In the post-financial crisis world economic landscape, people are increasingly turning to emerging markets as the new engine of global growth. But are Japanese companies ready to compete in the changing environment?
Companies from industrialized nations will need to shift their research and development operations to those markets to better understand the different needs of local consumers, and Japanese firms appear to be lagging behind their leading competitors in that effort, experts from U.S. business schools said at a recent symposium in Tokyo.
Five scholars from American business schools took part in the May 29 symposium organized by the Keizai Koho Center under the theme, “Global economic crisis and challenges for Japanese corporations.” Hideaki Miyajima, a professor at Waseda University’s Graduate School of Commerce, served as moderator.
Growth forecasts for the coming decades clearly show that emerging markets, notably China and India, will be where the demand for new products and services is going to be, said Gautam Ahuja, a professor of business administration at University of Michigan Business School.
With their labor cost advantage, these countries have emerged as new hubs of global manufacturing and services. With the lower end of global manufacturing and services fast moving to the emerging markets, a typical answer from businesses in developed economies is that they will move up the food chain — innovate and develop new technologies, he said.
“So if we accept this particular Darwinian logic of globalization, it would appear that there is a new division of labor. Japan, Europe and the United States serve as the innovative engine of the world economy while the emerging markets provide significantly cheaper, labor-based manufacturing and services,” Ahuja said.
However, he noted, companies based in the emerging markets are “not going to respect” such a division of labor but are trying to take advantage of their proximity to consumers in those markets to “create innovations that are meaningful” to their customers.
To cope with the new landscape of global demand, companies from developed countries need to compete among themselves to develop higher-value technologies and products, and also ensure that technologies “lead to products and services that the buyers in emerging markets find valuable,” Ahuja said. But added to this fairly difficult task is that companies from the emerging markets will be trying to innovate and develop technologies for new products and services, he added.
“The question is,” he said, “how well prepared are Japanese firms for this particular battle.”
Successful innovation, Ahuja pointed out, is not about creating new products, but creating new products and services that users demand and buy. And that comes not just from the creation of wonderful technology but from a match between user needs and technologies, he said.
To understand what consumers need and want, “the innovator has to put himself in the context of the buyer, and understand the buyer’s life and the buyer’s needs from the buyer’s perspective. You have to step into the buyer’s shoes to understand what their world is about and what needs need to be satisfied,” he said.
And this implies that firms that intend to become successful innovators in a globalizing world need to globalize their innovation efforts, and spread out their R & D activities across different countries, rather than concentrating them on one or two countries, Ahuja told the audience.
U.S. patent data show that Japanese companies on an average created a mere 2.5 percent of their inventions outside of Japan in 2003 — an indication that a major portion of R & D activities by Japanese firms is done at home, he noted. While the number has since increased, Japan lags far behind Germany, the U.S. and Taiwan in this respect, he said.
Furthermore, successful innovation only takes place when consumers can and are willing to pay for your products, Ahuja said. “Innovation efforts always have to recognize a balance between product quality and features, and the cost associated with creating these features and quality,” and innovation for a certain market is not always translatable to another, he added.
Electronics is one of the strong competitive advantages of many Japanese firms and electronics makers here often tout the latest sophisticated technologies in their products that, for example, reduce power consumption with a sensor that sees whether there is someone in the room or in front of the equipment, Ahuja said.
But such technologies may not mean much to consumers in India, where people are more worried about how to keep their refrigerators running when electricity is available for only certain hours of the day, he added.
“If you have looked at problems in a segment where people have more income, those problems do not necessarily translate to solutions at the other end of the spectrum,” he said. Targeting a different market segment requires different materials, marketing mixes, production processes, product features and distribution networks.
One of the implications of the high growth rates in emerging markets, Ahuja noted, is that such growth comes from populations “that have high aspirations but only limited ability and willingness to pay.” And one of the recent examples of successful innovation for these market segments is the Nano car developed by Tata Motors of India, he said.
