, kan-pai (drain the cup, the Japanese version of bottoms up). When drinking (e.g., beer or sake) with someone, two important rules must be followed: 1) do not begin drinking until everyone has a full glass front of them and a toast has been said, and 2) always offer to fill another persons glass, but do not attempt to fill your own. One removes his or her shoes before entering public restaurants or private homes with the toes pointing toward the exit. The rice bowl is always received or removed with both hands. Rice is eaten not all at once, but between other foods. Tea is often served in the same rice dish. Chopsticks are to be picked up with ones right hand and laid one inch apart parallel to the place setting when not in use. It is polite to wait until older persons begin their meals before juniors begin eating. A sake cup is turned upside down to indicate politely that you have had enough. BOWING If any one physical act characterizes the Japanese, it is the bow. For the Japanese, a bow signals respect and humility, qualities coveted. In Japanese society, especially in business, it is extremely important to know the rank of the people with whom you come in contact. The higher the rank of the person you are greeting, the lower your bow. The first ritual is the exchange of business cards to establish the rank and the relative positions of the individuals, and then they bow. The person of lower rank bows first. The meishi (business card) represents ones personal identity, rank, and name. Immediately upon introduction, cards are exchanged. The lower-ranking persons present their cards first. One presents and receives the card with both hands, bowing slightly while doing so. One then takes several seconds to study the name, title, company name, and address on the card; this shows respect for the others company. The company name and the bearers last name is stated on the card. The lower the bow is and the longer one holds the position, the stronger the indication of respect, gratitude, sincerity, obeisance, and humility is. The depth, duration, and repetition of the bow reflect the communicators social status. Physical distance between those involved is maintained and contact avoided. Bowing initiates interaction between two Japanese, it enhances and embellishes many parts of the ensuing conversation, and it is used to signal the end of a conversation. It is so pervasive that many Japanese bow repeatedly to invisible members at the other end of a telephone line. The person of lower status is expected to initiate the bow, and the person of higher status determines when the bow is completed. People of equivalent rank are expected to bow at the same depth while starting and finishing at the same time. Synchronization is an important feature. Three types of bows exist. The informal bow is used for casual occasions or when people of equal rank are dealing with one another. The body bends at a 15 degree angle, while keeping ones hands at ones side. The formal bow is a 30 degree angle; hands are held together, palms down, touching ones knees. Bows are usually repeated several times. The third type of bow (saikeirei) is the traditional form of bowing as commonly used by the elderly who wish to preserve their heritage. The deeper the bow is, the more courteous it is. Japanese managers are typically addressed by last name or by title; first names are used only by family members or close friends. RINGI The Japanese use a group-oriented consensus process of decision making (ringi) within their organizations. In this process, the original draft of the ringisho (decision proposal) starts at the lowest level of management, which then circulates it for inspection and approval to various horizontal and higher units that will be affected by and required to cooperate in the implementation of the proposed decision. If the proposal is approved by all affected units, the ringisho is returned to the original drafter for implementation. Most originate at the section level of management. As the proposal goes through departments, comments and reviews are attached. The circulating document is used as an instrument to show the record of approval and to transmit the decision to related departments. It also acts as a corporate record and serves to protect the continuity of corporate policies. The circulation of the ringi-sho with a very strict hierarchical order from the original drafter to assistant section chiefs to deputy department heads, and so onis the daily confirmation of the strict pecking order of the system. This decision-making process contributes to the diffusion of responsibility throughout the organization. Once the plan becomes official, no individual can object without risking ostracism from the organization. This also blurs sense of responsibility. The result is that it becomes impossible to put the blame on anyone because it is not possible to determine who is really responsible. The ringi seido process (consensus making among different levels) is a bottoms-up approach where the initiative is taken by the person who is going to be directly affected by the decision. Decision proposals move up from the initiating individual to the section head to the department head and then to top management. The more important the decision is, the higher up it must go in the hierarchy. The proposals are finally approved by management after obtaining the consent of all departments affected by the decision. Although the decision process may be slow, implementation is rapid because all parties concerned have agreed in advance. The disadvantage of such a system is that it relies on dynamic, informal interactions based on personal relations, face-to-face contacts, shared understanding and values, and company loyalty. Because of this decision-making system, Japanese employ far more middle- and upper-level management in foreign subsidiaries and joint ventures than do other countries. Table 1 shows strengths and weaknesses of the Ringi system. Table 1: Ringi System Strengths: 1. It encourages horizontal communications. 2. It allows responsibility to be diffused, thereby avoiding loss of face. 3. It allows fresh ideas to rise up the organization from lower levels of management. 4. It allows capable lower-level managers to demonstrate their abilities.

5. It allows more information to be brought to bear on decisions. 6. It reduces risk and internal conflict. Weaknesses: 1. The process is extremely slow (in a purchasing process for a typical Japanese firm, it took 121 days and 20 individuals to sign off on a relatively small item). 2. Interested parties can only approve or disapprove a ringi proposal (there is usually no procedure for expressing opinions or suggesting modifications). An executive fixes his hanko (individual seal) sideways to show that he has seen the proposal, but does not positively approve of it. When he is violently against a decision, he places his hanko upside down. 3. Political deals, in which favors are exchanged for approval, may cause poor proposals to be executed. 4. Alternative decision strategies are not discussed; only the proposed plan of action is considered. 5. Diffusion of responsibility may lead to an avoidance of responsibility and a lack of concern in critically examining proposals. To counteract these weaknesses, some companies are attempting to standardize and simplify the formats of ringi documents and have reduced the number of individuals who examine a proposal as well as allowing those that do to express opinions as they examine it. The actual decision is made by extensive consultation; this involves wide, informal discussions with personnel at all levels. Everyone who may be involved with the effects of the decision in any way becomes familiar with the problem or the issue at this point before the decision is made. All persons involved must have input and agree before an alternative is selected. The Japanese will not hesitate to postpone decisions if consensus cannot be reached. The ringi process is derived from and enhances the centralized decision-making process inherent in Japanese companies. This works well in Japan, but has inherent dangers and weaknesses if widely used outside of Japan. Coordination in most Japanese companies is shaped by consensus decision-making that is culturally dependent, requires intensive communication, and is also difficult to transfer abroad since non-Japanese managers typically lack both the language ability and the cultural background to participate in the subtle processes of nemawashi and ringi. Japanese companies typically expanded first into nearby, less-developed Asian markets where it was easy for the managers to control directly from Japan. Centralization and international coordination processes that relied on the direct actions and intervention of the headquarters management group resulted. This became very costly. As the overseas organization grew in size and complexity, managers at the center were swamped with requests for information, guidance, support, and decisions, causing the size and bureaucracy of the central decision-making apparatus to increase further. Eventually, such a system reaches its upper limit due to the overload of information and the centres inability to respond in a timely matter. Although Japan was well known for its decentralized management style, even into the late 1980s, over 90 percent of manufacturing was concentrated in Japan, making the overseas operations highly dependent on the parent company for products. Those that were not were still dependent on equipment designed by the parent, procedures directed from the parent, and supplies sent from Japan. Matsushita management presumed (as did managers in most other Japanese companies) that shifting production to local plants would threaten the quality and cost of Matsushitas products. The Japanese cultural heritage inherent in ringi meant that operating units separated by substantial time and distance barriers do not function well. It also becomes difficult to integrate non-Japanese into the ongoing management process. The net effect was to encourage Japanese companies to retain decision making and control at the center, where they could be managed by those who understood the subtleties of the system. At Kao, like most other Japanese companies, coordination and control were achieved primarily through centralization of decision making; corporate management was directly involved in most strategic and even operational tasks. A list of the most important Japanese values is shown in Table 2. List of Japanese Values Relationship Group Harmony Belonging Information Family Security Cooperation Group Consensus, Collectiveness Adjustment Group Achievement Honesty Loyalty Social Status Seniority Hierarchy Patience Indirectness Respect Job Competition Company

