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| Louis Turner is Chief Executive of the Asia-Pacific Technology Network, a member of the Royal Institute for International Affairs, and a part-time lecturer at the London School of Economics (LSE). Michael Hodges was academic director of the LSE International Studies Summer School until his death in the summer of 1998. |
"It is remarkable how Darwin recognizes among beasts and plants his English society with its division of labour, competition, opening up of new markets, "invention", and the Malthusian "struggle for existence". It is Hobbes' bellum omnium contra omnes (the war of all against all)." (Karl Marx cited by Stephen Jay Gould, THE PANDA'S THUMB (Norton, 1980) p.68)
Twin revolutions are wracking the Global Economy.
In the old "Eastern bloc", we are seeing the initial revolutionary triumph of capitalism. Marxist models lie dead in the water, but are not being smoothly replaced. This promises decades of continued turbulence in the old Soviet Empire.
In the rest of the world, we are seeing the growth of global competition, producing an enforced convergence of the Japanese, North American and West European economies. Job-losses, corporate bankruptcies and underlying structural change are intensifying, sometimes seeming as politically unpleasant as some of the changes being forced on the old Communist states.
In both cases, old certainties and power structures are being challenged. Both in the "East" and the "West", vested interests will seek to fight such change. However, they will lose. Technology has shrunk the effective size of the globe. In an electronic village (McLuhan), populations cannot be insulated from developments elsewhere in the world.
In particular, the USA is having to face the fact that it no longer dominates the global economy. The economic realism that other parts of the world learned in the era of the "American Challenge", is now having to be learned by the USA as competition comes from non-traditional areas such as Japan. Inevitably, this will prove an uncomfortable process for a proud nation.
What we are in fact seeing is a Darwinian battle for survival in a rapidly evolving world economy - and this book will build on this evolutionary metaphor to throw light on what the new Global Competition means for companies, countries and ideologies.
While Marx was developing the Communistic thesis, Charles Darwin was contemporaneously developing his theories about natural selection, working both from observation of existing species (the development of separate species of finches on different islands in the Galapagos archipelago) and on contemplation of the fossil record. Perhaps surprisingly, a number of the key intellectual strands which went into his final theory came not from biologists, but from economists such as Adam Smith and Thomas Malthus. It is thus more understandable how Marx came to have such a high opinion of a mere biologist. (Gould, 1980, pp. 66-8).
Marx himself is now thoroughly discredited as a political mentor. However, the biological ideas of Charles Darwin, that other intellectual giant of the mid-19th Century, can be returned to their economic roots, and can still illuminate much of what is happening today on the economic front.
we believe that the twin revolutions in the world economy are best understood by contemplating products, companies and technologies, to see which are surviving and which have been extinguished - and why.
So, just as Darwin erected his theoretical edifice on painstaking observation of orchids, finches, barnacles, climbing plants and the formation of vegetable mould by earthworms (Gould, Panda, p.19), we will concentrate on such apparently mundane examples of the workings of the world economy such as the spread of the Big Mac, BMWs, Black Label whiskey, the Boeing 737, the Sony Walkman, Marlboro cigarettes etc. We will also be looking at the "fossil record" - at some of those products and companies which have not survived, for lessons can be just as well be learned from those products which are extinguished by global competition as from those which triumph.
Take as an example the East German automobile, the Trabant. In the autumn of 1989, this featured nightly on the world's television screens as desparate East Germans crammed into them, seeking roundabout ways to escape to the West. Shoddy, noisy, polluting, badly designed and unreliable, the Trabants formed queues at East Germany's borders, then, after the breaching of the Berlin Wall, they streamed West as their passengers gazed for the first time at the western wealth which they had only seen on the West German television which the old communist regime had been forced to tolerate. With the unification of the two Germanies, the Trabant was doomed.
In isolation, the Trabant was unimportant and will all too soon be forgotten by the world. However, just as the opening of the first MacDonalds' hamburger bar in Moscow symbolised the superficial victory of the capitalist system, the Trabant illustrated precisely how much of a failure the whole Marxist experiment had been. Once one compared a Trabant with a Volkswagen, Toyota, Chevrolet or, even, the South Korean [##...], one immediately understood how obsolescent the whole of the Soviet and East European industrial system (some defence industries excepted) had become.
The demise of a product or company is, obviously, nothing new. How many now remember the Edsel, Ford Motor's disastrous attempt to launch a revolutionary new automobile in the 1950s? How many now care about a company like the long defunct White Star Line which owned the ill-fated Titanic? How many now grieve for [[##]], the Japanese motor-bike manufacturer, which Honda overhauled and destroyed in the 1950s?
Economic history is littered with such failures, which are the inevitable by-product of economic competition. In most cases, the failure of a product or the demise of a once- giant company is of no more significance than the trail of carcasses left behind a herd [[???]] of wildebeeste as it moves around the plains of East Africa, always on the move to stay ahead of predators. The weak and the unfortunate drop out and die, but the herd moves on, marginally strengthened by this perpetual culling of its less robust members.
Occasionally though one finds a series of corporate collapses which point to a more fundamental change in the underlying economic climate. Thus bicycle manufacturers were generally destroyed by the arrival of the automobile industry; passenger shipping lines were decimated by the emergence of jet aircraft; cinema chains generally lost their independence as the coming of television brought moving pictures to the home.
The demise of the Trabant alongside the myriad of East European products which will be phased out as the former socialist economies are opened to Western competition, will produce a deposit of industrial fossils of even greater significance. Here. we are not talking of corporate and product failures merely stemming from new forms of technological competition. Instead, we are talking of the failure of a complete economic system, the collapse of which will take down with it a significant proportion of the products which have been developed under it. No longer can the inadequacies of the latter be protected from the devastating competition of Western and Japanese companies which have long been competing in world of considerably greater intensity.
One of the sadder scientific pioneers was Alfred Wegener who first seriously propounded the idea that the world's continents had actually moved in relationship to each other over time. He could not come up with an adequate causal mechanism for how this might have happened, so his arguments were ridiculed. And yet, continents have drifted, producing distinctive evolutionary patterns in the continents which have been relatively isolated (Latin America and Australia in particular).
Ever since man started travelling, the isolation of continents has been reduced, sometimes with traumatic results as species which have been isolated from each other interact with unpredictable results. In the case of diseases, the impact has often been devastating, with the Amerindian population in Mexico dropping by 90% in the 50 years after Cortez landed there in 1519. The long isolation of the New World left its inhabitants totally unprotected against the ravages of, first, smallpox, then measles, typhus, influenza, diptheria, mumps et al (William H McNeill, Plagues and Peoples (NY: Anchor Books, 1976), pp. 180-5). On the more trivial level, the effect of the importation of rabbits into Australia is another example of how a relatively robust species can come to dominate a new, hitherto isolated ecology.
