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Business climate is ever-changing

by Minoru Matsutani

Staff Writer

The business environment surrounding U.S. companies has changed and they are looking for ways to not only survive, but thrive against severe competition.

Four U.S. business school lecturers presented a series of lectures on their research of U.S. businesses at a symposium titled “Corporate Competitiveness from the International Viewpoint,” organized by the Keizai Koho Center in Tokyo on May 30.

Each lecturer delivered their presentation before taking part in a panel discussion.

Productivity and capital allocation

The first speaker, John Asker, an associate professor in the Department of Economics at New York University’s Leonard N. Stern School of Business, spoke from his standpoint as an economist.

In his presentation “Resource (Mis)Allocation and Industrial Competitiveness,” Asker argued productivity is the prime determinant of a firm’s, industry’s or country’s competitiveness.

To increase productivity, companies can exploit technological or managerial innovation or better allocate existing resources. Asker’s presentation focused on the latter.

His research team used data from the U.S. census and the World Bank Enterprise Survey to show the correlation between productivity and sales-to-capital ratio versus better productivity and better sales-to-capital ratio.

Asker’s data showed the extent to which productivity is positively correlated to sales is different from company to company. However, “the important message is that companies should be doing everything they can to maximize productivity,” he said.

Brand imitation

Anocha Aribarg, an associate professor in the Marketing Department of the Stephen M. Ross School of Business at the University of Michigan, delivered a presentation titled “Private Label Imitation of a National Brand: Implications for Consumer Choice and Law.”

“Although companies invest a lot of money in marketing and branding to differentiate themselves from rival products, brand imitation happens in the U.S.,” she said.

For example, Procter & Gamble filed a lawsuit against Kroger, a retail operator, for imitating one of P&G’s popular shampoos. Energy Brands also sued PepsiCo for imitating its main product VitaminWater.

Aribarg stressed that imitation is not counterfeiting as imitated brands look similar, but differentiate themselves enough so as to not confuse consumers.

However, she noted that just because consumers are not confused, it doesn’t mean the imitations are not harming the company being imitated. Not only does it harm them, it also harms non-imitated, competing brands in the same market.

She conducted research on these subjects with other scholars, including Neeraj Arora of the University of Wisconsin-Madison, Ty Henderson of the University of Texas at Austin and Kim Young-ju of Korea University.

“People think that products similar to well-known brands have the same qualities just because they look similar. This is known as categorization theory,” she said.

In summarizing her results, she concluded brand imitation positively affects brand consideration and preference for the imitating label.

For the original and the other, non-imitated, brands, Aribarg noted that brand imitation has a negative impact. However, Aribarg did point out that brand imitation can be a negative when the imitations are of reputable retailers’ products.

For example, Seven & i Holdings Co. has private label items that are sold in 7-Eleven convenience stores and Ito-Yokado department stores and it would harm Seven & i Holdings to imitate other brands.

She finished her presentation examining the legal and managerial implications of her research, and voicing her wish for a legal framework to be established to reduce brand imitation.

“The legal system does not quite know how to quantify” so-called initial interest confusion, she said. But “we can quantify harm in terms of the decline in brand premium the imitated brand can cause and the share loss of the imitated brand.”

Internet and supply chain

The third speaker was Fangruo Chen, MUTB professor of International Business, Decision, Risk and Operations at the Columbia Business School at Columbia University, who discussed how the Internet has changed business.

Supply chain management means managing the flow of materials, information and cash. The Internet has changed the management of these because the Internet not only connects people, but also goods, including everything from refrigerators to shoes, he said.

“People are very excited about radio frequency identification chips (RFIDs). These chips are remotely readable and contain product information that can be affixed to product packaging,” Chen said. “With RFIDs, it’s the Internet of everything.”

With everything potentially connected to the Internet, it can dramatically affect the way business is done.

Manufacturers can now sell not only products but also services so that their customers can maximize the benefit of using their products. For example, Rolls-Royce Motor Cars embeds RFIDs in its airplane engines to provide better service, he said.

The Internet also makes it possible to sell poorly known products because online shops have nearly infinite space for inventory while physical shops have limited space. Search engines also make it easier to find hard-to-find products. Chen showed examples of growth in sales of little-known music, video and books.

The Internet also makes crowdsourcing, the practice of obtaining needed services, ideas or content by soliciting contributions from a large group of people, possible. For example, The Lego Group produces Lego sets based on designs and the demand of customers via the Internet.