Formality Tradition Spirituality Hard Work Politeness Family Modesty Indirectness Harmony with nature HAI: YES AND NO The Japanese often use the word hai which translates as yes; it does not mean they necessarily agree with you, howeveronly that they are listening to what you are saying, following along the train of thought, understanding the point you are making. It is not the yes, but the yes but . . . nuances that carry the most significant meanings in the Japanese language. These varieties include the conditional: If everything proceeds as planned . . . (This is followed by the counterquestion, the critical response, refusing to answer, answering tangentially, or delaying the response.) It is difficult . . . is a kind way of saying no. Killing with silence or sucking air through the teeth also signal no. Four levels of yes exist: recognition (but not necessarily understanding), understanding (but not necessarily acceptance and agreement), responsibility (understanding, but must consult with others and secure their agreement before acceptance), and agreement (understanding, agreement, and acceptance). One must review the nonverbal signals from the speaker to determine which level the speaker is referring. JAPANESE MEETINGS Business meetings are highly participatory, with everyone present getting involved in the discussions. Japanese meetings are designed solely for gathering information about whatever subject is being discussed (the Japanese love for information is due to their search for group success; they continually seek information to optimize the success of the entire group). The Japanese will invite all those concerned with an issue to a meeting regardless of title because group participation and consensus are key values in Japanese business. The group then takes that information and discusses it at a later time. The Japanese business meeting is one with a defined hierarchy and a solemn atmosphere where direct answers are never given. Debate does not exist; the purpose of a Japanese business meeting is not to discuss, to debate, or to argue a point, but to formalize an already established consensus position. In business meetings, most Japanese listen, watch, and feel (sense) the thoughts of the others rather than responding directly. Silence is considered a virtue; most conversations contain periods of silence during which each participant tries to sense the thoughts and feelings of the others. The Japanese during their meetings use Lecture #22: EVOLUTION AND CULTURAL BASIS OF THE SOGO SHOSHA Sogo shosha were first established in the late nineteenth century, shortly after Japan opened her doors to the outside world. At that time, trading was monopolized by foreign firms, particularly specialized trading companies. Bypassing a quick way of obtaining necessary economic inputs, Japan decided instead to rely on the West only for manufacturing technology (Western technology, Eastern morals). By the governments guaranteeing purchases of locally manufactured products, their infant manufacturing industries had begun. The desire to develop foreign trade that was independent of foreign control led to the emergence of firms specializing in foreign transactions, the precursors of the sogo shosha. Mitsui Bussan or Mitsui Trading Company (the ancestor of Mitsui & Company) began with the Meiji; it was the first sogo shosha in the modern period in 1876 when given the first opportunity by the new government to enter into banking, mining, and trading. Its major export item was coal and its major import items cotton and spinning machines. Mitsubishi was created in 1889 and others soon followed. Sogo shosha came to perform multiple functions, including procuring modern equipment, new technology and raw materials; financing purchases; and arranging for the shipment and exporting of the final products. Before the turn of the century, Bussan amended its charter to include ocean shipping and offered logistical support to client firms, ranging from shipping to warehousing to insurance. In 1874, foreign trading houses handled 97 percent of Japan's total exports and 94 percent of her total imports. By the mid-1920s, their existence was hardly noticeable. In the nineteenth century, English firms had foreign traders, but they tended to be specialized. Because Japan was late in entering international trade and needed quickly to enter markets and industries saturated by established competitors, large- scale generalists were neededthe sogo shosha. During the nearly 250 years of sakoku, the closing off of the nation from international trade, Japan had little opportunity to acquire trading skills. The only trade that existed was with the Dutch and Chinese through Nagasaki, which was stringently controlled, and little was learned. The price for a commoner to meet any foreigner was death. The dominant method of trade after this beginning was through Westerners' newly opened merchant houses at the port cities. In the beginning, Japanese naivete and the ignorance of Japanese traders were exploited. Transactions costs were high for would-be Japanese traders. Institutional arrangements called general trading companies evolved as a result of the previous 300 years. Given the lower costs of capital and information, and hence the smaller risks, Western traders could exchange profitably without the aid of an intermediary. In the West, the price charged for intermediation (commissions) did not usually justify the savings the intermediary provided. The exact opposite situation existed in Japan, which created the impetus for a dominance of intermediaries such as the GTC. Cultural separation was an important reason for creating sogo shosha. European trading companies existed as links between Asia and Europe, but European manufacturers did not rely much on intermediaries when trading across the Atlantic. Having little knowledge of Asian languages, customs, and business practices, manufacturers traded through specialized trading firms. To penetrate the Japanese market, Western manufacturers used Japanese trading companies. Japanese manufacturers wishing to do business with the West also encountered considerable cultural barriers, made even worse by the centuries of self-imposed isolation Japan went through before the Meiji. The other

problem was finding help from people who could handle the foreign language and culture and the international transactions for numerous small merchants who had been unable to do so or had been ill advised in the past. The sogo shosha have traditionally been involved in commodities, a high-volume, low-margin business, and have been a mainstay of offshore trading. This was not unique to Japan. At the beginning of the industrial era in the United States and Europe, large trading firms often dominated mercantile activities. As industrialization continued, however, manufacturing firms grew by internationalizing the many marketing and logistical functions that were once performed by outside trading firms. Thus, in the West, trading firms were often forced to become specialized commodity traders or wholesale and retail chains. All of the nine major sogo shosha began during the Meiji period. Mitsui & Company began in 1876. At that early time, combined, the sogo shosha handled only 1 percent of Japans trade but by 1900, that number had increased to 38 percent and more than doubled by the end of World War I. By 1907, three of the largest firmsNippon Menka, Mitsui, and Goshodominated their markets. Diversification did not commence until after the Second World War and did not become popular until the 1960s. The sogo shosha developed along two paths during the early postwar period. One was to start out as a small general trading firms dealing in diverse products and services (Mitsui, Mitsubishi). The other was to move from being a specialized trading firm (senmonshosha) into sogo shosha (C. Itoh, Nissho-Iwai). This metamorphosis was necessitated due to the need to obtain products for postwar Japan, the rationing of foreign exchange directly after the war, and the need to moderate the booms and busts of the postwar business cycles. During the postwar period, the sogo shosha provided trade credit to companies struggling with chronic shortages of capital. This role of financial intermediary has continued to this day. Mergers abounded during the 1950s. By the mid-1960s, thirteen large trading companies remained, and later mergers reduced the number to nine: Mitsubishi, Mitsui, Sumitomo, Marubeni, C. Itoh, Nissho-Iwai, Kanematsu-Gosho, Toyo Menka (Tomen), and Nichimen-Jitsugya. The early 1960s saw a shift in the industrial structure of Japan, with the rapid growth of basic industries. Maintaining health in these industries required obtaining long-term, stable supplies of raw materials from abroad. The first oil crisis of 1973 was a turning point for the sogo shosha. GTCs decided to shift their emphasis from rapid growth and sales volume to efficient management and the marketing of high-technology plants, products, and know-how. They also decided to accelerate at all levels their efforts to become global enterprises. The growth of mass consumer markets in the 1970s further expanded their functions to include development and distribution of consumer goods, housing construction, marketing consulting, and engineering. Japan's commitment to competitor intelligence is derived from the rice bowl culture. In medieval Japan, each family was responsible for growing rice on a small portion of land. Water was scarce, and irrigation techniques were precise in order to deliver the right amount of water to each plot. If one family did not take proper care of its plot, it might drain the water supply for the entire enclave. This experience instilled in the Japanese a sense that each of them has a part to playa collective orientation. In Japan, information is synonymous with intelligencejobo covers both concepts. PROBLEMS In order to effectively discuss the problems associated with the sogo shosha, their strengths, weaknesses, opportunities, and threats must be examined. The sogo shosha are a major force in world trade and will continue to do so for the foreseeable future. It is essential that we understand them better. Strengths One of the apparent strengths of the sogo shosha is the chance for employees to travel overseas, since the trading companies' role is to spot business trends and opportunities throughout the world. This role positions the companies to pick the top Japanese graduates. Another strength is that the groups encourage specialists rather than generalists and move employees into new jobs every five to seven years rather than every two or three years as in most Japanese companies. Another strength lies in the trading skills of the personnel nurtured through their system. Professional employees with lifetime employment and seniority mean higher wages even though slower advancement occurs. Career advancement is an important source of motivation and incentive. Building strong management overseas is another major challenge. Traditionally overseas offices have been filled with members of their core staff from Japan. Strong local managers now exist who have special knowledge of the local market. This contradicts the sogo shosha's internal system of contacts, and their personal network. A major concern is whether they can integrate local management into the entire corporate system. This is a common practice among American multinationals. But part of the sogo shoshas uniqueness and strength lies in their managerial system rooted in the Japanese environment. There is an additional problem in obtaining work visas for Japanese expatriates. There have been discrimination cases against Caucasians by sogo shosha in the United States. Local requirements exist throughout South America; for example, 75 to 90 percent of payrolls must go to nationals. To be fair, the sogo shosha are not the only Japanese companies caught up in this nationalistic fever; almost without exception, every Japanese company which goes overseas gives priority to Japanese nationals to the expense of host nationals, no matter how talented or essential they may be to the operation of the company in the country. Solutions exist to these problems. The sogo shosha can search for non-Japanese who can be acculturated into an existing sogo shosha system, but this is difficult, impractical, and time consuming. They can change the managerial system from a traditional Japanese generalist approach to a more Western specialist approach but this may destroy the cultural foundation of the sogo shosha. Finally, they could use a hybrid of the two. This may be the only feasible option. Sogo shosha must learn to recruit well-trained and educated local nationals and begin to use them to staff key positions, if they are to remain globally competitive. Weaknesses The sogo shosha do not know retailing. GTC managers find it difficult to deal with independently minded and highly practical managers of mass-merchandising firms. They must realize that cooperative procurement, merchandise development, or store leasing does not make these firms captive markets. GTC managers are prototypical organization

