A move towards systemic rationalization

Confronted with drastic changes in technology as well as in its major markets, the

Japanese electronics industry is undergoing a period of turmoil. Two fundamental

changes in technology are upsetting prevailing market structures. First,

digitalization implies that performance features of consumer devices are defined

by integrated circuits, with the result that market leadership positions based on

analog technology can no longer be taken for granted. Second, the spread of

“multimedia” applications implies a convergence of computing, communications,

and consumer-related technologies. Computer companies have entered

competition for consumer mass markets, and software and entertainment

programming capabilities have grown in significance.

Japan’s big integrated electronics makers have been able to strengthen their

position in the consumer sector. For example, Toshiba recently succeeded in

establishing its DVD (digital video disk) format as the de facto industry standard for

the next generation of recording disks, and traditional leaders in the consumer

electronics industry, especially the Matsushita group, Sony, and Sanyo, have

transformed themselves into integrated electronics makers by strengthening their

position in components, computers and telecommunications. Particularly

noteworthy in this context are the aggressive strategies pursued by both

Matsushita and Sony to become leaders in display technology.

Pressures have been particularly intense for smaller companies with a much

more limited product focus. The typical example is Aiwa, which has radically

reduced its product mix and which now produces 87 percent of its overall

production value abroad, mostly in East Asia. This extreme reliance on overseas

production has not guaranteed success. Aiwa failed to complement overseas production with product upgrading and differentiation; as a result, the benefits of

overseas production have been wiped out by increased competition from lowcost

competitors, especially in Korea and China (FT, 15 May 1996).

Although experimentation and “strategic drift” continue to prevail to some

extent, most firms appear to be committed to moving toward what I will call

“systemic rationalization”—the attempt to move beyond partial rationalization of

individual business functions (such as factory automation or JIT procurement

systems) to generate closer, faster, and more cost-effective interactions between all

stages of the value-chain across all production locations.

First, Japanese electronics firms are implementing for the first time formal

financial control systems; performance is now measured for every plant and every

business unit. Tighter financial control is expected to slim down “fat” product

portfolios and reduce excessive investment outlays. With stringent financial

control systems in place, parent companies are now granting greater local decision

autonomy, which, sooner or later, will erode the centralized governance structure

that has characterized Japanese IPNs.

Second, Japanese firms are introducing a strategy of procurement rationalization

and internationalization to reduce dependence on high-cost domestic supply

sources and to generate larger economies of scale. Rationalization means paring

down a company’s supply base. Internationalization means that a firm can choose

the best suppliers in the world, in terms of cost, quality and delivery performance,

no matter where their operations are located. Rationalization and

internationalization together mean that the size of each contract on average is

likely to increase. As a result, the client firm can request that each supplier offers

more favorable unit prices and delivery schedules. If the contract is big enough,

the client firm may even be able to ask the supplier to set up shop at a particular

location.

Firms must make important changes if they wish to reap the potentially huge

scale economies of international procurement. For example, procurement

decisions for low-volume, low-cost commodities (especially those with high

transportation costs) can be left to regional headquarters or even to individual

affiliates. Within the firm, procurement decisions need to be based on close and

continuous interaction among purchasing, engineering, finance, and quality

assurance. Improved inter-firm networking and administration are thus

increasingly crucial to the effective implementation of inter-firm networks.

Third, Japanese electronics firms are experimenting with new approaches to

innovation management, which, again, may have far-reaching implications for the

organization of their Asian production networks. Japanese firms are well known

for their capacity to reduce the development cycle for new products and thus to

accelerate speed-to-market for products that remain within a given technology

paradigm.25 Continuous refinement of product design and process engineering

have been hallmarks of the Japanese approach to innovation management.

However, recent research has highlighted that international innovation

management strategies of Japanese electronics firms lack a clear focus and have

been plagued by costly trial and error methods.26 Compared with their American

and European counterparts, Japanese firms are still at a relatively early stage of

R&D internationalization, and so far have very limited experience in organizing

international R&D networks. Moreover, in their attempts to internationalize

R&D, Japanese firms face even greater cross-cultural communication problems

than for manufacturing, and have failed to integrate ideas and concepts developed

abroad into the firm’s domestic R&D agenda.27 Japanese firms are finding it more

difficult than their American and European counterparts to recruit first-class non-

Japanese researchers, remain reluctant to localize the management of their

overseas R&D activities, and thus have failed to fully tap into local and regional

science and technology communities.