To develop the analogy to the economic level, we are seeing the final stages of the economic reintegration of continents which geologically drifted apart so many aeons ago. During the course of most of the current millenium, the coming together of the continents has been a slow affair, primarily dependent on developments in transport technology (the stirrup, the compass, the coming of steam, the internal combustion engine and improved aviation technology). In recent decades, though, the driving force behind such continental convergence has been the information revolution which has resulted in developments such as 24-hour financial markets, in which events in Tokyo, London, Wall Street and Chicago instantaneously react with each other. This is producing a world which poses completely new competitive challenges to established players. In effect, we are dealing with a world in which a significant product breakthrough in one country can be replicated throughout the world over the course of some three to four years. This is a speed of competitive reaction which is unparallelled in economic history.
....and this new world of near instantaneous global competition is starting to produce its own fossil record. Take the consumer electronics industry. In the last twenty years, both the American and West European industries have come near to extermination. Once proud names such as Admiral, Motorola, Magnavox, Philco, GTE-Sylvania, Warwick, Zenith, RCA, Grundig, Thorn-EMI, AEG-Telefunken [[??]], Decca and Rank have all retired hurt from the fray, either going bust, being taken over, or withdrawing from the consumer electronics sector. Effectively, only the Dutch giant Philips, and the French company Thomson remain to compete with the Japanese. To all intents and purposes, the Japanese newcomers (Sony, Matushita, Toshiba, Hitachi et al) have swept the world before them in a twenty year campaign of nearly continuous success. What has happened in consumer electronics has to a lesser extent been parallelled in automobiles, semiconductors, machine tools etc. The speed with which Japanese competition has emerged, and the competitive havoc it has wreaked are genuinely unprecedented in economic history.
We will try to explain the reasons for Japanese success in a later chapter. For the moment, let's focus on why the non-Japanese have failed. It is certainly not because of ideological failure on the lines of what has gone wrong in Eastern Europe. It has been more a question of being wrong-footed by the initial speed with which the Japanese emerged as competitors, of misinterpretation of why the Japanese were proving successful, and then of a failure to regain a momentum which, once lost, has gone until the Japanese make some tactical mistakes.
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We are dealing with an intensification of world competition. On the serious level, this manifests itself through developments like the rolling, global financial panics which have swept the world. On the apparently more trivial level, this is the world of the Teenage Mutant Ninja Turtles, which are a global fad, masterminded from [California], but supplied by a Hong Kong company relying on mainland Chinese factories. what are the wider implications?
Firstly, very few industries are now exempt from such competition. Sure, we are not likely to see a knock-down competitive battle between, say, European, American and Japanese cement producers (there's not much technology involved, and the transport economics do not encourage long-distance competition). On the other hand, whether the competition comes from Japan, from leading Third World countries such as South Korea or Singapore, or from elsewhere in the industrialised world, competition in increasingly with companies beyond one's immediate national boundaries. Competition is no longer merely something which occurs within one nation.
This means that reaction to global competition now takes place across whole continents, and not just within single nation states. So, once upon a time, competition within the automotive sector would mean that a series of countries would try to find national solutions to the problem of improving national competitiveness. Today, though, the problems are international. If there is over-capacity in the world automotive industry, then cutbacks will come across whole continents, and not just within single nations.
Increasingly the nation state is being challenged. The companies with which it is dealing are footloose. When considering a totally new plant, a global company can often choose between locations on a continental scale. That means they can choose between nations, which must therefore compete on the kind of investment climate which is on offer.
To some, the challenge is ideological. When companies have this freedom of choice, they will steer themselves away from countries which have radical ambitions. High taxation rates or a tendency toward nationalization will frighten off the global company. In such a world, a homogenization of policy responses to global competition is likely. National autonomy is thus limited.
The challenge can even be cultural. At the forefront of the global challengers are firms like Coca-Cola and McDonalds which do not just embody global competition, but a certain kind of homogenized American culture. Some speak of the Californiazation of the world. With companies like this to the fore, it is possible to see the forces at work. At a deeper level, an increasing number of global companies use English as their working managerial language. To nations with proud linguistic traditions like France or Japan, global companies therefore challenge them on a level which goes beneath mere product competition. Each competitive defeat for a national champion, means one more defeat for an attempt to maintain a distinctive national culture.
In fact, this emphasis on national culture raises the question of whether a dominant culture is emerging which will actually underpin this new world of global competition. On the one hand, there are the Americans, the British and a few allies who can be said to represent an "Anglo-Saxon" view of the world, which stresses openess, an emphasis on competition and a reasonable emphasis on legal procedures. At the other extreme, there are the Japanese with a much more personalised system, with an emphasis on national goals, and a deep sense of nationalism which makes foreign intervention in their corporate affairs a somewhat touchy business. In the middle, are the Continental Europeans who tend to value pure competition less than the Anglo-Saxons, put less emphasis on legal solutions to problems and, if not as nationalist as the Japanese, still tend to see the virtues of national solutions.
It is still unclear what underlying culture will emerge in an era of global competition - but emerge one will. As companies from different nations compete with each other round the world, it is inconceivable that their competition will be regulated in different ways from nation to nation. As Switzerland has been discovering with its banking secrecy laws, it is inevitable that the countries which take corporate governance seriously will put pressure on their neighbours which, by taking a lax approach, tempt companies to look for the easy way out.
However, these are longer-term worries. In the short term, as global competition starts to bite, and as the world economy digests developments in East Europe and the post- Kuwait invasion scene in the Middle East, the initial signs of a major global shakeout are apparent.
At the plant level, company after company is having to make drastic employment cutbacks. [Philips: Citicorp: et al] No longer are we talking about the odd thousand employees here or there. Today, we are seeing cases where companies may even rid themselves of 100,000 employees, as British Steel was forced to do during the 1980s.
Even IBM, which long prided itself on never making an employee redundant, has had to resort to layoffs which come as close to being enforced as can be. At the level of company ownership, trans-national solutions are increasingly being found. Japanese companies, having initially concentrated on "transplants" (that is overseas plants primarily replicating Japanese-based operations) have moved into an era of corporate acquisitions, of which Sony's acquisition of CBS and Matsushita's of MCA are the most visible. In Europe, the British who have long been aggressive corporate raiders are being joined by the French and other continental Europeans who are starting to flex their muscles by investing in other European companies.
Within certain industries such as airlines, financial services, telecommunications, automobiles and defence industries the global shakeout is taking place on a global basis. Whatever their nationality, the companies concerned now accept that a purely national strategy is no longer defensible. The talk is of "strategic alliances", which increasingly straddle continents, bringing together combinations of European, Japanese or American companies in alliances which will have varying fortunes, but which will, in some cases, lead to permanent merging of corporate identities.