individuals, while those in retail firms tend to be highly individualistic and self-made entrepreneurs. GTCs see this as a wedge to establish themselves in the mass-merchandising field. Not so for retailers. It is only the means to achieve specific objectives such as access to financial resources or dependable suppliers of quality merchandise. The sogo shosha are also highly vulnerable, since their expertise is in commodities, not technically oriented products. Some manufacturers (Sony, Honda, etc.) have undertaken many of their own domestic and international marketing activities. As Japanese manufacturers gain experience in exporting, they need to rely less on the expertise of trading companies. The sogo shosha also lack consumer marketing skills. They typically do not provide strong sales assistance. The keiretsu and bank relationships are changing. If advantages previously gained by financial muscle are lost, much control in the GTCs relationships will disappear. Their business is becoming increasingly complex and diverse. They must shift from a trading mentality to one of managing large and complex conglomerates. Can they do this effectively and successfully? Opportunities Today's challenge to sogo shosha is globalization. At the outset, service to Japan's national interests was the main objective: to operate as Japan's major supply and distribution channel, primarily as importers of industrial raw materials and as exporters of manufactured goods. Their new role is becoming one of manager and coordinator of projects, plant exports, financial accounts, information, and other services. The GTCs may own hundreds of small subsidiaries and large joint ventures, but all have one primary purpose: to support the core business of selling and buying and to generate new business opportunities, not for development and manufacturing purposes per se. The majority of their subsidiaries are in sales, warehousing, transportation, and other service industries. By contrast, Western conglomerates are centered around manufacturing industries, with their primary objectives being to improve cash flow and maximize profit. Threats The sogo shosha became involved in ill-conceived or poorly implemented new ventures. They diversified into real estate and housing, but the current status of Tokyo's real estate market is not healthy. Therefore, they have divested illconceived new ventures, withdrawn financial support from marginal suppliers, and reduced headcount by limiting the number of new recruits and encouraging early retirement; they have also restructured losing businesses by spinning them off. They have begun to stress large-scale foreign direct investment in major industries in key countries, have put forth a major effort in third-country trade, and have pushed for major construction projects through bartering and countertrade. Examples include the Mobarakeh steel complex in Iran when Japans Kobe Steel accepted crude oil for 50 percent payment in return for construction materials. Japanese imports of Chinese crude oil and coal would be taken over a 5-year period in payment for Japanese plant and equipment, construction equipment and technology. Kao will take 60 percent of the output of palm oil in its Malaysian joint venture. Kawasaki took Englands Aveling Barfords rigid dump trucks in exchange for three models of Kawasaki wheel loaders. The majority of countertrade is with lesser developed countries, including the former Soviet Union (now Russia) and China. Offset is more often used with industrialized countries. Japan appears to use countertrade to export finished capital goods while sourcing industrial raw materials. A major problem of the sogo shosha arose when they expanded aggressively and got caught when overcapacity and stagnant growth occurred in their markets. Their traditional strengths have been in commodity businesses that were rapidly reaching maturity. An individual sogo shosha's desire to increase its market share, particularly through the use of financial power, has often resulted in chronic overcapacity. Its power can be most effectively exercised over small firms, but in maturing industries, slow economic growth means continually providing financial support to poor prospects at a nominal returnwhere they must keep affiliated firms afloat. The sogo shosha face many challenges during the 1990s. Japanese banks that have become more internationally oriented have begun to dispute the trading companies role in trade financing. Manufacturers are questioning their role in marketing and turning away as the market in question grows larger and more significant. For example, Marubeni has invested in automobile dealerships in Belgium to import Nissans, and it also imports Nissans into Poland; however, Nissan exports directly to France, Germany, and the United Kingdom, its major European markets. As technology becomes more complex, it becomes more difficult for the sogo shosha to deal with technical aspects; sogo shosha excel at commodities but the further away from a commodity a product is, the less capable a sogo shosha is of handling it. In addition, as the marketing and service requirements become more specific and involved for many of todays complex products, the sogo shosha are less able to play a dominant role in their marketing.

INTERDEPENDENCE OF GLOBAL MARKETS While the Japanese economy is continuing to grow because of heavy consumer demand and corporate capital investments, sogo shosha have responded to these changes by moving from being producer oriented to being more consumer oriented. They are presently looking to participate more in new, promising industries such as electronics and biotechnology. The devaluation of the American dollar has resulted in increased investments in the United States. Major incentives also exist to produce higher-priced value-added goods. The sogo shosha have evolved upstream (into mining or manufacturing) and downstream (into retailing) through equity investments in joint ventures and affiliates. They are slowly changing from pure traders to financially sophisticated investment holding companies. There are increased risks, and their capital is tied up longer, but the potential profits (and losses) are greater. They have become pseudomerchant bankers active in foreign exchange trading, commodity funds, and mergers and acquisitions. Many of the factors that combine to produce their distinctive competence also constitute formidable barriers to entry. Returns are very low, and there is a high degree of competition between the sogo shosha. No reason exists for a

customer to enter into an exclusive relationship with a single sogo shosha, since maintaining ties with several allows the company the opportunity to play one against another. Out of necessity, sogo shosha must attempt to cover all products in all world regions. This creates high fixed costs in order to maintain a network of offices worldwide. It also encourages growth and provides incentives to expand volume. A competitive standing exists among firms resulting in an inherent desire to outperform rivals as well as a high degree of competitive matching. That is, the tendency exists for the sogo shosha to duplicate the offerings of their rivals. The sogo shosha must always search for new business opportunities to add to their existing array of services to specific clients. They must search for differential advantages. The sogo shosha have been found to be less than satisfactory in marketing products that require intensive marketing and post-sales service at the consumer level (Sony and Honda do all their own marketing globally). The commodity mentality widely shared among sogo shosha does not lend itself well to successful consumer marketing. In most consumer durables fields, they have not done well. They have traditionally performed better with ships, military hardware, and aircraft where the marketing of these products requires excellent contacts with a relatively small number of potential customers and high-ranking government officials. The Sogo shosha were ideally suited to the high growth period of the 1950s and 1960s, when Japan expanded capitalintensive heavy industries. By the early 1970s these industries began to mature. Energy prices started to rise, leaving the Japanese in a disadvantageous position. Mitsubishi is perhaps the most changed GTC. It has a profit margin of 1.7 percent compared with an average of 1.3 percent for the industry. It invests in the securities of companies with which it has some business relationship, as supplier, customer, or provider of credit, and then exerts large amounts of influence. Trading companies also entered new businesses, such as the information and telecommunications industries. During the late 1980s, many made huge profits from zaitech (financial engineering) games in Tokyo's booming stock market. This has hurt them in the 1990s with the collapse of the Tokyo Stock Market. They need to issue more equity, since they are woefully undercapitalized. The big banks in Japan have over three times as much capital as the average GTC. As their old role diminishes, the only choice for them will be to try new and riskier endeavors.

WHAT MAKES SOGO SHOSHA UNIQUE ? In the West, several large trading companies exist: Continental Grain, Cargil, and Bunge. European trading companies such as East Asiatic, Sime Darby, Inchcape, and Jardine Matheson play an important part in trade throughout Asia by performing many sogo shosha functions; however, they are neither simple intermediaries nor a true sogo shosha. To be a contemporary sogo shosha, a trading company must have a worldwide network, handle numerous commodities, and account for a large share of the foreign trade in the country of its domicile. For a trading company to be a sogo shosha, it must deal with many products (rather than concentrating on just one product group), engage in both export and import, have offices throughout the world, and wield considerable power in the spheres of marketing and finance. Jardine Matheson, a British trading company located in Hong Kong, started out as a true trading company more than a century ago. But it cannot be considered a trading company today. Besides trading, it is engaged in light industry, shipping, tourism, insurance, merchant banking, leasing, real estate, resource development, engineering, and construction. Trading is only one of its many activitiesand a small part of it. The Danish company East Asiatic started to export teak from Thailand to Europe over a century ago and became one of the most successful European trading companies operating in Asia. Today, though, like Jardine Matheson, trading accounts for less than 30 percent of its total sales. It is the difference between the boeki shosha (foreign trading companies) and the shoji kaisha (companies engaged in trade).

