With the strong yen creating an increasingly competitive environment and the Clinton administration achieving a conspicuous lack of success in trade negotiations, many executives in the United States and Europe have abandoned their search for new opportunities in the Japanese market. Frustration has set in as attempts to become "insiders" have proved futile. Some companies have shifted their attention to emerging markets like China and India. But by ignoring Japan, they are making a big mistake.

Over the past four years, the Japanese market has changed dramatically. The demise of the fast-growing bubble economy and the subsequent strengthening of the yen have established a new climate for domestic and foreign competitors alike as parallel imports, private brands, and generic products claim a growing share of many markets. The rapid rise of the yen against the dollar—¥124 at the end of 1992, ¥100 at the end of 1994, and as low as ¥80 in 1995—suggests that businesses can expect to face intensifying competition.

Long known for their preference for branded products, Japanese consumers are now turning to the expanding array of cheaper goods. A low-cost segment is emerging across consumer and industrial markets. Daiei, Japan’s largest retailer, has cut the price of 20-inch TVs by 46 percent, color photo film by 50 percent, canned beer by 43 percent, and orange juice by 47 percent. Of 300 enterprises in Japan surveyed recently by Asahi Bank, 55 percent say they have been forced to slash their prices.

The challenge of the low-cost segments

The new discount segments are likely to command a substantial share of some markets in the next four to five years. Projections indicate that discounters, most of which sell private brands and parallel imports, will increase their share of the household products market from 37 to 60 percent by 2000, striking a harsh blow to the traditional Mom and Pop stores that have dominated this market for so long. In the pharmaceutical industry, generic drugs will grow from 13 percent of the total drugs market today to 25 percent by 2000.

Companies are having to rethink the most Japanese of Japanese business practices

To compete effectively in these new segments, companies will need to reform their business practices in ways unparalleled since the Second World War. Low-cost segments set demanding performance standards: distribution costs 25 to 40 percent below traditional levels; low-cost, innovative, and aggressive salesforces; and new training, compensation, and management practices that develop the skills companies need to compete in these segments. These requirements are forcing many companies—both domestic and foreign—to overturn cherished beliefs concerning how to hire, train, promote, and manage. Indeed, companies are having to rethink the most Japanese of Japanese business practices: sales, distribution, and human resource management.

Foreign affiliated companies (FACs) have long held that the only path to success in Japan is to become an "insider" by acquiring the attributes that have made the big Japanese companies so successful. Aware that Japanese sales, distribution, and human resource management methods are unique, they have worked hard to establish strong relationships with distributors and have adopted traditional personnel practices such as lifetime employment and promotion according to seniority. Often, FACs have adopted practices that are more Japanese than those employed by the Japanese themselves—even in areas where it was not productive to do so.

No longer constrained by the need to behave like insiders, FACs enjoy a wider choice of strategic options

The recent market changes represent important opportunities for US and European companies competing in Japan. No longer constrained by the need to behave like insiders, they enjoy a wider choice of strategic options. The CEO of one FAC commented, "For years, we were in a joint venture with a Japanese partner that taught us how to do business in Japan in the traditional way. It solved all our problems for us and essentially defined our company’s cultural values here in Japan. Breaking the joint venture relationship pushed us to do many things we had never even considered before."

Sales and channel management

Progressive companies are establishing more efficient sales and channel management practices

A number of progressive companies are taking advantage of the changes in the market in order to establish more efficient sales and channel management practices:

Bypassing existing distribution systems

In order to reduce its costs in response to the threat posed by generics and parallel imports, Monsanto recently took the bold step of bypassing its complex and costly distribution system. Despite operating in the agricultural market—one of the most traditional in Japan—where strong relationships are often the key to success, Monsanto broke its ties with its distributors and linked up with a stronger partner. It reduced its distribution costs significantly and expects to see its market share rocket thanks to the more direct contact it now has with end users.

As the first company in the industry to restructure its distribution system, Monsanto took a huge risk, since it was dependent on distributors for all functions except marketing. To limit this risk, the company rigorously assessed both the consequences of dropping its existing partners and the capabilities of potential new partners. It also made detailed plans showing how it would use outside specialists to replace the functions lost through restructuring.