At a deeper level, countries (even continents) are having to learn that they cannot do everything. The UK has been the first major industrial power to accept that it does not have a single indigenously-owned company in the automotive sector, while it has virtually accepted the same position in computing. On a wider front, the Europeans are desperately resisting the possibility that the whole continent may be left without a viable semiconductor, computer or consumer electronics industry. In each case, it is down to at most two serious potential players in the world economy. In no case it is certain that these players will last the course against the might of Japan.
Some governments are actually increasing the pressures for global shakeouts by conscious decisions to liberalise or deregulate hitherto protected sectors such as financial services, airlines or telecommunications. Led by the Americans, with the British closely behind, such governments have become convinced that their economies will gain competitive advantage if they take the lead in such liberalisation. Partly the gain will come from the benefits offered to consumers: partly, from the increased competitiveness which the affected companies will gain from being forced into global competition relatively faster than competitors in other nations.
Add to such pressures for change, the EC's 1992 programme which will facilitate competition across Europe, and the gradual re-emergence of the USSR and Eastern Europe into the global economy and one has a picture of an intensification of competition on a global basis.
In this new world, no country can stand on one side. Competition will push progress whether a country wants to take part or not. To stand on one side for the sake of national autonomy will be in almost all cases to fall behind the global competition. Autarchic policies probably no longer work.
None of this is to argue that increased global competition is inevitable, since at least the pressures for liberalization and deregulation are at least partly political. Two of the standard bearers for such liberalization, President Reagan and Prime Minister Thatcher, have now left the political stage. In financial services, the severity of Third World debt problems and the depth of America's Savings and Loans scandals mean that there are real questions about how fast further financial liberalization can safely go. Similarly in airlines, the American experience with deregulation may well have led to lower airfares in the shortrun, but the concentration of the US airline industry round at most three or four financially healthy survivors (American, United and Delta) does not bode particularly well for the US consumer. Once again, some retreat from liberalization might be considered.
On another level, environmental pressures are growing on companies throughout the globe. In part, these pressures will come as world politicians start to grapple with the problems of climate change and other less catastrophic environmental issues. At the level of the individual company, the vulnerability to hostile global publicity campaigns is ever-growing. From the backlash against ITT for its attempted malign involvement in Chilean politics in the late 1960s, through the global reaction to Union Carbide's Bhopal disaster and Exxon's Alaskan disaster, to the global publicity accord Toshiba's evasion of strategic export controls when selling to the soviet defence effort, it has become clear that the backlash against companies caught in such scandals is growing in intensity as each decade goes by. A world of near-perfect information may make global strategies easier to plan, but this transparent world can be a double-edged sword in terms of hostile publicity. Should there be a series of scandals involving leading corporate players in the world economy, there is little doubt that a significant backlash against such companies could be triggered.
Ultimately, though, it is technology which is intensifying the pace of global competition. Politicians may decry the implications of this competition, but ultimately they will be unable to stem it. It is no longer possible to go along with the title of the old Anthony Newley musical by saying "Stop the World. I want to get off". The world rolls on, and each rotation sees an intensification with which the great economies are becoming integrated both through trade and the direct investment of their companies.
Such competition is no respecter of institutions. Back in the early 1970s, the growing volatility of world financial flows (an early sign of a changed underlying economy) forced the abandonment of the Bretton Woods fixed exchange rate system which had played such a prominent part in ensuring post-1945 economic recovery. For the first major time, the world's economic managers discovered their impotence in the face of global market forces.
One can similarly point to once-great companies which have come under increasing pressure. PanAm, which was once the USA's unofficial flag carrier, is in apparent terminal decline. Philips, one of Europe's last great hopes in electronics, has finally reached for the axe and is desperately restructuring in an attempt to regain its competitive position vis-a-vis the Japanese. Chrysler, one one of the American challengers which so disturbed the Europeans in the 1960s, now desperately needs a foreign partner if it is to survive.
At the societal level, it is currently difficult to demonstrate what ultimate constraints are imposed by this new era of competition. Certainly in the past one can point to countries like Argentina and Uruguay which, though once among the richest in the world, threw it all away by following policies which paid too little attention to international competitive realities. To some extent, the discovery of the full economic backwardness of the Soviet and East European economies is of equal relevance. once again, a country like Czechoslovakia was in 1939 among the most productive in Europe. Forty years of central planning has undoubtedly taken its toll.
What is less clear at the moment is the degree of freedom which today's advanced industrial countries have in coming to terms with this new world. Some countries like the UK have come as close as can be to running non-nationalist economic policies, where it is felt that a British company with a weak management is of less attraction than the same company under strong foreign (even Japanese) management. Others are still hesistant about going such a radical route. The jury will remain out for a while about which is the best strategy.
What is certain is that, in Darwinian terms, the intensity of competition on a global basis continues to increase. One potential model for survival (the Marxist one) has clearly been demonstrated as a model for extinction. What has to be demonstrated is whether any of the East European and Soviet economies are going to be able to evolve in any way which gives them a non-dependent role in over the next two or three decades.
The question for the rest of us is how deeply our societies will have to evolve to guarantee us survival among the world's leading economies. It goes without saying that all companies within the industrialised world will have to develop increasingly flexible and globally focussed strategies if they are to survive as independent entities. Some will find defensible niches in this global economy. Some will seek alliances to guarantee survival, even though most of such alliances will inevitably be short-run affairs. What is certain is that fewer and fewer companies will be able to sustain a strategy based on a single national economy. For most sizeable companies, such a strategy will be a one- way ticket to the fossil beds.
The challenging questions, though, are about how societies as a whole will evolve given the intensification of global competition. Will governments feel obliged to support their companies with forms of industrial policy? Will governments feel forced to improve the investment climate they have to offer, perhaps even defining this as guaranteeing a placid and increasingly well-educated labour force? Does national survival at the global level require not just an undemanding fiscal policy, but modifications to labour relations and educational policies designed to upgrade the attractiveness of the country's labour force?
And what is the future for legislation and regulation designed to control corporate behaviour? In whatever future we can imagine, governments are not going to fade away, even though global companies will play increasingly sophisticated games to avoid control and regulation. How will national governments respond to this global challenge? Will forms of international regulation emerge to supplement the national regulations which companies should be able to avoid? .... and if such international regulation does come about, whose regulatory culture will be dominant? Observers are already talking glibly about "the triumph of capitalism" or "victory of the Anglo-Saxon regulatory culture". Does it make sense to speculate along these lines? Or will international regulation evolve in unexpected ways to respond to the new challenges thrown up by global competition?