THE ROLE OF THE KEIRETSU IN JAPANS ECONOMY The keiretsu system is a driving force behind Japan's industrial success. Japanese keiretsu such as Fuyo, Dai-Ichi Kangyo, Mitsubishi, Mitsui, Sanwa, and Sumitomo generate nearly one-quarter of Japanese business revenues. This system is not simply a superior form of business operations; it is a system that fits Japanese culture. The fact that the Japanese are team oriented has been well documented (Weihrich, 1990; Miller, 1991). The keiretsu is the ultimate form of teamwork. It is the team concept that makes this system part of Japanese corporate culture. While Americans have been complaining that the keiretsu violates U.S. antitrust laws, the fact is that it is rooted in economic cooperation, which lowers transaction costs, and in collaborative research efforts, which expedite development of new technologies. When an organization gains membership in a keiretsu, both financial and non-financial benefits accrue. These benefits include reduced risk through mutual support and the control of stock voting power, cooperation in marketing and product development, guaranteed markets and sources of supply, ties with a trading company that supplies needed raw material imports and handles export trade, and a bank to supply financial resources. Trading firms also arrange for transportation, insurance, warehousing, and financing. Although there are about 6,000 trading companies in Japan, the ten largest firms account for half of Japan's exports and almost two-thirds of its imports. Vertically integrated industrial entities can spread high R&D costs over a large product base and thereby reduce the financial exposure and risk in technology ventures. Interdependency upstream and downstream allows resources to be mobilized quickly, technical expertise to be pooled, long-term risks to be shared, enabling technologies to be rapidly applied across a diverse product base. A fragmented industry, as is common in the United States, spreads R&D funds thin, slows technology diffusion, and diffuses manufacturing and marketing power. Companies must work together systematically to create the effort required for competitiveness in the global marketplace. American individualism and its entrepreneurial heritage do not readily adapt to large-scale intercompany and interindustry cooperation. Japan's FTC is concerned about kato kyosocompetitive chaos. With large companies gobbling up most of the business, small firms find it difficult to competeleading many to bankruptcy or employee layoffs. Excessive competition has resulted in sympathetic views being voiced by Japan's FTC and numerous consumer groupsbut this compassion for the less efficient has kept prices high. The goal is to have "order" in the marketplace. This results in limiting consumers' choices, while slanting the playing field toward producers and away from consumers. In providing stability in the marketplace, cartels are allowed, even encouraged, to form. Japans cartels tend to strengthen Japanese producers in the world marketplace. The closed dango system is used in the construction industry. If open bidding were used, many small operators would be forced to declare bankruptcy. In return for economic security among industry participants, certain limitations on their freedoms are imposed and accepted. When the market becomes saturated, cartels are formed (as in textiles, steel, and shipbuilding) to work out solutions to reduce overall production. The government often subsidizes the destruction of some company facilities so that only the most contemporary and competitive facilities will remain. It, therefore, avoids serious dislocations in the affected companies. Competition within Japan may be fierce; it takes place within the framework of the government and sectoral associations that define the scope and nature of activity and encourage some cooperation between firms in R&D, standards setting, market segmentation, and so on. Managed competition brings benefits for the entire sector (but at the expense of consumers who are forced to pay higher prices). The keiretsu system combines horizontal scale, diversification of related systems, vertical technical coordination, and market discipline. The combination of these factors provides each sector with stability and economies of scale, while at the same time preserving internal rivalry. Japanese producers can access capital through their parent companies and their banks in order to protect themselves from short-term financial pressures, which then enable them to participate in risky long-term R&D. Though the keiretsu is not illegal, it does discriminate against imports because members purchase only from other keiretsu members. This, in turn, excludes foreign competitors from participating in the Japanese market. To imagine a keiretsu in the United States of equivalent proportion, imagine AT&T, DEC, GE, Ford, Prudential, Amoco, Merck, USX, Alcoa, UAL, CSX, and Caterpillar all aligned with their central bank, Citicorp. Japan has not one of these economic giants but six. KEIRETSU WORLDWIDE Are keiretsu relationships a uniquely Japanese business practice? International keiretsu-style practices have received positive evaluation, particularly in the auto parts industry. For example, the Big Three U.S. auto makers have begun favouring long-term contracts with selected parts producers instead of short-term agreements they are accustomed to making. Associations of suppliers have been formed to help maintain communications between auto makers and parts producers. European car makers are also following in the United States' footsteps. This growing tendency for keiretsu-style practices to be adopted internationally indicates that the advantages of this cooperative business style have come to be recognized worldwide and not just in Japan. Keiretsu auto parts procurement can encourage joint development activities between any manufacturer and its suppliers, provide steady improvement of parts quality, rationalize production methods with a long-term perspective, and allow cost reduction through equipment investment. Participation in keiretsu relations enables suppliers to gain a clear understanding of the development policy or production plan of the manufacturer and to form a strategy to meet the requirements of that policy or plan. In addition, suppliers are able to raise their technological level and guarantee product quality, since the keiretsu enables them to anticipate a stable business relationship. This, in turn, enables manufacturers to enjoy the advantages of more efficient development of new models by assigning the development of some specific parts to specialist suppliers. In summary, keiretsu agreements can grow into a relationships of shared prosperity and development for both manufacturer and suppliers.

Do keiretsu relationships in fact forbid entry of new parties? The exclusiveness of keiretsu relations frequently raises a problem regarding the difficulty newcomers encounter when entering the markets. Keiretsu create entry barriers for newcomers by engaging in anticompetitive practices. Stricter antitrust enforcement seems to be an inevitable result. The U.S. Justice Department is deliberating whether to punish antitrust violations by keiretsu in Japan by suing their American subsidiaries. The U.S. Federal Trade Commission (FTC) has been conducting a probe of the actions of Japanese companies and their suppliers operating in the United States. It is erroneous, however, to refer to a keiretsu as a totally exclusive operation when one takes a closer look at the auto parts supply situation in Japan. In many cases, producers place multiple orders with several parts producers in order to encourage competition between them. This process is called natural selection and involves entry by a technologically superior parts producer. The horizontal groups of the keiretsu can provide the security and stability needed to promote the risk taking and long-term investment often shunned by American companies. By collaborating on production and research, keiretsu members deliver new products ahead of rival non-members. For example, Toyota Motor Corporation, one of the Mitsui Group companies, introduces new car designs in only four years, as opposed to the five to eight years for Detroit and Europe. American suppliers, more than their Japanese counterparts, provide many of the advances that drive innovation but design goes more smoothly with a keiretsu approach. Keiretsu linkages provide risk- and informationsharing benefits to its members and serve as a more efficient substitute for vertical integrationpermitting reliable supply, while preserving corporate flexibility. This results in a painful trade off between openness and efficiency. GLOBAL DEVELOPMENTS Japanese ethnocentrism can be seen throughout the world. American and European multinationals tend to use nationals to run their local operations. The Japanese policy is for most important divisions and overseas offices of major Japanese firms to be run by Japanese citizens. In fact, Japanese firms select few foreigners for local management jobs or home office corporate responsibilities. The Japanese are not confident about foreigners' business savvy. They tend to stick together by looking out for each other's interests. The tightly knit, exclusive group of Japanese expatriates provides an image of arrogance, contempt, and little goodwill toward the locals. They tend to promote within at higher levels than other multinationals. No more training is typically given than is needed to get the job done; technological secrets are rarely provided. Eighty-five percent of Japanese firms in the United States have a Japanese CEO, while only 20 percent of American firms in Japan have an American in charge. Local staff employed by Japanese branches do not have good promotion prospects. Internationalising business is well accepted, but internationalising personnel is not. A dual employment system exists for managers as well as for staff employees. One is for staffs dispatched from Japan who are permanent members of the firm, and the other is for the local staff. The dispatched staff have their careers in the main organization and can be sent anywhere in Japan or overseas; the local staff are hired strictly for local work, and their promotion can only be in the branch. The coveted Japanese lifetime employment system applies only to the dispatched staff, not to the local staff. A study of the Australian operations of sixty-two multinational companies (forty-two American- or European-owned and twenty Japanese-owned) found that the factories owned by Americans and Europeans contained equipment made in a variety of countries; Japanese factories contained mainly Japanese-made equipment . When a Western firm needs something new, it takes competitive bids; a Japanese firm will go first to members of its keiretsu, then approach another Japanese company, and use non-Japanese or local sources only as a last resort if the item cannot be found elsewhere. American firms in Japan generally use Japanese contractors; Japanese companies in the United States and Europe use Japanese contractors. In 1992, Japanese-affiliated companies in the United States imported $71 billion of goods and exported only $20 billion, almost the same amount of the trade deficit for that year. Japanese multinationals are more likely to rely on Japanese managers. Most Western-owned affiliates are managed by locals. In the same Australian study, only one of the twenty Japanese-owned companies was entirely run by Australians. When Australian managers were used, they were often shadowed by Japanese advisors who exercised the actual power. Forty-five percent of executives and 85 percent of CEOs of the Japanese subsidiaries were Japanese. A native working for a Japanese-owned firm encounters discrimination and is treated like a second-class citizen in his own country. The Japanese often believe foreign workers cannot build as good a product as Japanese manufacturers. Even though Brazilians and Koreans can sell inexpensive steel, very little ends up in Japan. None of the major trading companies will carry it, since their own steel companies are in financial trouble. Small importers might be willing to handle modest amounts, but they will insist that it being landed at warehouses away from where any domestic steel is going out so as not to be seen by others. If seen, the company could be marked as a disloyal customer and treated in a less-than-friendly manner the next time a boom brings a seller's market. Yokonarabi or herd instinct is a normal business practice in Japan. When one company introduces a successful new product, all major competitors must follow or lose face. This results in intense competition, with all having the same product in the same market segment. An example of this practice occurred in 1986 when Mitsui purchased the Exxon Building. This transaction led shortly thereafter to Sumitomo's purchase of 666 Fifth Avenue. This was followed by Mitsubishi buying Rockefeller Centera transaction Mitsubishi was pressured into making to save face, causing them to pay $846 million, a price far above the property's market value (since then the market value has fallen to less than one-half of the original purchase price). Why? Mainly to maintain prestige. In order to