Another innovation in production technology benefitting from the Internet is 3-D printing, he said, adding that the global 3-D printing market, which combines the sales of 3-D printers, printer services and materials, is expected to more than quadruple to $16.2 billion in 2018 from $3.8 billion in 2014, he said.

The Internet also enables the management of logistics quality by, for example, using RFID chips to control the temperature for delivery of climate-sensitive products.

Supply chain management, however, is probably the area where the Internet has the biggest impact.

“Demand variability increases as you move up the supply chain from customers toward suppliers and mitigating the effect of demand swing is one of the most important business agendas for manufacturers,” he said. For example, the difference in demand between peak time and downtime is far bigger for factory equipment makers than factory operators, product distributors and retailers, respectively.

The Internet lets companies know real-time inventory so that they can optimize inventory allocation, he said.

The Internet in not only beneficial to businesses as it can also quickly turn consumer complaints into large-scale consumer activism. Also, data leakage can harm customers easily and quickly because of the Internet, he said.

Platform competition

The fourth speaker, John Morgan, a professor at the Haas School of Business and the Department of Economics at the University of California, Berkeley, delivered a presentation titled “Platform Competition.”

Platforms are the structures that dominate the Internet, Morgan explained. For example, Google is the search engine platform as it accounts for 75 percent of Internet search traffic in the U.S. and 80 percent globally, he said.

Back in the 1990s, Microsoft Corp.’s Windows became the operating system platform, with the company achieving dominance through its affordability, he said.

For auctions, eBay, Amazon and Yahoo were competing aggressively, but eBay ended up commanding more than 90 percent of the U.S. market, he said.

For social networking, MySpace and Friendster were early comers, but Facebook is the dominant platform, suggesting that the first mover advantage did not exist in the SNS field, he said.

He then explained why platform competitions end up in monopolies, citing the cost effect, network effect and big data effect, among others.

Simply put, more customers and sales mean less cost per unit, and this is especially so in Internet businesses, he said.

The network effect suggests that the more users, the more convenient it will become. For example, “if there were only two phones in the world, one would tire of talking to the same person all the time,” he said. Therefore, the company that attracts more customers exponentially increases customer satisfaction.

In the same way, a strong company wisely utilizes big data from its large customer base, making it easy to provide good service and attract more customers.

Morgan then revealed the answer to the question of what makes a winner. “Surplus,” he said, meaning the net value a company delivers to its customers.

“Competition among dating sites is a bit different because there are many different tastes in dating and they can’t be similar,” he said. For example, there are dating sites specifically for the Jewish market, which, while very popular among Jews, are not very attractive to non-Jews.

Regarding the video console industry, Morgan also sees no clear dominant player among Sony, Nintendo and Microsoft.

Morgan concluded that, although surplus ultimately matters, different segments have different dominance patterns.

Q&A session

Christina Ahmadjian, a professor at Hitotsubashi University’s Graduate School of Commerce and Management, moderated the Q&A session following the presentations. She began by asking Asker for examples of companies known for their strong capital allocation.

“Mitsubishi Heavy Industries Ltd. is the best I’ve ever seen, in terms of how much resources each division would receive,” Asker said.

“In 1990s, Japan was extremely focused on product quality, but as Japanese companies reached the quality frontier, they should have thought about where to scale down,” he said, suggesting that Mitsubishi Heavy Industries has examined what to focus on across the company.

Asked for examples of companies warranting further study, Asker said Amazon is an excellent example of wisely using big data.

“Merely having a lot of data is not a solution. Without informative data, it’s no good,” he said. “Amazon management understands data and how to use big data intelligently.”

Aribarg also commented on big data, saying the problem of big data is that data may not be clean and thus experiments to verify the data are essential.

Then Ahmadjian asked Morgan how Japanese companies can obtain “surplus,” the key element to becoming a winning platform.

Morgan stressed the point that there is no first mover advantage in the field of Internet businesses. “Remember Japanese companies have been the second or third player in and ended up dominating the market. You can do it,” Morgan told the mostly Japanese audience.

Aribarg then asked audience if branding is big in Japan.

In response, a Canon Inc. employee in the audience said, “Japanese have a tendency to purchase based on quality over price, so brand is very important.”

Morgan asked why Japan lags behind Apple and others in industrial design while it manufactures “gorgeously crafted” Japanese traditional products.

While no clear answers came out, Chen suggested some Japanese companies excel in management.

“I teach operational management at Columbia and I have been talking about process innovation at Toyota, 7-Eleven and other Japanese companies for a long time,” he said.