To conclude this chapter, it may seem that we have come a long way from the world of Sony Walkmen, Big Macs in Muscovy and Teenage Mutant Ninja Turtles. However, these are but interesting surface indicators of a continued change in the nature of the underlying world economy. There is no doubt in our mind that the coming decades will be littered with extinct products and companies. Already we have seen global competition effectively extinguish an ideology which has served as a potential model for nigh on a hundred and forty years.
Tomorrow's industrial archaeologists will have a field day with the resultant fossil record. We, however, cannot wait. This book is an attempt to illuminate today's struggle for global survival as it wages, red in tooth and claw, around us.
The Global Shakeout has begun. It will continue.
"Praise be to information technology!"
(Eduard Shevardnadze [#@], former Soviet Foreign Minister, commenting on the role that CNN's satellite-transmitted news coverage played in keeping information flowing during the failed coup of August 1991 (OBSERVER, 1 Sept 1991, p.21)
The incompetent August 1991 coup attempt in the old USSR was a dramatic example of the political impact of new communication technologies. The plotters failed to appreciate how satellite broadcasting techniques had started to undercut their control over traditional television stations. They similarly failed to come to terms with an increasingly automatic telephone system. Nor could they stifle the flow of fax messages between centres of resistance. The coup failed on several levels. However, the failure of the coup's leaders to control information flows within the liberal establishment played a particularly crucial role.
Within the military sphere, the 1991 war against Iraq again showed the impact which communication technologies could play. Laser-guided smart bombs could hit targets with 20 feet accuracy, even when launched from 50 miles away. This compares with the Vietnam war where bombs were getting within 200 feet of their target, but had to be launched from within three miles of it, and with World War 2, accuracy was no better than one mile around the target from planes within three miles (FORTUNE 3 June 1991, p.54). This increase in military precision graphically demonstrates the impact of electronic command and control in the field of death and destruction. It was not accidental that the first bomb dropped in the war against Iraq was a 2000 pounder dropped squarely into the AT&T building in central Baghdad by a Stealth fighter. This was the key building for the communications of the Iraqi military (INTERNATIONAL HERALD TRIBUNE, 19-20 Jan 1991, p.5).
Information technology and communications clearly key factors in determining military success, but they are equally influential in the business sphere. It is only by understanding the technological forces which are at work, that one can begin to understand why the forces of global competition are biting so deeply. It is a revolution in information technology which has produced a coherent global economy. Understanding that revolution is crucial.
It was during the 1950s that this revolution became widely significant. With the mass-production of transistors and the resultant impact on the fledgling computer industry, the cost-performance of information technology started to improve at between 20-30% per annum (this analysis rests heavily on Yates & Benjamin 1991). So, at a time when the average cost of technology (automobiles, cameras et al) was rising in proportion to labour costs at around 1.5 times for each decade, the computer industry could produce performance increases such as a mainframe computer which, in 1980, costed the equivalent of the annual wages of 210 skilled workers, fell in price over the decade to the equivalent of 2 such workers, and could still, by the year 2000, fall to no more than a tenth of that. (Morton 1991 p9).
Casting around economic history, it is difficult to come up with any technology, which has consistently improved its cost-performance ratio so significantly over such a long period - and the industry is still a long way from maturity. In particular, because this technology deals with information flows, we are actually talking of a revolutionary cheapening of all aspects of handling information. This is a genuine revolution which is pervading all aspects of contemporary society. It is the business sector which is now driving this revolution, both as the provider of relevant technology, and as the innovative user of the ever-cheaper information flows which are thus made possible.
The IT revolution has primarily been a liberating force, making it easier for companies to view the global economy as a single unit. It has reduced the importance of national boundaries. It is allowing companies to manage increasingly sophisticated systems. It is encouraging a steady miniaturization of products.
In effect, technology has conquered three problems which have traditionally held companies back. We are seeing the triple conquest - of Distance, Complexity and Size,
Obviously, the conquest of distance is not just about the use of information technology - after all there has, over the last seventy years or so, been a steady progression from steam ship, to propellor-driven planes, to the earlier jet planes, and then the current generation of jumbo jets, which are able to fly non-stop half-way round the globe.
Although the cost-performance improvements in long-distance travel have been nowhere near so dramatic as within the IT sphere, one should certainly not discount the impact of the spread of cheap, reliable air transport. One must remember that the conquest of the oceans by commercial airlines has been almost entirely a post-1945 development. Flights from London to New York initially took ... X hours (now # by Concorde), with fuel stops in Gander (?); from Los Angeles to Tokyo, X hours (now #); from London to Sydney, X hours (now #). [#@]
In the intervening post-1945 period, there has been the speeding of schedules by the introduction of jet aircraft, the steady extension of their range, and the increase in their size (the Jumbo revolution). In real terms the cost of air transport has fallen and, even today, simple things like the introduction of new, longer haul jumbos can still produce significant effects such as shortening the Tokyo-to-London or Tokyo-to- Washington flights by up to 7 hours.
The impact on managerial mobility has been immense. Prior to World War 2, the coordination of subsidiaries on another continent could only be achieved through lengthy secondments and the occasional stately progress of a visiting executive.
And we are not just chronicling the speeding of people. Of equal importance has been the speeding of freight by the development of air freight and containerization. Once again, we are primarily dealing with a post-1945 phenomenon, with freight increasingly being carried in planes dedicated to freight and nothing else. In addition to the development of the relevant planes, one should not discount the importance of the standardisation of the containers in which freight could be carried. This occurred around [#@] [196?] and speeded freight by sharply reducing the amount of handling which any cargo would need.
The impact of these freight developments means that, in extremis, we can even see bulky products such as auto bodies being air-freighted across the Atlantic, as Cadillac was doing in the late 1980s, when it had its Allante bodies built in Turin, flying them daily to Detroit for attachment to their chassis. (International Herald Tribune, 14 Feb 1989, p.14). On a more coomon basis, the development of airfreight has meant that fashion-sensitive industries can be located in geographically remote locations such as Hong Kong, without companies losing any of their ability to respond rapidly to demand changes in other continents.
But the conquest of distance is not just about the transport of bodies and products, it is also about the transport of information and ideas. Here we are dealing with a number of technological paths which, greatly facilitated by the information technology revolution, are converging on each. The first path has been wire-based, starting with the telegraph which took off in the 1850s (the first trans-Atlantic cable was laid in 1866 (O'Brien 1992 p 8)), but then developing into the telephone. The second path has been a broadcast path, which started with radio and then added television. What the IT revolution has done is hastened a convergence between these once mutually exclusive communications paths, to produce a world in which intensive computer data traffic, telephone conversations and multiple television channels are starting to be transmitted in a digital form allowing them all to share the same channels - be that via a satellite or a fibre optic cable.