attract top talent from leading Japanese universities, it is vital to keep up with one's peers. Isolated from their markets, Japanese manufacturers often find it safest to offer a wide array of products, at least as many as the competition. It is presumed in Japan that being in a particular industry means doing what other companies in that industry do. Japanese keiretsu investment is aimed at America's financial institutions, high-tech manufacturing, and entertainment industry. Japan is gobbling up the companies that make the machines used to manufacture semiconductors and hence is targeting emerging American technologies. Inexpensive capital, secrecy, and political influence are at their disposal, while their economy is largely protected from foreign investors and outside competitors in many high-tech businesses. Japanese interests over the last decade have funnelled more than $4.5 billion into Ameican scientific, educational, and economic policy institutions, mainly to gain access to cutting-edge technology. But in Japan, foreign companies have no such opportunities, since Japan's best research is isolated in the labs of private corporations, shielded from takeover by the keiretsu system. Japan, by transporting its vertical keiretsu auto supplier network to the United States, has blocked American auto suppliers from the transplant market. There currently exists a $10 billion American auto parts trade deficit, almost exactly the amount Japanese transplants import from Japan. Keiretsu ties have effectively precluded many American suppliers from participating in the transplant market. Transplant auto companies typically deal with Japanese suppliers because of nationalistic preference or organizational ties rather than business considerations. Little incentive exists for a Japanese producer to incur the added costs necessary in dealing with non-keiretsu suppliers, especially foreign suppliers. If a company were to change suppliers, current suppliers would be incensed and would tell their keiretsu sister companies to stop selling it crucial raw materials. In industries dominated by companies with the tightest keiretsu affiliations, imports tend to be abnormally low. Germanys import quotathat is, the import share of market volumeis 47 percent while it is 22 percent in the United States, but only 5 percent in Japan, a good portion of which stems from Japanese businesses that have been transplanted overseas. Firms in each keiretsu attempt to maintain in the U.S. market the same close relationships they enjoy at home. The keiretsu is a system of lifetime business relationships built more on trust than on signed contracts. To break such a relationship just because someone else, regardless of nationality, offers a cheaper product or service is to the Japanese a violation of trust and the worst kind of dirty dealing. Strong motivation exists to maximize intra-keiretsu dealings. However, to encourage competition in price and quality, an auto producer usually has within its keiretsu several companies producing specific parts. The keiretsu system has its drawbacks: Excluded companies have trouble competing. The keiretsu structure and close relations between industry and government minimize the risk of investment. As a result of such relations, many companies can afford to lose money for five years to establish leading market share for their product; such is the determination for Japanese companies to do anything it takes to be the market leader. Few, if any, American companies can afford to slug it out that long. Japanese semiconductor makers ran up $4 billion in losses between 1985 and 1987 to achieve dominance in memory chips. Sumitomo Bank does not need to do a Western-style financial analysis of fellow keiretsu member NEC before granting it a loan; it has and will supply funds even when that business is unprofitable. No American bank would have given so much money under similar conditions. In the early 1970s when Mazda was close to bankruptcy, the other members of the Sumitomo keiretsu saved the company by extending loans, employing workers temporarily, and purchasing only Mazda cars. Firms in the United States do not have the security of a huge bank or sister companies to fall back on. Thus, a Japanese company can compete on price and sustain horrendous losses, which do not endanger the corporations standing in the financial community or raise its cost of capital. The keiretsu structure ensures the ability of Japanese companies not only to remain in those markets, but also to dominate themmaking the future of smaller competitors look rather dismal. Their power extends over distributors and dealers in the form of captive distribution networks. They effectively prevent their distributors from carrying competitors' products by threatening to stop supplying products. These threats can either be implied or actual threats. Distributors are eager to please since they do not want to upset the harmony of the relationship between the their companies. WORLD REACTIONS American politicians and business leaders have requested that the tight supplier-buyer relationships be loosened to provide American firms a better chance to sell to Japanese companies; they also have insisted on more public financial data on keiretsu companies, requested that there be appointments of outside board members, and enhanced shareholders rights. Article 23 of the General Agreement on Tariffs and Trade (GATT), which examines whether a member country provides the same access and benefits to other countries that it enjoys in foreign markets, may be used by the United States to open a case against Japanese economic institutions and keiretsu practices. T. Boone Pickens became the largest stockholder of Koita when he purchased 26 percent of the stock of the auto headlight supplier, yet for over a year he could not get the ownership rights, board representation, or the management voice to which he was entitled. Management refused to talk to him. Since corporations in Japan are not directly accountable to stockholders, Pickens was ignored. In Japan, it is rare for a non-Japanese to become a director. Typically a company's board consists of its top executives and a representative or two from a fellow keiretsu company. These stable shareholders hold on to their shares at all costs. A company that does not would become mura hachibuan outcast from Japan's corporate club. The company is totally controlled by management; investors have little power in business operations. Since keiretsu

members have cross-equity shareholdings, they do not have to be short-term managers, worrying about constantly rising earnings and higher dividends, in order to keep stock investors satisfied. They can sacrifice profits by lowering prices to gain market share. No such freedom or protection against stockholders exists in the United States. This creates the long-term visionary yet predatory, nature of the Japanese system. Stable shareholders may care about their returns, but the long-term relationship is more important than mere financial gain. In the West, capitalism means stockholders control the enterprise; in Japan, the enterprise is run by the managers for their workers. Individual stockholders have either little or no voice over company decisions. An individual stockholder attempting to voice his or her disgust at a stockholders' meeting will probably be quickly removed from the room by sokaiya, professional bouncers used by Japanese corporations to prevent dissent. To date, no true Japanese multinationals exist, such as BASF, Exxon, GE, Hoeschist, GM, IBM, ITT, Shell, or Unilever, which engage in production, marketing, exporting, and R&D in several countries of the world. Japanese subsidiaries tend to center around production and marketing within each host country and export mainly to neighboring countries. Considerable anxiety exists among Japanese managers when having to venture out from the comfort of a familiar and supportive home into what many still see as a strange and inconvenient outside world. Socially and psychologically and in its business structure, Japan remains insular and exclusive. CRACKS IN THE KEIRETSU SYSTEM The yen appreciation put a great deal of stress on the Japanese economy, and today deregulation in various sectors is maintaining that pressure, resulting in an acceleration of the loosening of the keiretsu ties. The keiretsu are not gone by any means, but they no longer have absolute control as they once did. In hundreds of instances, the rigid walls between the keiretsu are breaking down, and individuals and companies are falling through. The largest cracks in the keiretsu have come from changes in Japanese employees' attitudes. For decades, Japanese workers have devoted themselves to one employer, believing that big companies would always return their loyalty. When companies had to lay off employees during the oil shocks of the 1970s, it became apparent that this belief was no longer warranted. Big companies take care of themselves first and their employees second. Young people today are realizing that big companies and keiretsu are no longer a guarantee of anything. A majority of young people leaving college twenty years ago would have been proud to join a prestigious group like Mitsui, even if there were better paying jobs elsewhere. This way of thinking is rapidly disappearing as university students who once cherished the company man idea now believe it is a dated philosophy. Gradually even the allegiance to the corporate group will fade, and already in the financial sector aggressive companies are hiring talented managers from rival organizations, just as in the West, and some Japanese employees are giving up company loyalty for a better job across the street. The cracks in the keiretsu have been appearing for some time. More than thirty years ago, Matsushita took advantage of the "company castle town" structure common to the factories of many big manufacturers. Matsushita decided to take on Sumitomo, a powerful rival. It was looking for a way to catch up with NEC, a key member of the Sumitomo Group, in the field of communications technology, so it bought some land and built a factory near an NEC plantproducing the same kind of products as its established rival next door. It was clear to NEC's subcontractors that Matsushita was interested in the same kind of work and would welcome them as Matsushita subcontractors as well. At that time, the unwritten rules stated that each major manufacturer was responsible for its own subcontractors and that manufacturers would not steal from one another. Matsushita succeeded brilliantly and did much business with the subcontractors. This kind of activity will only increase in the future. The walls of the keiretsu will never fall down, but cracks will continue to appear. Companies that are quick and aggressive enough to take advantage of the opportunities will grow and prosper. Japans system of corporate cross-sharing, the glue that holds together the keiretsu system, may be letting go. The Japanese banks, centerpieces of the keiretsu corporate groups, appear to be selling large chunks of their strategic shareholdings in other corporations. Companies, in turn, are unloading bank shares. Banks need to free up capital to write off bad loans and corporations are finding that holding expensive shares in their major lenders is no longer feasible. In the twelve months ending March 1994, Japanese banks were net sellers of nearly half a billion dollars worth of shares; the Japanese top 100 corporations unloaded over 100 million shares of bank stocks over the same period. THE LIKELY FUTURE OF THE KEIRETSU Toyota's president indicated that systems that have worked perfectly well for Japan in law, in finance, and in commercial practices can appear exotic and exclusionary from an international perspective. Japan "needs to change its systems to accommodate the new borderless society." In July 1991, the Japanese government published new regulations stating that shareholdings were allowed, but could not be used to block a company from doing business with a competitor. Rules published by Japans FTC prohibit companies from enforcing suggested list prices and enjoined them from acting together to boycott new entrants to a market, a traditional way of keeping new suppliers and competitors out of a field. These regulations should have a dramatic effect on keiretsu relationships. Japan's trade surplus has remained huge and disturbing to many foreign countries. American marketers have international products, abilities, and dedicationin fact, in Europe and in many other parts of the world they dominate the market. In Japan, though, they are bit players. American businesses are not alone; the Koreans, Taiwanese, and Hong Kong Chinese have not penetrated the Japanese market to any considerable degree. Barriers to entry still exist in Japan, and the keiretsu structure ranks as one of the foremost obstacles. Protectionist tendencies are rearing their ugly heads worldwide. The United States is in the midst of a buy-American fad, aiming its negative efforts at Japanese manufacturers. The Europeans, with the economic unification of the European Community in 1992, have already put up formidable walls, quotas, and barriers. The pressure placed on the Japanese to open up their markets is only going to increase. Reciprocity will become the name of the game in the world marketplace. The Japanese companies dependent on trade and exports will bear the dire consequences if their home markets are not sufficiently opened. The keiretsu cannot live outside of Japan. Without the cozy Japanese bureaucracy-industry relationship, similar keiretsu arrangements will quickly find themselves in legal entanglements in non-Japanese countries (as is already

