In The Business Reinvention of Japan, Ulrike Schaede explores Japan's approach to economic development in the late 20th and early 21st century. Her thesis is that this approach—what she calls an "aggregate niche strategy"—offers important lessons for the West by balancing the pursuit of corporate profit with social stability, economic equality, and social responsibility and sustainability.
It's also a case study in the power of open organization principles, which come to life in Schaede's account. I would argue that Japan's "aggregate niche strategy" was successful, in part, because of them.
In this review, I'll explore Schaede's argument about Japan's economic development in order to demonstrate how open principles played a role in Japan's "reinvention." In this first part, I'll provide some historical, economic context necessary for understanding Schaede's argument. In the next part, I'll explore in more detail the implications of Japan's strategy and the role open principles clearly played in it.
Japan under the radar
The period between the late 1990s and early 2000s was already a difficult one for Japan. And then, on March 11, 2011, the Tohoku Earthquake struck and claimed more than 20,000 lives. All transportation stopped; everything came to a stand still. Those of us working in the center of Tokyo felt it. I slept at my desk that night.
Given the magnitude of that event, one might expect the Japanese economy to crash. But the value of the Japanese Yen increased! Furthermore, although the economy weakened, Schaede points out that the general population experienced no massive financial stress. That was because, to some degree, many businesses depended on products from that rural Tohoku area. It turns out that similar dependence is from many regions throughout Japan. As Schaede notes, "in 2011 in that Tohoku region there were 30 precision machinery and medical device factories, over ten chemical and materials plants, three large auto plants, and more than 20 auto parts suppliers." She also explains that all of Japan produces 44% of the world's automobile microcontrollers, which control almost every component in today's automobiles. Japan also claims 80%-100% market share for some specialty chemicals.
Achieving this kind of market penetration had required Japanese companies to work outside their more conventional, comfortable customer base. Throughout the 1990s, Japanese companies really put open organization principles into full practice, particularly adaptability in a changing market, expanded inclusivity and collaboration in product development globally, and transparency regarding where they could and could not compete globally. Japan has adapted itself from being an exporter of consumer gadgets to a global critical product component supplier.
Achieving this status required several decades of fatiguing, trial-and-error experimentation and research collaboration. But ultimately, it involved Japan's transition to a predominant manufacturer of components (if one were to assign a label to the success, it would probably be "components developed in Japan"). So while Sony was losing market share to Apple, behind the scenes, Japanese component suppliers were increasing production of components for the iPhone.
As most of these products are supplied with confidential non-disclosure agreements, the public doesn't see a label like "Japan Inside," but Schaede mentions that Japan has an estimated 80% of the electronic automobile parts market for seats, windows, and wipers, 40% share of electronic power steering, 66% of carbon fiber, and between 40% and 70% of advanced automotive sensors (depending on the version). In medical equipment and office automation equipment, Japan has a combined share of over 70%. In household appliances, the Japanese component share is around 50% for components and 70% for raw materials. Schaede studied more than 900 global markets, and she had found similar shares in many of them. On a product development level, all this requires close collaboration and transparency with non-traditional partners.
Shifting the supply chain
Beginning in the early 1990s, Japan was forced to shift its supply chain, as it couldn't compete with basic commodity products due to falling transportation costs and lower trade barriers. Up to this point, nearly all product development was internal to companies, subsidiaries, or other affiliates very closely connected in Japan. That strategy was no longer viable.
Firms had to adapt and be more inclusive to partners outside the company—particularly overseas manufacturers with certain development capacities. On the developmental level, they had to be transparent about places where they were both strong and weak. Then, once they'd confirmed their strengths, they had to offer both difficult-to-make and difficult-to-imitate products within targeted supply chains.
Schaede explains that until roughly three decades ago—when the United States, the United Kingdom and the Netherlands dominated foreign direct investments (FDI)—Japan had hardly participated. From that point on, Japan started making very strategic overseas investments in product development operations in Europe and the United States. This has brought Japan's global inclusivity and collaboration to a whole new level. Today, Japanese components are inside cars, TVs, headphones, computers, smartphones, watches, printers, scanners, batteries, and airplanes. Shaede also notes that Japanese companies provide one-third of the world's semiconductor manufacturing equipment and more than half of that industry's most critical raw materials.
A culture shift
To achieve all this, Japanese companies had to change, and many have successfully adapted their business operations built on the manufacturing of critical components, inputs, and materials as well as their strength in systems engineering. While many of these products fit into countless, very small, seemingly unimportant, almost unnoticeable niche markets inside various supply chains, in total they result in sizable business scale.
This kind of repositioning isn't easy for a tightly cultured economy like Japan's, but it was forced on them in the early 2000s when Japanese business laws changed, exposing them to foreign competition. Meanwhile, the globalization of supply chains that had begun in Northeast Asia, particularly between Taiwan, South Korea and later China, continued to annihilate Japan's business model of simply exporting well-made consumer goods. Companies like Apple and Samsung were walking away with Japanese companies' markets. They had to do something different.
Today's ongoing transition to 5G and digital manufacturing, edge computing, machine learning, big data, the arrival of autonomous vehicles, and smart cities all present huge opportunities that play directly to Japan's existing strengths. In these fields, Japanese companies will need to continue the more collaborative style of working that served them so well in previous decades and remain more globally inclusive. These collaborations form the basis of the "aggregate niche strategy" Scahede says was central to Japan's economic reinvention, and which I'm arguing is based on open principles. In the second part of this review, I'll explore that strategy in more detail to better understand the lessons organizations can draw from it today.
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