Merging wholesalers

Yukijirushi, Japan’s largest manufacturer of dairy products, merged five associated wholesalers to cut its distribution expenses in the face of severe cost pressure. With the prices of domestic dairy products three times those of imports, and imports expected to increase in number, the company’s cost structure was no longer sustainable. During the merger, Yukijirushi had to manage the conflict of interest created by the fact that nonexclusive food wholesalers would be delivering competitors’ products, and it spent a long time persuading the wholesalers to merge.

One technique it used to overcome this difficulty was to develop a clear vision for the group, showing that the opportunities generated by the merger would outweigh the risk of carrying rivals’ goods. Thanks to the restructuring, Yukijirushi was able to establish the second-largest food wholesaler in Japan.

Establishing relationships with outside distributors

Kao, Japan’s largest toiletries and household products manufacturer, achieved 15 consecutive years of growth largely on the strength of its web of exclusive sales companies, which collected sales information that helped it develop excellent marketing skills. Despite huge success in traditional markets, Kao was forced to form relationships with outside distributors (including affiliates of 7-Eleven and Daiei) to meet such emerging needs as daily deliveries, joint deliveries to make store operations more efficient, and, of course, lower costs. The retailers that started using their own distribution systems benefited from a 30 percent reduction in distribution costs, which has raised questions about the efficiency of Kao’s own distributors.

Restructuring the salesforce

One major foreign consumer goods company built a successful business in Japan by utilizing traditional sales and distribution channels. Through these channels, it was able to cover the many small neighborhood grocery stores scattered throughout the country. However, convenience stores and large-scale new-format retail stores have now become the fastest-growing outlets, as well as leading the battle to cut grocery and beverage prices. Many of these stores are owned by, or affiliated with, nationwide companies such as Ito-Yokado and Daiei.

In addition to offering prices lower than those of local stores, these national and regional chains have more advanced sales and merchandising strategies. They also tend to be more demanding buyers in terms of price, delivery, and service.

Serving national accounts successfully requires companies to have synchronized annual marketing plans, joint product development, and central warehouse delivery. To meet these requirements, the consumer goods company is setting up a new national accounts sales and marketing company which will have a closer working relationship with national retailers and utilize advanced marketing and account management skills. To achieve lower costs, this company will operate at very low overhead levels relative to sales, utilize different production suppliers, and outsource some distribution.

Human resource management

Companies competing in the new environment, and especially those in low-cost segments, face a fresh set of challenges in hiring, training, promoting, and compensating employees. Many are having to adopt radical new approaches to human resource management:

Recruiting

For many years, leading companies in Japan targeted their recruitment efforts at recent graduates from top-tier universities. After joining the companies, these graduates would undergo extended periods of training. While this system has served traditional markets well, it does not necessarily yield employees with the skills and experience to respond quickly to opportunities in low-cost segments.

One company executive lamented: "It is extremely difficult to retrain experienced traditional salespeople. Many of our salespeople have worked through distributors and have never actually sold anything. Although they are referred to as salespeople, it would be more accurate to call them order-takers or technical or service representatives. It is difficult for these people to succeed in selling to nontraditional segments, and, as a result, we are forced to look outside for salespeople with real selling experience."

Many companies today are considering a much wider range of candidates to serve nonconventional markets

Many companies today—among them such traditional businesses as Kirin Beer—are considering a much wider range of candidates, including women and experienced hires, in the search for the kind of skills they need to serve nonconventional markets.

Compensation and evaluation

Employees in Japan have customarily been remunerated according to seniority. Until they reach the mid-point of their careers, they are underpaid in relation to their contribution; after that, they are systematically overpaid in proportion to the number of years they have served. Young employees supported this system when the economy was thriving, since they could be sure of reaping the rewards of long service eventually. In today’s slow-growth era, however, talented young workers have begun to seek higher salaries and to gain skills that will increase their marketability.

To attract such talent, several Japanese companies in traditional industries such as steel, electronics, and retailing have started to link compensation to performance. Among them is Marubeni, one of Japan’s "big six" general trading companies. It recently abolished the routine annual salary increase for managers (who account for 50 percent of employees), replacing it with raises based on individuals’ performance. In addition, it increased the differential between the annual bonuses of high and low performers to 30 percent. Today, the salary gap between the most and the least effective employees at the age of 55 can be as large as 300 percent.