the case for many Japanese subsidiaries operating in the United States). The keiretsu does not have a future as a global organization. It can operate only under the favorable conditions found within the Japanese culture, industry, and government, conditions that cannot be duplicated elsewhere The Japanese market will eventually open. Many Japanese firms are more dependent on the world market than their own; thus, in order to continue playing on the global playground, they must offer their home field as a marketwith rules similar to those of others. Therefore, the only question remaining is, When will changes occur? When their market opens wide enough for foreign players to legitimately compete, the keiretsu structure will be forced to change. It is unavoidable, since many incestuous relationships exist within the structure. The following changes are postulated to occur within the next five years: 1. Banks will be limited in or prohibited from owning equity of businesses. 2. Limitations will be placed on cross-equity ownership by other companies. 3. Interlocking directorates and presidents' meetings will be abolished. 4. The July 1991 Japanese FTC regulations are just the beginning of more stringent antitrust regulations that will be issued. The end result will be the disappearance of the modern-day keiretsu. No doubt, though, an evolutionary form will appearthe successor to both the zaibatsu and the keiretsu for the twenty-first century. It will be uniquely Japanese in origin and created in response to its cultural demands and history. The keiretsu have been an important ingredient in Japan's economic success. However, with the realization of the global market and the loss of patience among Japan's trading partners regarding trade reciprocity, those elements that are required for the keiretsu have become the same ones inhibiting fair trade. These characteristics must change or else a global unilateral trade war will resultone the Japanese cannot win. Professor Paul Herbig Japanese Marketing lecture Series lecture #6:The Japanese Distribution System Introduction Distribution in Japan is typically complex, multilayered, inefficient, and highly unique. According to Peter Drucker, the field of distributive trades may still be considered as a dark continent in the economy in Japan. While the United States needs two people to build a car and one to sell it; Japan requires one person to build the car and two to sell it. The average retail price in the United States is 1.7 times the factory invoice price; in Japan, it is an incredible three times the factory price. It costs two to three times as much to sell a car in Japan as it does in Europe or the United States. An extremely efficient manufacturing industry shields the gross inefficiency of the distribution system and the agricultural and service sectors. In reality, modern Japan is an industrial power only in mass-produced products such as automobiles and consumer electronics. Japan has more wholesalers and retailers per capita than any other advanced industrial nation. The per capita numbers of wholesalers and retailers are more than twice those found in the United States. The relative productivity of Japanese distribution is half that of its manufacturing segment and much less than that found in the United States or Europe. A product changes hand from manufacturer to general distributor to special distributor to special subdistributor to retailer to consumer; sometimes the product never physically changes hands, merely the paperwork. Primary, secondary, and tertiary wholesalers exist in Japan with each group performing different functions in the physical and financial aspects of distribution. Often goods are trucked from one warehouse to another in the same block. All these costs are borne by the Japanese consumer. A product ends up in the consumers hands only after it has passed through a distribution chain consisting of at least two and sometimes as many as five layers of wholesalers before landing on the retailers shelf. Each layer adds a margin. The product moves from the factory to the sales company, which is a wholly owned subsidiary of the company that manufactures the product, but is a separate organization. The next layer is the large wholesaler or institutional customer, followed by the small wholesaler, who will take the product out to the secondary wholesalers and the hundreds of thousands of mom-and-pop stores throughout Japan. Maintaining the relationship between channel members is often far more important than maintaining the sales level of a particular product or short-term profitability. This is expressed through personal relationships, which are built through frequent visits and elaborate courtesies. Wholesalers are expected to supply a substantial number of personnel to retailers to support their product sales. Such support staff often work in the retail store, but are paid for by the wholesaler. Distributors and wholesalers are often also expected to provide product specific sales training and extensive after-sales service. This can also involve the occasional provision of money to send the son to school, frequent exchanges of gifts, friendly discussions, and very little direct pressure to sell. Historically, Japanese merchants developed ingenious collusive ways to prevent competition within a system dominated by wholesalers, which are in the pivotal position at the hub of commercial activities. Merchandise had to pass through multiple levels of highly specialized intermediaries. MANUFACTURERS In Meiji Japan and through to this day, the manufacturing class has enjoyed higher prestige than the merchant class because the manufacturers were credited with Japans postSecond World War economic success. The intense rivalry between wholesalers and retailers puts pressure on manufacturers to continually bring out new products. However, the lengthy Japanese distribution channel makes it difficult for manufacturers to keep their

fingers on the pulse of the market. To overcome this obstacle, many manufactures open and operate antenna stores, which are designed to broadcast ideas and receive ideas and feedback from consumers. In these stores, manufacturers collect retail information and consumer feedback, identify early emerging trends, and promote particular products and present images of the future in order to test responses. Another technique used by many manufacturers is having their own distribution channels; Matsushita sells through 56,000 retail outlets, half of which sell only Matsushita products and are, therefore, solely dependent on Matsushita. If Matsushita products fall behind those of Sony, the retailers suffer. This exclusivity puts much pressure on manufacturers to innovate and to match competitors innovations. It also provides the manufacturers with a built-in base of customers and a firm starting point for any products it manufacturers. Manufacturers are increasingly at war with independent discount retailers, who disrupt the manufacturers price structure and other channels. Matsushita is restructuring its rebate system, which used to reward stores based on the percentage of Matsushitabrand products in their inventories. The system has helped preserve loyalty among the companys 25,000 National stores in Japan by, in effect, discouraging them from buying and offering other makers products. The company will now base its rebate on the stores actual sales of Matsushita goods. The National stores, named after Matsushitas brand of household electronics sold in Japan, have played an important role in making Matsushita Japans biggest consumer electronics company. These stores account for as much as 60 percent of Matsushita sales in Japan. Tight relationships between suppliers and manufacturers increase innovation. First, where buyer and supplier have a close relationship, frank and open exchanges of information usually take place, which often leads to innovative problem solving. Because buyer and supplier are closely linked, a new supplier can only break in by offering something significantly different. A lower price is usually not enough to sway a customer. The in-supplier is usually working hard with its customer to develop new and improved ways of doing things; the out-supplier has to work even harder and innovate even faster to break in and gain a foothold. The long-term commitment between Japanese channel members is prompted by relationship building. Solid business relationships are based on mutual trust between customer and supplier. One of trade practices peculiar to Japan is that traders try to resolve their disputes flexibly based not necessarily on formal contracts, but on their mutual trust and confidence, which have been built up by human relationships and a long stable continuity of transactions. This raises entry costs, requiring considerable time and effort for any new entrant to create a new business relationship. As a result, obstacles to foreign or out-group manufacturers are immense. Manufacturer-paid demonstrations in retail outlets are also used to strengthen the manufacturer-dealer relationship. When a manufacturer or wholesaler sells to a department store, their agreement often requires the producer to provide a number of sales personnel and maintain a minimum level of sales for the retailer. The manufacturer often pays for management education programs for dealer personnel, store display kits, information, and financing. The Japanese manufacturer typically has a network of hundreds of primary wholesalers who deal exclusively with it. The wholesalers livelihoods depend on the manufacturers ability to continue to provide products that will compete successfully against rival chains of distributors. The distribution network is an extension of the company itself and is of major concern to the manufacturer. A perfect example of this is Fuji who has over 80 percent of the film market in Japan. Nearly 70 percent of photographic products in Japan pass through four distributors with which Fuji maintains exclusive agreements. These distributors are bound to Fuji by financial, operational and technical means. As a result, Fuji film has a virtual monopoly on the colour film and processing market because it controls directly or indirectly most retail film shops. Due to its control of the intermediaries, it also can and has leaned heavily on independent shop owners unless they come to heel and carry only Fuji film. Senior executives are obligated to visit each distributor at least once a year to reaffirm their commitment. The distributor will likewise visit the head office, factories, and branches of the manufacturer, knowing he will be treated like a family member. Manufacturers are frequently equity partners of their key distributors, and the branch manager of the manufacturers sales division in each major town will usually sit on the board of his local distributor. As a director, he is privy to all the plans and strategies of the distributor and can thus guide events in the way that is most favourable to the objectives of his own manufacturing company. Each distributor is a dedicated and exclusive wholesaler for one manufacturer in each product category. To carry other brands would be a violation of the giri (loyalty) that the wholesaler has to the manufacturer. Therefore, to see many different brands from different manufacturers, the consumer must visit numerous separate shops. To a manufacturer, a distributor is worth working with only if he is totally committed to the manufacturers line of products. Manufacturers control over wholesalers and retailers have been established chiefly by oligopolistic manufacturers using keiretsuka, vertical restraints, or control. This control provides certain advantages in reducing the transaction costs and providing better after-sale service exist but these have offsetting disadvantages in reducing price flexibility and discouraging traders from acting on their own in the market. These restraints also tend to restrict new entry or exit. Wholesalers and retailers often deal only with the products of their associated manufacturers. The Japanese strive to maintain retail prices at the same level in all classes of trade. No law such as Robinson-Patman exists to prevent such covert price fixing. Retail price maintenance is the standard. In Japan, retailers who break the price line are often boycotted by manufacturers; they are regarded as untrustworthy. Coca-Cola Japan has seventeen bottling plans in Japan, including the worlds biggest in Tokyo, and controls 90 percent of Japans cola market. It uses its clout in typical Japanese fashion to punish mom-and-pop retailers who dare to place a rival on their shelves. Japanese consumers pay an average of 100 yen (approximately $1.20) for each cola can or bottle (no quantity discounts).

