Four Surprising Facts

Transcription

1 Choose and Focus: Recent Transformations in Japanese Business Strategies Ulrike Schaede School of International Relations and Pacific Studies University of California, San Diego Stanford University STAJE October 17, 2008 Four Surprising Facts! In August 2008, Japan marked 78 months of economic growth.! In March 2008, Japan s s current account balance surplus increased for the 6 th straight year. It reached its highest level since 1985 ( 24.6( trillion).! For FY 2007, Japanese listed firms posted record combined pretax profits for the 6 th year in a row.! Leaders behind this growth include companies such as JSR, Nitto Denko, Teijin, Softbank, Astellas. 2 1

2 What We Know about Japanese Business! Business groups ( (keiretsu) Horizontal (inter-market); vertical (subcontractors)! Main bank system Regulated interest rates; loans cheaper Informal bailouts, few bankruptcies! Internal processes of corporate governance Cross-shareholdings shareholdings! Subcontracting hierarchies (shitauke)! Lifetime employment Seniority wages and promotion! Restricted distribution system! Industrial policy Administrative guidance/extensive intervention! Difficult entry for (foreign) competitors The strategic logic underlying these has changed. 3 The Challenge is! People in the U.S. have not looked at Japan since the late 1980s/early 1990s.! Business interest has shifted to China.! The new Japanese strength is in intermediate products and components, not in end products.! There is limited awareness of the New Japan and its strategic repositioning. 4 2

3 : Japan s Strategic Inflection Point! Banking crisis; recession of the 1990s! Globalization ( hollowing( out ; ; imports reach Japanese markets)! Political entrepreneurship ( Leave( it to the Market )! Social distress (crime, suicides, homelessness) = In 1998, Japan reached a tipping point.! Irreversible change in laws, processes of regulation, and markets ! New strategic context for Japanese firms! New industrial architecture 5 Strategic Drivers in the Postwar Period (1950s-1980s) 1980s)! Bank strategies: volume Regulated interest rates Risk exposure! diversification! Company strategies: size Access to policies, quotas, talent, loans: sales Large firms DER: over 600! stability! business groups! insurance through relationships Lifetime employment! diversification! exit difficult! promotion of special talent under seniority pay 6 3

4 40 Years of Diversification! Companies: Market share in many product markets Banks wanted to see sales revenues. Industry rankings based on sales:! Access to talent in hiring.! Access to favorable industrial policies (quotas).! Access to bank loans.! Shareholders: stability is critical Any sale is a good sale. Any investment (growth) is a good investment.! Stock prices reflected expectation of market share. Lenient accounting and disclosure rules.! No consolidated accounting Subsidiaries were a good way to hide things. 7 Diversification vs. Unbundling! Diversification Reduces risk of corporate failure Increases profits if related Decreases profits if unrelated! Optimal point differs by company.! In Japan, coupled c with sales priority. " decline in performance over time! Bubble period excesses (exuberant diversification)! 1990s recession: need to restructure Laws that allow spinoffs, etc. performance x none related unrelated diversification 8 4

5 TSE Shareholder Structure Large Banks Trust Banks Insurance& Inv. Banks Corporations Foreigners Individuals 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100% Source: TSE, #$19%&'()*+,-./ Strategic Drivers in the New Japan! Compete for investors through higher ROI cost of financing determined by credit rating, ROE threat of hostile takeovers! Compete through high margins no longer an advantage in mass production of standard goods no longer also-runs in many industries! Compete through technological leadership focused R&D on clearly defined areas of excellence new system of innovation! Compete through efficiency and getting things done new work content, performance pay, a market for talent! Compete through lower costs global sourcing hollowing out and weeding out Old Japan suppliers no longer insurance through relational pricing 10 5

