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 / Spring 2004 / Issue 34(originally published by Booz & Company)


Japan's Coming Competitive Renaissance

Guided by the ancient philosophy of bushido, a new generation of companies is set to emerge on the global scene.

Illustration by Christoph Niemann
For nearly a decade, the industrialized world’s attention has focused on the ailments of its second largest economy: Japan. Huge government debt, a sliding yen, a floundering stock market, a troubled banking system, and price deflation unheard of in a major industrialized country since the 1930s have combined to depress an economy and humble a business system that were, only 20 years ago, the envy of the world.

The Japanese system had always had its critics, of course; in their 2000 book Can Japan Compete?, Michael E. Porter, Hirotaka Takeuchi, and Mariko Sakakibara argued that the Japanese economy is made up of two distinct parts, highly productive export industries and an uncompetitive domestic sector. Yet, with performance slipping even in the robust areas during the last decade, many executives, economists, and strategists began to believe that the Japanese were no longer a threat in the global marketplace. The IMD World Competitiveness Yearbook 2003 even ranked Japan 11th in competitiveness, a remarkable decline from its top ranking a decade earlier, and below all other large industrialized economies, including the United States, Canada, and the United Kingdom.

Has Japan really lost its competitive edge?

No. The Japanese have long shown an innate ability to reinvent themselves, in ways that often embrace painful changes. We believe there is compelling evidence that they are in the process of doing that now, leveraging many of the nation’s existing skills and advantages to enable their companies to take on leading roles in the New Economy emerging from the tangle of postindustrialization. While investors and competitors remain riveted by the ongoing travails of such internationally recognized corporate brands as Sony and Daiwa, other large Japanese companies have managed to keep or regain their global stature. Japan is also witnessing the rise of a breed of newer innovators, companies that have bucked the downturn to establish leading positions in their industries. With healthy balance sheets, focused strategies, creativity, speed, and flexibility on their side, these companies — they include the Kao Corporation, Nidec, Hoya, Bandai, and NTT DoCoMo — are spearheading Japan’s new growth and global outreach.

Contrary to the argument that the Japanese have been left far behind in the Internet revolution, these innovative companies are, to a great extent, making use of rapid advances in network, digital, and information technologies. They are building new business models and organizational forms for the 21st century, laying a competitive foundation for the Japanese economy to reassert its former dominance.

In particular, three clusters of Japanese companies — the large multinational kaisha, the keiretsu alliances, and the newer net-batsu — are starting to leverage their strengths and core capabilities to outmaneuver Western competitors and show how certain age-old Japanese practices are readily adaptable to the New Economy and still very relevant to business. (See “Three Clusters for the New Economy," at the end of this article.)

Beneath the Bubble
History readily proves the resilience of the Japanese people. Occupied by the United States from 1945 to 1952, Japan emerged from the devastation of World War II to grow its economy eight times in real terms over the next 18 years. By the end of the 1960s, Japan’s gross national product was the second largest among industrial nations in the free world, after that of the United States. After a brief stall during the energy crises of the early 1970s, Japan spent a decade leading the world in competitiveness, exceeding by far the U.S. and Europe.

By the mid-1980s, however, the export-led Japanese economic juggernaut collided with a U.S. economy overwhelmed by stagnant growth, inflationary pressures, and high interest rates. With protectionist pressure mounting, the Reagan administration engineered an accord among the United States, the United Kingdom, France, West Germany, and Japan to devalue the dollar. To cushion its own economy from the rising yen, the Japanese government adopted an “easy” monetary policy to help companies continue to export. Prices of goods, services, stocks, and property shot up. Japanese speculation was rife, further driving up the value of stocks and property. The Japanese then went on a spending spree in the United States, Western Europe, and Asia, investing in real estate and businesses.

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  1. Angela A. Andal-Ancion, Phillip A. Cartwright, and George S. Yip, “The Digital Transformation of Traditional Businesses,” Sloan Management Review, Summer 2003
  2. Yamada Atsushi, “Japan’s Economic Crossroads,” Japan Quarterly, October-December 2001
  3. Michael E. Porter and Hirotaka Takeuchi, “Fixing What Really Ails Japan,” Foreign Affairs, May-June 1999
  4. Ben M. Bensaou and Michael Earl, “Information Technology in Japan: Are There Lessons for the West?” in Information Technology and Industrial Competitiveness: How IT Shapes Competition, by Chris F. Kemerer, ed. (Kluwer Academic Publishers, 1998)
  5. Philip Evans and Thomas S. Wurster, Blown to Bits: How the New Economics of Information Transforms Strategy (Harvard Business School Press, 2000)
  6. Larry Kahaner, Competitive Intelligence: How to Gather, Analyze, and Use Information to Move Your Business to the Top (Touchstone, 1998)
  7. Miyamoto Musashi, The Book of Five Rings (Bantam Books, 1992)
  8. Kenichi Ohmae, The Invisible Continent: Four Strategic Imperatives of the New Economy (Nicholas Brealey Publishing, 2000)
  9. Michael E. Porter, Hirotaka Takeuchi, and Mariko Sakakibara, Can Japan Compete? (Basic Books, 2000)
  10. Ezra F. Vogel, Is Japan Still Number One? (Pelanduk Publications, 2000)
  11. The Japan External Trade Organization: Click here.
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