Major consumer goods industries are dominated by a few powerful manufacturers with well-known brand names. The large retailers enjoyed a low level of competition in many areas (their competitors were unable to build new stores to directly compete with them); they let wholesalers and manufacturers perform the major channel functions, thus reducing their own risks; and they used wholesalers distribution centres, which saved them the costs of setting up those facilities themselves. Transactions are carried out based on the tatene or desired resale price set by manufacturers for each distribution level. Designated wholesalers are used to handle delivery and payment even if stores negotiate directly with manufacturers. Chains often may change wholesalers only after getting the manufacturers approval and must select from among those designated by the manufacturer. Manufacturers in Japan provide sales support, including after-sales service, advertising, and assistance in handling consumer claims. They routinely offer rebates to get retailers to move the product. These may include rebates for selling a certain quantity and achieving sales targets, making early payments, performing services, keeping inventory, providing sales promotions, being loyal to the supplier, following the manufacturers price policies, and cooperating with the manufacturer. These rebates are tantamount to a non-tariff barrier, which would be discriminatory, unfair, and illegal in most countries outside of Japan. Rebates must be negotiated separately with each channel member, and the importer is required to pay for the multitude of services and activities that in his home country would be included in normal business transactions. Rebates are typically paid at the end of the year, not as incurred. Manufacturers rebates are based not only on quantity purchased, but also on loyalty and service. Rebates are provided as incentives for distributors, a portion of the profit returned to distributors to motivate them to purchase and sell a manufacturers products. Rebates are treated as confidential information between a manufacturer and a particular distributor. The manufacturer pretends to be giving the best possible rebate to each distributor, who, in return, believes it will receive the rebate if it demonstrates great loyalty to its supplier. These practices are rooted in Japanese history and values. The return of unsold goods is another widely accepted practice. Henpinsei (returning unsold items to suppliers at no cost) adds to the cost of a product but strengthens loyalty among channel members. Elsewhere in the world, returns are usually not accepted unless goods are defective or deficient in some way. In Japan, retailers can return unsold goods for any reason. This increases the total costs, which are then passed on in retail prices. By allowing retailers to return unsold products, manufacturers thus take the risks of sales failures. This is especially relevant when selling new products or risky items or when wholesalers and manufacturers are pushing merchandise. Other special programs offered include tempu (meaning the addition) in the pharmaceutical industry when suppliers routinely give customers extra items besides those invoiced as a special discount for some orders; this is typical for large-volume or out-of-season orders. Okiwasure is when the manufacturer makes a conscious error in delivering more items than ordered (and naturally failing to charge for the extra items). Deferred payment between channel members is designed to promote harmonious relationships between suppliers and resellers in view of the shaky financing of most small channel members. The liberal use and extension of trade credit by means of promissory notes is common. These are often called pregnancy notes, as they may not become due for nine months. Detailing is another manufacturer practice. While the volume of goods leaving the factory may appear to indicate a successful launch, often a large proportion of those goods are returned later to the manufacturer. The detailing force asks the opinions of wholesalers and retailers about the product, determines exactly how well the product is moving, and provides an estimate of what the level of returns is likely to be. The detailing force also establishes personal relationships among the manufacturer, the wholesaler, and the retailer. The presence of the detailing force allows the wholesaler and the retailer to express their frank opinions regarding the product and its prospects. The detailing force also assists the wholesaler and the retailer in merchandising, advising the retailer on the arrangement of his store. WHOLESALERS During Japans feudal period, the country consisted of many small, largely self-contained provinces, each of which developed its own distribution system. Manufacturers who wished to penetrate these regions successfully needed to develop relationships with wholesalers in each area; 500 such regions existed in Japan at that time. Many of the current relationships are holdovers from that era. As a result, Japan has as many wholesalers as in the United States with less than half the population and considerably less surface area. As it is difficult for many manufacturers to sell in volume directly to the retailer or the end user, a large network of wholesalers is usually required. Over 400,000 wholesalers exist, half of which employ fewer than five persons; only 5 percent have thirty or more employees. The ratio of wholesale to retail sales in Japan is four, three times higher than that found in the United States. Three levels of wholesalers exist in Japanprimary, secondary, and tertiary wholesalerswith each group performing different functions with respect to the physical and financial aspects of distribution. Thousands of middlemen dominate an internal distribution system of Byzantine complexity and medieval inefficiency. Prices rise as each middleman takes his cut, many for just moving the merchandise only a few miles, some not even touching the goods. One example of this practice are apples. Apples from the United States move through the hands of more than a dozen middlemen in less than a day; starting at $.25 at the dock, each apple eventually costs the consumer $4. Over 50 percent of large wholesalers in Japan operate without a contract. Japanese businessmen dislike being legally locked into an uncertain future and resent the feeling of basic distrust that generally accompanies such discussions and negotiations. Most products pass through three or more wholesalers on their way from manufacturer to retailer. Wholesalers act largely as agents of the manufacturer, handling financing, physical distribution, warehousing, inventory, promotion, and payment collection functions for manufacturers. With expensive land, limited space, and high storage costs, most retailers have limited inventory and use the wholesalers distribution centers. Wholesalers act as warehousers, since most Japanese retailers have little space for keeping stock. As a result, wholesalers deliver their products to the retailers fast, frequently, and in small quantities. Wholesalers and manufacturers often take over the

risk from the retailer by giving credit on stocks, by allowing the return of unsold goods, and by requiring resale price maintenance. In return, the retailer provides valuable information on the sales of his products to the wholesaler and the manufacturer. Important information about the products, such as defects and tastes, reaches the Japanese manufacturer quickly through the close relationships of the retailer with his clients and with the wholesaler and the manufacturer. The wholesaler is often required to provide substantial sales support for the retailers. Substantial numbers of personnel are routinely sent to retailers to support their product sales; they often work in the retail stores, wearing store uniforms, but they are paid for by the wholesaler. In some department store areas, the wholesaler-supplied personnel vastly outnumber the store-employed personnel. Food departments in Japanese supermarkets carry relatively few processed foods. Extensive use is made of tenants who handle the more specialized food items. The rationale is that it is in the interest of the wholesaler or the manufacturer to have its personnel selling the products, since they are better able to explain the products to customers than retailer-employed personnel. In one sense, the department stores only provide a location and clerks (some of whom are also provided by wholesalers and manufacturers) while the wholesalers really sell the products. Product-specific sales training and extensive after-sales service are also provided. Retailers expect their wholesalers to be actively involved in business development and exert pressure on the manufacturers to remain competitive in their product offerings. These close business relationships make it easier for retailers and distributors to suggest product modifications and improvements. Suppliers engineers and designers tend to have very good working relationships with the manufacturers engineers. This leads to quicker product innovation. This system also encourages the sharing of information on product trends, innovations, competition, and market opportunities and serves as a source of objective information and valuable insights. The business loyalty demonstrated helps reduce uncertainty and tension, while contributing to a more cooperative business relationship and making each work harder for the other. The big dealer or retailer expects to be called on at least once a day by the wholesaler or distributor. Important customers expect to be able to place a call and have a representative on hand in half an hour. Delivery service in Japan is considered in terms of retailers and wholesalers expectations more than from a cost or efficiency perspective. Another distinctive feature of the Japanese wholesaling business is the close and frequent interaction which exist among wholesalers. It is common business practice for the wholesalers in Japan to resell products to other wholesalers. Japanese wholesalers sell their goods to other wholesalers twice as frequently as do their Western counterparts. On average, they sell 38 percent of their goods to other wholesalers, 28 percent to industrial users, and only 22 percent to retailers. Japan has over thirty times the number of food wholesalers as does the United States. Wholesalers are oriented mainly, although not exclusively, along functional, geographic, and product dimensions. Functional wholesalers take on very specific roles as export or import wholesalers or as primary, secondary, or even tertiary wholesalers. Geographic orientation expresses itself by a national or regional (provincial, as Japan has provinces instead of states as is found in the United States) focus. Product orientation is based on regional comparative advantage due to manufacturing concentration on particular product categories. The exclusive distributor is also a fixture in Japan. Sole import distributors have a tendency to keep prices high and restrict distributive channels in order to maintain their brand images. A large general wholesaler of consumer goods has the typical showroom with the merchandise very well displayed. However, all the merchandise is that of a single manufacturer. The wholesalers ties to the manufacturer may go as far as equity involvement and financing. In this case, the distribution network is an extension of the company itself. Japanese distributors tend to keep their clients away from their customers. They tend to hesitate investing in inventory and service. Dealers receive other incentives or aids from manufacturers or upper-level wholesalers. In order to gain their cooperation, free trips, visits to resort areas, and tickets to theater and sporting events are routinely provided. This practice helps create a group feeling and closeness to business associates. Such offerings are viewed as appropriate means of showing appreciation, maintaining goodwill, assuring good human relations, and treating customers as they should be treated. These multiple layers of wholesalers who have developed close personal relationships with other wholesalers, manufacturers, importers, and retailers, serve as informal, non-tariff barriers to foreign companies, and by doing so keeping outside companies out of the Japanese market. Many retailers are unwilling to disrupt their longstanding personal relationships with Japanese suppliers even when foreign companies offer superior product or price differentials. They (accurately) fear lack of commitment, breakdowns in communications, and reprisals by long-term partners if they are found handling foreign competitive products. Lecture #26: Contracts, counter trade, and costs CONTRACTS AND AGREEMENTS The Japanese are typically indifferent to print and legal terms of contracts. Westerners assume that the less ambiguous the terms are and the more literally they are enforced, the fewer will be the attempts by self-interested parties to bend the interpretation in their own favour. The Japanese believe the more ambiguous the terms are and the more liberally they are interpreted, the easier it becomes for ongoing relationships to develop and mature, even in changed circumstances. They believe that contracts must change according to the situation. Whole relationships develop and mature from the particular and changing needs of partners. Once an agreement is finalized, the Japanese will honour it down to the smallest detail and expect the other side to do likewise; a written contract becomes superfluous. Their word is their bond. Why should it become necessary to iron out all the details? Over 50 percent of all large wholesalers in Japan operate without a contract. The Japanese philosophy is that long-term relationships do not need detailed legalistic contracts. The Japanese believe that only a fool believes he can clearly see what tomorrow

