and MASAAKI KOTABE The Japanese market holds much promise for U.S. firms as new forms of doing business evolve. Mail-order and nonstore retailing are becoming part of the daily consumer landscape. Likely to be even more prominent is the ability to conduct business in “market space” rather than the traditional “marketplace.” Global e-commerce offers alternatives that bypass many traditional entry barriers into Japan. According to a recent international study on Japanese distribution strategy published by the American Marketing Association, U.S. firms are better positioned to take advantage of such opportunities than Japanese members of the distribution system because Japanese industry is lagging in its implementation of information technology.

Why aren’t more U.S. firms in the Japanese market? The answer lies in the numerous Japanese market barriers, key to which are the “keiretsu”: the set of intimate relationships among Japanese suppliers and manufacturers that lock up the Japanese distribution system. These practices, however, are beginning to change in the wake of Japan’s decade-long recession, when many keiretsu companies experienced severe asset deflation and lost control of member companies’ shares.

Many traditional barriers persist, however. Relative to other markets, real-estate prices, labor costs and freight charges remain high. The need also remains to offer channel members high levels of service, substantial financing and frequent rebates.

Other barriers to entry stem from Japanese consumers’ expectations of high quality, an increase in bureaucratic red tape as a result of understaffing in Japanese government offices, the country’s inadequate import infrastructure and delays in processing patent, trademark and other intellectual property rights.

How, then, should U.S. and other foreign firms cope with Japan’s market barriers? The key: better business strategy.

Trade negotiations with the Japanese government may help somewhat, but the use of seasoned business practices is the best way to win market penetration. These include thorough market research, adaptation of products to meet local expectations, emphasis on service, collaborative ventures, a long-term orientation and responsiveness to changes in the market.

Also important is the development of an export-complaint-management system that shows customers how, where and to whom to complain, and encourages them to do so. An ECM system uses complaints to progressively improve products and processes — an approach crucial to success in Japan.

U.S. firms will improve their foothold in the Japanese market mainly through direct investment, rather than exports. Lack of such investment may serve as a self-fulfilling prophecy of lack of success. If being on the spot sends signals of reliability, long-term outlook and corporate commitment on the part of foreign firms, then an export-only strategy may communicate the damaging opposite.

Traditional trade negotiations are losing their relevance when they concentrate on bureaucratic impediments directly controlled by the government. They focus mainly on issues that are of only marginal importance to overall business success in Japan.

A new focus is required on business models beyond trade, such as foreign direct investment, licensing and franchising, and the protection of intellectual property rights. These options require foreign firms to become more Japanese in orientation and location, enabling them to compete the Japanese way.

Conversely, change will not become entrenched in Japan until the country adopts more American practices. Some of these include increased consumer optimism and spending and less obsession with low-interest personal savings. The emergence of a nimble Japanese venture-capital market would also have dramatically positive effects. Mutual adjustment will benefit both the United States and Japan.

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