It was the telegraph (and Morse code) which was electricity's first major contribution to a shrinking globe - but, since then, progress has been massive. In 1850, using the telegraph, a dollar would get standard business letter transmitted at an average 1400 miles per hour. By the 1960s, using analogue technologies, a dollar would get a 1000 times more information sent over that distance (1.4 million miles per hour per dollar), By the 1980s, using digital infrastructure, a dollar would get a further 27-fold increase in traffic (38 million miles per hour per dollar) (FORTUNE, 3 June 1991 p58. See also Yates and Benjamin p.72 for a slight variant of this calculation).
What this kind of crude calculation does not do is give a sense of how the quality - as well as quantity - of transmitted information has changed for executives. In the 1850s, the telegraph was used for morse code messages about information such as the price of wheat or meat in different parts of the USA. Today, we might be talking of a teleconference between executives in, say, New York and Tokyo. With some slight picture degradation, each set of executives will see a television picture of their opposite numbers; they will be able to talk with each other perfectly naturally (with the slight delay due to distance); they will be able to fax documents to each other as they talk; they can each refer to computer terminals which are linked in real time. Teleconferencing across widely separated time-zones is still not very satisfactory (there are very few hours when people in New York and Tokyo actually feel like talking to each other), and the television pictures still suffer a bit in quality. However, in a world where executive time is precious and days lost travelling (and suffering from jet lag) are precious, teleconferencing is coming into its own and is an excellent example of the richness of the information flows which can now take place across the globe. Telecommunications have come a long way from Henry Morse.
A different example of how today's telecommunications technology has conquered distance is the development of round-the-clock financial markets. Reuters, the leading provider of instant financial information had, by late 1990, got a system ot 200,000 terminals in 129 countries, allowing currency specialists to watch financial developments in all the main markets of the world on an instantaneous basis. In times of financial crisis, it is systems like Reuters which allow the trading community to continue transactions as the markets in different time-zones close down and open up. Other networks like airline reservations systems can have a similar, instantaneous, global coverage - though the scale of business put through them is considerably less.
The world of financial services may seem relatively arcane to many readers, so broadcasting developments may have more direct relevance. One need only point to the television coverage of the collapse of the Soviet Empire and the coverage of the Iraqi war to illustrate the strides which global broadcasting technology has made.
One of the authors remembers watching the breaching of the Berlin Wall live in a Tokyo hotel room, with Germany's Willi Brandt [#@] being interviewed on a French television channel, with Japanese sub-titles. Many people think of the Iraqi war as being almost CNN's war - from the initial live transmissions from Baghdad as the first bombs and missiles went in, through the interplay of continued live transmissions from Baghdad, London, Washington, New York, Tokyo etc which meant that the world's diplomats both came to rely on CNN as a vital information source and, increasingly, as a conduit, in its own right, for diplomatic initiatives. .... and then there was the attempted Moscow coup, after which Shevardnadze went on record, not just to praise information technology, but to single out CNN:
"Praise be to information technology! Praise be to the reporters and announcers of CNN! Those who had parabolic attennae and could receive this station's broadcast were getting a full picture of developments, while the obedient TV of Leonid Kravchenko was pouring forth the murky waves of disinformation and lies"
Eduard Shevardnadze, THE FUTURE BELONGS TO FREEDOM summarised in The Observer, 1 Sept 1991 p21
Such pictures would be filmed on miniaturized video cameras, and transmitted back to studios using portable satellite dishes which, at 1.9 metres in diameter are relatively portable. During the Gulf War, there were some 120 satellites available for commercial use around the globe. Alternatively, as happened when the Chinese blocked satellite transmissions after the Tiananmen Square massacre, there is the fledgeling camera technology which produces electronic pictures which can then be sent via modem over conventional telephone lines. (FINANCIAL TIMES, 18 January 1991, p.12).
Such conquests of distance would be of little importance if management had not also been given the power to manage geographical complexity. Once again, technology has come to the rescue through steady, but massive improvements in computing power.
In the early days of computers, it was major national projects such as the Manhattan Project which produced the first atom bombs in World War 2, or the Apollo Programme which put the first man on the moon which benefitted from the application of the most powerful computers of the day.
By the late 1950s, though, fledgling multinationals like Ford were starting to apply computers to the task of coordinating their activities across whole continents. It was at this point that it became worth their while to create regional or international divisions with the task of rationalising the activities of competing subsidiaries within the same continent. In the case of a pioneer like Ford, the first faltering steps toward such coordination came in 195# [#@] when Ford Europe was created to bring together the then semi-independent subsidiaries in the UK, West Germany and Belgium [#tighten [#@]]. Attempts to tighten trans-Atlantic coordination were even further away.
Today, the picture is very different. Companies like Ford and General Motors have a world-wide network of assembly plants, component supplying plants, joint ventures and other strategic relationships with a variety of other companies throughout the globe resulting in a complex, ever-shifting pattern of component flows both within and between continents. So, the US assembled 1991 Ford Crown Victoria was 73% US made, but also included a fuel tank, seats, and instrument panels from Mexico, shock absorbers from Japan, front wheel spindle from the UK, electronic engine control from Spain, and an electronic control for the anti-lock brake system from Germany. (Fortune 17 June 1991 p.38).
Now this is just one model assembled in the United States. However, each Ford model produced anywhere in the world will have a similarly complex flow of components, though not necessarily that many flowing across the Atlantic or Pacific. Even at the assembly level, plants will tend to specialise in the production of just one or two models, but these will generally be for sale across a whole continent and, sometimes, for export elsewhere.
Quite simply, coordinating this cobweb of component and product flows is something which could only be achieved in a computer age. The apparent complexity of the flows results from the fact that each plant is supposedly producing at its optimal scale economies. The complexity which computing power brings under control has an underlying economic purpose.
The impact of computing power has a different, more subtle significance, because it has changed the way in which factories themselves are organised. Without computers, factories had to be kept as simple as possible. Thus, Henry Ford's approach to mass assembly was the dominant one - where possible, lines would be dedicated to one product with a limited or, if the great Henry could have his way, no variations of note.
Today, assembly lines are very different. If you visit, say, one of the Toyota plants in Toyota City, you will see partly assembled cars following each other down the line, each distinct in colour, types of wheels, size of engine and so on. What is happening is that they are being produced to the precise specification of customers, and production technology can now handle the coordination of flows of parts etc needed to support this customization of the assembly process.
As the seminal work of an MIT-led team, THE MACHINE THAT CHANGED THE WORLD (Womack et al) has shown, we are living through a revolution in factory automation and product design. The fact that factories are becoming more flexible is allowing much more customizing of products to the personal needs of consumers. The customer is being given an attention which is unprecendented since "Fordism" replaced the craft-based manufacturing processes aimed at privileged elites (The Womack book reminds us that it was possible in the 1890s to dictate where one wanted things like the brake and engine controls to be located - a luxury which mass assembly took away).