Training and development

The traditional approach to training is to have employees follow a broad-based career path and rotate between jobs so that they can gain experience in many aspects of a business. In order to develop managers capable of operating in the new low-cost segments, however, many Japanese and foreign companies, including Sumitomo Metal and Toray, have begun to introduce systematic management training courses. Kao has set up various training schools—the Kao Management School, Sales School, and Beauty School—providing intensive programs to help employees rapidly develop the skills to compete in new market segments. In the interests of fostering career development beyond the boundaries of individual divisions, Fuji Photo Film decreed that a bucho (department manager) could rotate staff without having to obtain permission from the personnel department.

Staff reduction

Once not even an option, staff reduction is now a necessity for many companies. Some foreign players have injured their reputation by taking a heavy-handed approach to restructuring. One foreign pharmaceutical company abruptly fired 100 people and abolished employee welfare programs. Its Japanese staff, including senior management, put up strong resistance to the restructuring, and the company received bad publicity that damaged its account relationships.

Japanese companies have begun to take bold steps toward staff reduction, shattering the myth of lifetime employment

This and other examples of failed restructuring attempts are often cited as evidence that restructuring is not possible in Japan. However, foreign companies that have restructured carefully and discreetly have been able to reduce staff by between 20 and 30 percent without incurring the adverse publicity or union and recruiting backlashes that deter many from taking action. Japanese companies too have begun to take bold steps toward staff reduction, shattering the myth of lifetime employment. NKK, the fourth-largest Japanese steel company, has announced that it will cut 4,500 personnel—20 percent of its total workforce—by 1996. Nissan Motor has announced it will cut back its staff by 12.5 percent over three years by means of a hiring freeze and the transfer of workers to subsidiaries. And, in a well-publicized restructuring program, Aiwa shrank its personnel from 3,100 in 1985 to 1,400 in 1993. It returned to profitability in 1988, and went on to achieve a higher growth rate than its competitors.

Strategic advantages for "outsiders"

The changes that have taken place over the past few years have created the opportunity that many US and European companies have been seeking to capture a share of the Japanese market. While disadvantaged in their quest for insider status, foreign companies have a head start in developing the strategies and organizations needed for effective competition in low-cost markets. After all, many have experienced similar changes in their home markets recently, and they already know how to make the most of their capabilities in Japan.

When Monsanto restructured the distribution system of its agricultural business in Japan, it applied what it had learned from parallel efforts in its other overseas markets. Philip Morris has used its cigarette marketing and sales skills to great effect, gaining a 14 percent share of a market dominated by the entrenched Japan Tobacco Company. Toys "R" Us and Tower Records have successfully leveraged their merchandising, distribution, and inventory management skills to lead the charge into the low-cost toy and record and CD markets.

Nontraditional outlets favor less established players who find it easier to act in nontraditional ways

The chief executive of one American FAC recently commented, "I feel sanguine about our future here in Japan. The fastest-growing channels for our products are discount and convenience stores. We think that these nontraditional outlets favor less established players who find it easier to act in nontraditional ways, such as forming direct alliances or producing private labels."

Time for a closer look

Most foreign companies have not yet started to make the many changes they would need to implement to profit from Japan’s new competitive environment. Despite increasing pressure on prices, loss of market share, a variety of emerging retail formats, and innovative industrial product distribution schemes, many companies continue to define markets and channels the same way they did five years ago. Those that have already built successful businesses in Japan are struggling with the challenge of capturing new markets without alienating their existing customers and distributors.

FACs with a competitive product or service cannot afford to ignore market changes and current possibilities—not least, the chance to boost profits by taking advantage of the favorable exchange rate and cheap overseas sourcing. Given the size of its market and the impact of the many changes that are under way, Japan offers one of the largest opportunities in Asia for FACs. Companies would be wise to look beyond the macro picture of Japan and its trade disputes to understand the micro changes in their industry, and the new growth opportunities that are emerging as a result.