6 Refocusing: From unwieldy goliaths to nimble competitors! Choose and Focus (6789: 6789:) Exit: : spin-offs, M&As, MBOs (focus on core business) Reorganization: company system,, holding company structure (implement new goals through incentives, promotions, accountability) Consolidation: : purchase competitors (choose core businesses and dominate in those)! From sales focus to profitability focus From stability to winning 11 Japan s s Restructuring Wave: Choose and Focus of Nikkei 500 Firms, Criteria: 1) Exit: sale/liquidation of a business unit 2) Reorganization: holding company, with SBUs spun off into independent entities 3) Consolidation: acquisition of a company in the same industry 2 actions 27% 3 actions 5% more actions 2% 1 action 41% no action 25% divest consolidate reorganize Findings: 1) 75% of Japan s largest firms have undergone reorganization. 2) 41% (194 firms) have restructured in more than one way. 3) 25% (177 firms) have done nothing. * Without financial institutions, n=

7 Is that a lot or a little?! U.S. wave of refocusing 1980 Conglomeration in the 1960s! Strict antitrust: mostly unrelated Refocusing in the 1980s! Reagan Administration! New insights into finance Companies should be specialized and comparable Investors should engage in their own portfolio diversification! Emergence of buyout funds (KKR, )! At least 20%, but more likely about 50% of U.S. Fortune 500 firms restructured in the 1980s (Markides( 1995)! Compare to Japan: 36% of firms have divested, 75% have restructured.! A truly remarkable episode in global business history. 13 Successful Hostile Takeovers # Others 79 Investment Funds '95 '96 '97 '98 '99 '00 '01 '02 ' Source: Recof data, quoted by ESRI 14 7

8 Hostile Bids! Horie and Livedoor (2005)! August 2006: first intra-industry industry bids Oji vs Hokuetsu, Aoki vs Futata! First use of TOB for industry reorganization change in industry leaders, market shares, competitive jockeying! 2007 Bull-Dog Sauce! 2008 J Power; Aderans! Trendline will slope more steeply Corporate restructuring Increasing performance Industry realignment 15 Can this be good?! Goal behind a takeover is to improve the target s s operations to make it work at full potential.! Best defense against hostile takeovers is to operate at full potential.! Bull-Dog case caused losses in one company, but also a quiet turnaround in a million other mid-sized firms.! For Japan s s economy overall, this is important weeding-out, social costs notwithstanding. 16 8

9 VC Industry Development &#!! &"!! &!!! 3454/ ,-.+//+0,-12, %!! $!! #!! 9,,46/ "!!! &''$ &''( &''% &''' "!!! "!!& "!!" "!!) "!!# "!!* "!!$ 17 Creative Destruction! Old Japan New entry greatly limited Large firms had in-house venture departments Limited labor mobility; limited market for ideas Difficult and expensive to open a company! New Japan Choose and Focus : : Large firms have spun off in-house venture groups New demand: a market for innovation New supply: lots of das-sara, emerging serial entrepreneurs Startup-enabling laws! 1990s: startup promotion initiatives! 2003 One-Yen Company! 2006 Corporation Law 18 9

10 IPO Markets "*! "!! "!# &$' &(* &*% &%% &*! &!! *! %$ :9;<9= &!( &"# &"& BCD>EF; &"&! &''% &''' "!!! "!!& "!!" "!!) "!!# "!!* "!!$ "!!( (1) IPOs are not the best proxy for measuring entrepreneurship. (2) Perhaps more important: 2006 Corporation Law and clarity on M&A. 19 Summary (1)! Old Japan s s political economy set strong incentives for CEOs to pursue market share, and therefore stability and security.! Since 1998, Japan s s business organization has moved towards the market strategic inflection point CEO incentives: risk and return! New Japan competitive repositioning: From sales (at any cost) to profitability From diversification to focus 20 10

11 What does this mean for Japan?! New leadership No longer end products, but components and materials Laggards influence is waning! New firms Mergers between spun-off SBUs: : unencumbered by business groups; focused, driven New entries! Newly empowered actors Consumers Employees (professionals, women) Entrepreneurs! New system of innovation Focus " outsourcing " startups 21 What does this mean for Global Competition?! Japan s s leading firms are re-entering entering world markets as lean, focused, driven competitors.! New competitive dynamics within Asia Asia is more than mass-production Asia is more than China Samsung: China is catching up, while Japan continues to lead. We are sandwiched between them. Japan s s new technological drive is pulling and pushing Asia to new levels (e.g., LCDs in Taiwan).! Relying on what we used to know about Japan is a recipe for failure