will bring and that the only permanency for the future is the relationship. In Japan, the underlying intent of a regulation or an agreement is considered to be the real contract, and that intent must be implemented in keeping with the changing situation; little weight is given to actual written word, and provisions can be disregarded when situations change and actual problems arise. If heavy snow falls in Tokyo, so that cinema audiences shrink, the film distributors offer generous rebates to movie houses. For the Japanese, many of the particular wants of both parties need to be accommodated through a whole relationship, preferably one that is flexible, loose, and friendly. The actual points matter far less than building the relationships. The greater the mutuality and the trust are, the more it will be possible to include the widest range of particulars sought by either party. Maintain the relationship at all costs, but be constructively critical within it. CONTRACTS The Japanese dislike formal Western-style contracts. They tend to prefer brief written agreements that set forth basic principles. Japanese written contracts tend to be very short, two or three pages; they are purposefully loosely written and primarily contain comments on principles of the relationship. The gentlemens agreement (a loosely worded statement expressing the mutual cooperation and trust that have developed between the negotiating parties; these agreements allow a great deal of flexibility in the solution of unforeseen problems) often has more force than a legal contract, since it involves a sense of honour and obligation. If something goes wrong after signing the contract, the Japanese attempt to resolve it by mutual agreement. If disputes arise, the common interests of both parties and their relative strengths are factors that generally determine the outcome. Instead of submitting disputes to a third party, such as a court, the Japanese prefer to settle their differences through discussions with people who are familiar with the respective problems and situations. To submit an issue to court would bring embarrassment to many Japanese. The Japanese do not view the signing of a contract as the end of negotiations. The Japanese view a contract as a piece of paper, and people are human beings. Japanese firms want long-term business relationships based on kan, emotional atonement. The Japanese have a stricter social code concerning obligation. The penalty for failure to discharge an obligation is dishonour of oneself, ones name, and ones family. Another reason for the dislike of contracts is the Japanese feeling of extreme uncertainty about the future. The Japanese prefer that the contractual obligations be left as vague as possible in order to provide for a maximum of flexibility. The traditional Japanese view is that a contract is secondary in a business transaction, which should be premised on an ongoing, harmonious relationship between two parties who are committed to the pursuit of similar objectives; relationships, not contracts, are negotiated. Japanese contracts are always considered open for renegotiation. To the Japanese, a negotiated agreement is seen as an indication of the direction to be taken, while adjustments and modifications can be made as conditions and circumstances warrant it. (If contractual language is necessary, a phrase such as the following is often used: All items not found in this contract will be deliberated upon in a spirit of honesty and trust.) An agreement is seen only as the beginning of an adaptive process rather than the end. The American expectation of contractual finality is foreign to the Japanese way of thinking. Japanese negotiators do not mind suggesting major changes even after a contract is signed. The Japanese do not believe that a contract alone can ensure the success of a venture. According to Japanese thought, a truly wise person would not absolutely commit himself or herself, since human interactions are so indeterminate. The flexibility given means the Japanese will not lose face if future circumstances should change. The fundamental Japanese approach to contracts is to emphasize the relationship being created. The contract is only a tangible acknowledgment of the existence of such a relationship, not a precise instrument that establishes and defines the relationship. The Japanese feel that agreements require seasoning and maturity; as people work together, understandings become clearer and increasingly advantageous to both partners. As the relationship and conditions change, the assumption is that performance expectations ought to change. Flexibility, adjustment, and pragmatism, then, dominate the execution of long-term contracts. The Japanese prefer conciliation and mediation to litigation in business matters for several reasons: reduced costs, the clogged court system (some cases drag on for as long as ten years before a final decision is reached), and the Japanese emphasis on harmony or reconciliation (chotei). The pre-war Japanese constitution stated that Japan must strive to resolve interpersonal cases by harmony and compromise. Arbitration is viewed as a negative action, which damages the business relationship. Legal approaches and confrontation are rarely used. Those approaches would destroy the harmony and trust required for continued business dealing, and they are almost impossible to regain once they are lost. The Japanese wish to maintain the relationship for mutual benefit rather than seeking a one-time gain. COUNTERTRADE Because Japan is an island nation poor in natural resources, trading is the heart of Japans economic life. Japan led the way in the world in buy-back deals in the late 1960s and early 1970s. Sogo shosha units specializing in counter trade, such at Mitsubishi, Maruabeni, and Nissho-Iwai, set up permanent offices in Communist European capitals. Counter trade plays a key role in their trading ventures. It provides a growing quantity of raw materials from resourcerich Southeast Asian countries, while supplying the same countries markets with Japanese finished goods. Japan has also used counter trade to expand trade with the former Soviet Union and now Russia. In 1982, Russia bought construction machinery from Komatsu and Mitsubishi and, in return, gave Siberian timber. Marubeni provided $35 million to a Peruvian company in 1993 to develop a copper mine, in return receiving 70 percent of the mines annual output. Itoman and Company built an apparel factory in Shanghai in 1978 and supplied it with 100 sewing machines and technical help; in return, it received pajamas and blouses for export to Japan (Wills, Jacobs, and Palia, 1986). Likewise, Japan put up $800 million for the construction of an aluminum plant in Brazil, with the proceeds to be paid in annual shipments of aluminum to Japan. TARGET COST Japans system of forecasting, monitoring, and interpreting costs is fundamentally different from that of the West. This system guides and motivates planners to design products at the lowest possible cost and gives them considerable freedom in introducing new products and getting them to market quickly. The critical feature of the Japanese system is its focus on getting costs out of the product during the planning and design stage. The Japanese engineer tends to

consider the impact of his design on costs or manufacturability; the Americans want to know whether it can be done from an engineering point of view. In Japan, the price at which the product can succeed in the marketplace is determined first, and then the costs required to make a necessary profit are targeted and allocatedthus, the target cost. Instead of designing a product and then determining its costs, target costs are based on what the marketplace will bear, and these are allocated to each component of the product and to suppliers responsible for these components. The team in charge of bringing a new product idea to market determines the price at which the product is most likely to appeal to potential buyers and the price the market is most likely to accept. After deducting the desired profit margin from the forecasted sales price, the planners develop estimates for each of the elements that make up a products costs: design and engineering, manufacturing, sales, and marketing. Each of these is further subdivided to identify and estimate the cost of each component that goes into the finished product. Every part of the function is treated as a component, and each is assigned a target cost. Then intensive negotiating processes begin among the company, its internal departments, and its outside suppliers. Compromises and trade-offs by product designers, process engineers, and marketing specialists produce a projected cost that is within close range of the original target. From this crucial judgment, all else follows. That is the point at which virtually all subsequent costs are determined, from manufacturing to what customers will have to spend on maintenance. In other words, companies work backward to make sure they can achieve the desired cost. The Japanese also use target costing to make existing products less expensive by what is known as the teardown analysis. Japanese companies often establish target costs for their components based on comparative studies of the competitors products. Engineers methodically take apart competitor products, applying benchmarking or reverse engineering, and analysing materials, techniques, and features. Then they determine the competing products probable cost and set this as their own target cost. Japanese engineers set target costs in expectation of what competitors costs may become in the future. By tearing down competitors products, they analyse the materials, process, and production and hence the products probable costs. This then becomes the target cost for the entire company. The Japanese company then usually adopts the lowest cost of all its competitors as the target for its own similar product. The Japanese do it routinely, as an integrated part of target costing programs. When they discover that a competitor has cut the cost of a component, they rush to match or undercut it. By so doing, they set their sights on tomorrows marketplace, not todays. The Japanese know a competitor is going to come along and bring out a better product at a lower price, so they constantly strive to be the one to do it instead of their competition. The Japanese company then directs its designers and engineers to meet that target. Everyone from designers to engineers to purchasing agents must struggle to meet the cost and make the necessary trade-offs to meet the cost chosen. Then manufacturing, once the product is in production, works on continuous cost reduction. This system encourages managers to worry more about the role a product could play in gaining market share than about its costs. This system is almost entirely the reverse of what is typical in Western companies. In Japan, compromises and tradeoffs ensue until target costs are met. The focus then is to reduce that cost with each new product generation. Long-term supplier interdependence means companies work with their suppliers to achieve target costs and reductions over time and are willing to support them with engineering help and process innovations to do so. Because of the keiretsu relationships between manufacturers and contractors, pressure can be brought to bear on the subcontractors to meet the cost target. Tataku (to beat down) is the Japanese word used to describe the tactic used to bludgeon suppliers into meeting a difficult target cost.