However, today's assembly companies are not just producing a greater variety of models, but at an ever-increasing rate. Again, as the MIT book demonstrates, the Japanese are leading this process. Some of their gains in speed are the result of "parallel engineering" - ie getting different specialists to work in parallel on the design, prototyping, production engineering, final assembly cycle. A fair amount of this speeding of development times again comes down to computers which, when used in the design process can cut whole stages in the development process. The battle is on to integrate the manufacturing process directly with computer-aided design so that, ideally, as designs are finalised on the computer screen, orders for the relevant components are automatically fed to suppliers, factory layouts are determined etc.
Once again, computing power, which is still bounding ahead on at an unslackening rate, is allowing companies to manage complex processes which were once totally separate activities.
One of the drives in the electronic underpinnings of the IT revolution has been the need to get the technology down to the workings of individual atoms. By so doing, the micro-electronic engineers are gaining yet more speed, at lower poser consumption, with less heat emissions. As they get down to this level, they are proving able to cram more and more functions into any given space. A miniaturization revolution is therefore at work as well.
Its impact works in a number of ways. Firstly, it has allowed the revitalization of apparently mature products. The radio market, for instance, was transformed when fragile, bulky valves were replaced by the solid-state transistor to produce a smaller, portable product which was one of Sony's first global successes. Today, companies use the power of miniaturization both to increase the range of functions a product can offer and to decrease its size. This is very much what is happening with computers which were first offered in a "luggable" form, then became genuinely portable and now are being offered in "notebook" size.
Secondly, it has helped develop new consumer products by miniaturizing and cheapening expensive, bulky specialist products. This is what happened with the Video Recorder, which, until miniaturization was a bulky product selling to broadcasting studios and not widely elsewhere. The application of microelectronics produced a product which was both affordable and could sit at home under the domestic television set. By mastering this process and beating off the competition from Philips the Japanese produced a consumer product which went on to overtake colour televisions in export volume. This is also what happened with the personal computer, which was the first massively successful attempt to get professional computing power onto an individual's desk at an affordable price.
This miniaturization also works at the level of allowing product designers to cram a steadily increasing range of functions into a given product. Sometimes the results are obvious, as, say, radios have combined tape recorders, then compact disk players and so on. Often it is less obvious, as, for instance, the electronics under the bonnet of the automobile are incrementally improved, allowing the spread of funcations such as anti-lock braking devices, sophsiticated fuel-injection control devices, electronic window controls etc. None of these are revolutionising the automobile as the transistor did for the radio, but they are increasingly taking the functions built into luxury cars like Cadillacs and Porsches and building them into standard middle-of- the-range models.
Moving to a deeper level of impact, the miniaturization process is has a number of secondary effects. For instance it is at the heart of the growing capacity of satellites used in international telecommunications. Similarly, it helped produce the drastically improved effectiveness of electronic warfare shown in the Gulf War.
Ultimately, though, there is a dark side to this miniaturization process. It is, after all, not just the consumer electronic giants which value the ability to decrease the size of their products. Equally interested are terrorists and other potential challengers to the global status quo.
What the electronics giants have effectively produced is a wealth of "dual use" technology - technology which is overwhelmingly produced for consumers, but which can also be used for more malign purposes. A simple example are the increasingly sophisticated timers built into products like a video-recorder. No longer does a bomb-maker have to construct a timer out of an alarm clock; commercially available electronic timers can now be bought which allow times to be set for weeks or months in advance.
So far, we have been dealing with the liberating impact of technology. However, the IT revolution we are describing is also a tyrant. Quite simply, the pace of technological change it has made possible has increased. At the same time, it has quite widely raised the cost of staying at the forefront of any particular technology. This has raised the stakes for any company which sees itself as a technological leader. To stay in the race, they are increasingly forced to treat the world as a single unit. A company which tries to pay for its growing research and development budget from the income of one continent, is nearly always now going to be destroyed by competitors which sell world-wide. It is this technology push which is one of the prime forces making companies think globally.
There are an increasing number of industries in which a new venture will require a minimum of $1 billion investmwent. This is true of automobiles where each generation of models will require at least this amount of expenditure. In semi- conductors, the industry is looking a future where each new semiconductor factory will cost between $1.5 - 2 billion and, by the year 2000, it is probable that only that only ten such plants will be needed globally to supply world needs. In aero-engines, the stakes are similar. General Electric's revolutionary GE90 engine will need between $1-1.5 billion to develop.
At the same time, the production cycle is often drastically shortening. The parallel engineering described in THE MACHINE THAT CHANGED THE WORLD is forcing western auto companies to speed development times per model by over a year just in order to catch up with where the Japanese companies have got to (from roughly 5 years in the mid-1980s to under 4 years). In practice, the Japanese auto producers continue to progress, and there are some Japanese models which are now being developed in under three years. In computing, the cycle is even faster, with production cycles for computer ranges having come down from four years to between 12-15 months. Although there are now clear signs that in some industries such as semi-conductors, the life-cycle of products gives very little chance for anyone to make adequate profits, there is a reason why the product cycle continues to shorten. Quite simply, being first with a product gives a company a major competitive advantage over rivals, if only because it gets them on to the learning curve early, and thus allows them to keep a continued cost advantage over later imitators.
The impact of all of this on research and development is noticeable. The proportional effort which has to be put into research and development is growing. In semiconductors, about 15% of sales have to be ploughed back into research - which is, by historical standards, a very high proportion. Within an industry such as automobiles, one can show a steady annual rise in expenditure on research going back decades (Womack et al p.133). In industry after industry, there really is a sense of "research or die".
All these developments are forcing drastic strategic choices on companies. First, they are increasingly being forced to "bet the company" (see Blackwell & Eilon 1981), with the risk that the failure of a particular product will bring the company down. Boeing had a crisis like this in the late 1960s. The Rolls-Royce aero-engine company was driven into the arms of the State in the 1970s when it underestimated the development costs of the RB 211 engine. Today, there is clear evidence that a number of firms in the general area of electronics are being pushed into research efforts which are moving them too far ahead of actual market developments.
Faced with this kind of technological intensification, companies are being forced out of their national or continental habitats. However large or well protected a national market may be, it is not going to give the kinds of financial returns needed to support a product cycle as close to annual as makes no difference. In the capital intensive industries, companies are being forced to go global to recover their research, development and manufacturing costs.
And what is happening at the company level between the likes of Boeing, Siemens, Toyota et al can be seen in its purest form at the super-power level where, through the SDI initiative, the USA upped the financial cost of staying in the Superpower league in the development of defence systems. And, though the Soviet authorities had managed to match the American pace in the development of space systems, nuclear warheads, conventional armaments etc, they finally had to capitulate. On the back of a fundamentally flawed economic system, they could not ultimately erect yet one more technologically sophisticated system. The Reaganite vision of a defence system able to pick off the vast bulk of incoming nuclear missiles may have been fundamentally flawed, but the SDI initiative finally snapped the ability of the Soviet military machine to compete.