“If there is a world financial crisis and recession, somebody has forgotten to tell buyers of the Tata Nano,” Ahuja said. The 623 cc city car, with a price tag of about $2,000, received more than 200,000 orders before the first car was delivered, and its Web site has had an average of 1 million hits a day, he pointed out.
Ahuja noted that changes in growth patterns and the emergence of the developing economies have triggered a “reorganization of the global division of labor.”
“To succeed in the most likely role in this new division of labor, firms from developed countries may need to relocate some part of their R & D efforts to the emerging markets to understand the buyers’ problems and their life context. Japanese firms are behind some of their leading competitors in this process, though they are moving toward globalizing their R & D efforts,” he said. Consumer willingness to pay and preferences for product features in emerging markets “are likely to be very different from those conventionally targeted by Japanese companies, requiring a key change in the modes of operating and ways of thinking about technology-based competition,” he added.
Companies targeting emerging markets should also be aware that consumer needs vary widely even within those countries, said Song Jingsheng, a professor of global operation management at Duke University Fuqua School of Business.
In China, economic development in major urban areas like Beijing, Shanghai and Guangzhou has reached such an advanced stage that many white-collar workers can afford products designed for consumers in industrialized nations. However, many people in China’s vast rural areas don’t have refrigerators and dishwashers, and their needs for household electronics can be entirely different, Song noted.
Song also pointed out that major Japanese automakers running plants in China are mostly clustered in the Guangdong area — along with their selected parts suppliers.
This may come from their pursuit of product quality, but it may also have something to do with the homogeneous makeup of the Japanese management team in their Chinese operations, she said, noting that promoting Chinese managers in their local operation may open up channels of communication with Chinese employees and other suppliers.
Being in isolated clusters may also prevent firms from achieving breakthrough innovations that often result from the unusual combination of knowledge from different segments of the economy, said Melissa Schilling, an associate professor of management at New York University Stern School of Business.
Based on her research on the history of technological collaborations among firms, Schilling said, “Combining knowledge that is very heterogeneous — such as between electronics and chemical/medical firms — is harder and is more likely to fail. On the other hand, there is significant research that says this is the pathway to breakthrough innovation.”
“Radical innovation is more likely to come from unusual information combinations,” and if there is no interaction between unlikely parties such as between electronics and chemical companies, “we might see less radical innovation,” she said. Companies that serve as gateways between these parties “may play a disproportionate role in the likelihood of such radical innovation taking place,” she added.
Technological collaboration is a “very important engine of innovation and economic growth,” and as firms use these alliances to pool resources, and exchange information and share risk, they are simultaneously weaving a larger network that connects them, Schilling told the audience.
“This network is a medium that transmits information and other resources between the connected firms,” and research shows that this larger network — its structure, size, density and each firm’s position — influences the chances of innovation, she said.
Japan’s traditional “keiretsu” corporate groupings in this sense may have mixed impacts on innovation by Japanese firms, Schilling noted.
“In some ways a keiretsu looks a lot like an alliance network. You have relationships between firms and presumably within a keiretsu you would have a lot of information liquidity, meaning that information could travel between the partners quite readily and quickly, and with a lot of understanding because any particular organization in the keiretsu has multiple points of contact with other organizations in the keiretsu,” she said. “This makes it very likely for them to receive information, and makes it easier for them to understand, interpret, assimilate and utilize the information. So on the whole that’s a good thing.”
The downside, Schilling noted, is that the keiretsu creates isolated clusters in the network.
“There could be a disincentive to integration across keiretsu and one thing we know (from research) is that if you have a cluster of firms that repeatedly engages only with each other, innovation will decline because the information within that cluster will become homogeneous and redundant. There is not enough novelty to stimulate new ideas and new innovations,” she said.
In an alliance network, “you want to have a diverse range of partners that you get information from, (and) you would want to have connections across the keiretsu . . . So from that perspective, the keiretsu structure, where you have groups of firms that primarily focus inward, would be suboptimal,” Schilling said.