We make no excuse for putting technology at the heart of this book, because there is no way that one can understand the spread of global competition, without understanding the underlying technological forces at work.
Some of these forces are working toward global decentralisation. The breaking down of national boundaries through the steady improvement of international communications is making it easier and easier for new actors like South Korea, Malaysia or Mexico to become significant global competitors.
On the other hand, the impact of technological intensification should not be discounted. In key industries like computing, telecommunications, aerospace, pharmaceuticals and automobiles there is a trend toward corporate concentration on a global basis. Corporate giants are having to run ever faster just to stay competitive.
Only the very fittest will survive.
Basil Blackwell & Samuel Eilon, THE GLOBAL CHALLENGE OF INNOVATION (1981, Butterworth Heinemann)
Michael S Scott Morton, "Introduction" , Morton (ed) 1991, pp 3- 26.
Michael S Scott Morton (ed), THE CORPORATION OF THE 1990S: INFORMATION TECHNOLOGY AND ORGANISATIONAL TRANSFORMATION. (1991, New York: Oxford University Press)
Richard O'Brien, GLOBAL FINANCIAL INTEGRATION: THE END OF GEOGRAPHY (1992, London: Royal Institute of International Affairs/Pinter)
James P Womack, Daniel T Jones & Daniel Roos, THE MACHINE THAT CHANGED THE WORLD (1990, New York: Rawson Associates)
Joanne Yates and Robert I Benjamin, "The past and present as a Window on the Future" in Morton M 1991, pp 61-92
If the IT revolution was starting to erode the economic relevance of national boundaries, it needed specific politicians and administrators actually to start dismantling the laws and regulations erected in more nationalistic eras. With Mrs Thatcher becoming British Prime Minister in 1979, President Reagan taking on office in the USA in 1981, and Prime Minister Nakasone taking power in Japan in 1982 a formidable trio of market- oriented political leaders came to hold power simultaneously in the three legs of the triad world. Between them, they oversaw a major jump in economic liberalization in their countries. To some extent they reinforced each other's views. Premier Nakasone dropped out of the scene in 1987, and Reagan a year later, leaving only Mrs Thatcher to serve out the decade. However, not only had they swung the industrialised world toward a more aggressively market-oriented stance during this decade, but they had prepared the world for Perestroika, the collapse of the Soviet Empire, and the ultimate destruction of the Command economy on which it rested. The free-market ideology entered the 1990s in a much stronger position than it left the 1970s.
Of course, the forces behind this upsurge in economic liberalism are more complex than this. The Thatcher-Reagan (and Nakasone?) revolution was not just the result of politicians acting in a vacuum. The times were right for them, but there were independent forces at work which encouraged them in their mutual determination to sweep away regulatory boundaries and to increase the amount of international competition.
If one throws into the analysis the fundamental liberalization of the European Community which started with passing of the Single European Act in 1986 (the so-called "1992" process), along with the collapse of the Soviet system of economic management then the 1980s were truly a revolutionary decade in which the free-market philosophy ended up a sigificant winner.
This triumph of capitalism was no foregone conclusion. After all, in the late 1950s, Nikita Khruschev could still promise that Marxist economic management would bury the West. In the 1970s, it was still common for newly independent Third World states to adopt variants of Marxist economic management, sometimes, as in Chile, through the electoral process. In the same period, it was still necessary to take the Communist movement seriously in OECD countries such as France and Italy.
However, by focussing only on the collapse of the Marxist spirit, one only picks up part of the story. Within the western "capitalist" system, there were important developments which increased the intensity of competition in key industrial sectors - and it is this "deregulatory" phenomenon we will focus on in this chapter. Originally, this separate revolution was narrowly based in the US and, later in the UK, with developments focussed within a narrow range of highly regulated industries, including telecommunications, airlines and financial services. Gradually, as the 1980s unrolled, it became possible to talk of a wider liberal-market revolution within the Capitalist world. The fact that Japan joined this liberalization process was significant, while the European Community's adoption of the "1992" programme can be seen as a further major commitment to liberalization within West Europe.
Deregulation has been one of the ways these economies have moved forward. In country after country, governments have retreated from the regulation of core industries. In some cases, governments have allowed companies to move into sectors hitherto blocked off from them (banks into securities etc); in others, governments have given companies a freedom to compete on prices (as has happened in airlines).
During the 1980s, deregulation was joined by the privatization of key state companies, which would be sold off to private shareholders. This was Mrs Thatcher's particular contribution to the liberalization phenomenon, and the British experience influenced thinking in Eastern Europe, where privatization is now seen as a generally desirable goal - though there are serious questions about how easily it can be implemented.
Then, there have been a number of measures aimed at increasing the competitive pressures on protected industries. Thus key companies such as AT&T have been broken up to provide a new set of competitors. Domestic competitors have been deliberately brought in other situations. In still another approach, foreign competitors have been allowed to enter industries once treated as national preserves. One way or another, the number of competitors in key industries has been increased.
There were a number of reasons why governments have seen fit to get deeply involved in the running of industrial sectors.
National security, followed by safety considerations, have been the prime reasons why governments have always taken an active role in supporting national airlines. Prior to World War 2, the strategic interests behind the international spread of Pan Am (for the USA), Imperial Airways (British), KLM (Dutch) and Deutsche Luft Hansa (German) were very clear. After the war, governments kept firm control over who could or could not fly into their territory. Governments increasingly saw an economic case for protecting airlines as a form of national champion.
In Europe and other regions with a socialist history there has been a belief in the importance of the state actually owning the commanding heights of the economy. Even where states have not been socialist, there has been a general understanding that some activities such as postal services were too important to run under private enterprise. Telephone systems were viewed as just such a community service. The USA was rare in having its phone system in private hands - but it ensured that AT&T was heavily regulated to protect the consumer.
This kind of prudential regulation has been another extremely important force behind industries such as financial services. Clearly governments have always got to ensure that bank collapses do not wipe out the savings of large numbers of unlucky citizens. Hence the insistence on things like capital-adequacy ratios to ensure banks do not get themselves financially over-exposed, or barriers like the Glass Steagall Act in the USA which stop banks getting involved in securities trading, or vice versa (the philosophy being that banks should stick with what they know, and should not get involved in risky diversifications). Similarly in airlines, regulatory structures emerged to control safety and pricing policies (more to protect the airlines than the consumers). In telecommunications, there has always been a network of regulation both to protect the integrity of the system and to ensure that the average citizen got fair value for money.
Finally, an industry like the phone, electricity and gas supply industries have been seen as natural monopolies. Historically, few people have fancied having two or three phone companies all trying to provide phone networks to the same street or neighbourhood. In so far as the phone business was a monopoly, it needed regulating to protect the consumer from price gouging and other exploitative behaviour.
Obviously, many of the motives behind regulation are "motherhood" ones. However, in many cases the regulator steadily became an important force for restraining potential competitors. Quite often the regulator has also been a chauvinist, fighting the national cause strongly in any international negotiations.
Slowly, a consensus has grown that old-style inward-looking regulation was no longer good enough - that it increasingly involved significant economic costs with whatever benefits it delivered.
So far, we have seen a variety of dregulatory moves. By themselves, each of these measures may seem minor, but, in their entirety, they have produced a major increase in the competitive pressures within a set of industries such as airlines, financial services and telecommunications, which have helped set the competitive tone on wider national economies.
The results have not been startling. It has, in fact, been a little like taking the bars off the cages of a group of somewhat sleepy behemoths. Faced with increased competition in home markets, giants such as AT&T, Nomura, Delta, British Telecom, NTT, American Express, Deutsche Bank et al have been forced to join the global competitive battlefield, further intensifying the pressures on those other companies already out there in the international arena.
At the same time, the technology push described in the last chapter has also been an important force behind the start of their global drive. The giant telecoms players such as AT&T, BT, NTT et al are being forced to think globally because of the massive development needs of their particular industry. So, the breaking down of the regulatory environment in which they long cossetted has given them an increased freedom to roam the world looking for the scale economies needed to stay in their industry. They are mostly satisfying themselves for the moment with strategic alliances with other related companies, but competition is stirring itself.
In financial services, technology has worked primarily as a liberator. Initially, improvements in technology helped erode the ability of regulators to put a ring fence round national economies. As international communications improved through the decades, it has become increasingly easy to carry out financial transactions in less regulated parts of the world, thus leaving regulators with the dilemma of trying to maintain tight restrictions on a national industry in which the main innovative action is taking place elsewhere in the world. On the other hand, the cost of investing in the technologies needed to stay at the global cutting edge are not insignificant. In general, though, the pressures on financial institutions to go global have come more from the need to follow traditional multinational clients than from the cost of technology.
In airlines, the impact of technology has worked in a number of directions - all away from the once cosy world of national regulation. In the first place, the initial ease of entering the industry through the purchase of a few planes undercut attempts to maintain a system of regulated prices. However, once authorities gave ground on pricing, then the scale economies to do with running airline networks have started to take over - once again forcing a global strategy on airlines which once viewed themselves purely in national or continental terms.
In all such cases, technology has been a factor at work. It has been at its most subversive for national regulation in the field of financial services. As we shall see later, the intensification of the technological stakes has been most important in forcing regulators to rethink their strategies toward telecommunications. Either way, technological change has interacted with ideological developments - and it is the effect of this interaction which is now largely irreversible.
The first signs of the pressures that would build on national regulators came in financial services with the creation of the Eurodollar market in the 1950s. Bankers - initially the Soviets - sought to keep dollars outside the jurisdiction of the American authorities. As they did so, it became clear to other, more commercially-oriented bankers, that they could get higher interest rates by keeping dollars outside US jurisdiction where the American authorities were trying to prop the value of the Dollar up by a variety of mechanisms which affected interest rates which could be paid within the USA.
The key to the success of this initial attempt to escape tight American regulation was the reactions of the British authorities. Only too aware of how the City of London had relatively declined since its halcyon days in the 19th Century, they realised that, by providing a lightly regulated alternative to the USA, they could pick up a significant amount of footloose financial activities which could be attracted by the market rates on offer in London.
London was brilliantly successful with this strategy. Thirty years later it is still the leading financial centre in the European time-zone.
Lesson number 1: national regulatory authorities are potential competitors. Competitive deregulation is a powerful tool in their lockers. Where an industry is as footloose as financial services, strict regulation will be undercut by other centres offering a more relaxed environment. As we will see in later chapters, Wall Street was deregulated in 1975, mostly to do with the pressures put on brokers by the largest financial players. This then triggered a subsequent defensive response from from the City of London in 1986, which has subsequently led to reactions in other financial centres on the Continent of Europe. Such competitive deregulation is clearly a force to be reckoned with.
If the British took the lead the original lead in liberalising financial services, the USA very much took the political lead in deregulation from the mid-1970s.
The Wall Street Big Bang of 1975 has already been mentioned
This was followed in 1978 by the very different case of airline deregulation. In this case, a steady stream of new entrants into the US industry was showing that there were a slew of potential competitors like People's Express willing to come into the market at prices well below the current regulated prices. The motivation for airline deregulation under President Jimmy Carter was partly populism, but also a strong economic sense of the benefits which would come to consumers from deregulation.
Lesson number 2: other countries reacted slowly to this American initiative, which has not been without its controversial angles. What is increasingly clear is that early deregulation in the USA has produced a small set of financially strong airlines which are going to be very difficult for the Europeans and the Japanese to deal with. Early deregulation can bring important competitive advantages.
In telecommunications, liberalisation came about in a very different way. In this case, as in airlines, there were new competitors coming to the fore - in this case based on new technologies like microwave transmission. In 1983, the regulator (Judge Greene) decided that competitive diversity would best be achieved by breaking the overly dominant AT&T up and allowing powerful competitors like IBM into the field.
This particular decision was very much driven by the IT revolution, which had begun to produce an increasing variety of commercially relevant technologies, in areas such as fibre optics, space satellites, voice- and data-handling networks and cellular telephony.
Lesson number 3: by this time, other countries were getting interested in the virtues of deregulation-to-gain-competitive-advantage. Both Japan and the UK followed the USA very promptly with their versions of telecommunications deregulation. This was another form of competitive deregulation aimed not so much at attracting footloose investment from round the world (as in financial services), but in acting as a catalyst in the development of a vibrant telecommunications infrastructure. The aim was both to stimulate technological creativity at the supply end, and a competitively priced telecoms market which might benefit telecoms users. A competitive, innovative telecommunications service was seen to be as much an important part of a country's infrastructure as a decent road system.
Britain responded directly to all three of these American dregulatory initiatives. In so doing, it proved itself the only European country which instinctively knew why such steps were important.
The driving force behind this quick response was Prime Minister Mrs Thatcher who added her own footnote to history by pioneering a wave of privatizations of the state sector, which in their way created a new path which economic liberalization could take. Starting in 1981 with the sale of a 51.6% stake in British Aerospace, the British government had found buyers for ,25 billion of assets by the end of 1986. (Andrews, 1987 p.194).
Lesson number 4: the Thatcher Revolution showed up most distinctively through her privatization programme, which was to have an important demonstration effect throughout the industrialised, developing worlds and emerging ex-Soviet bloc countries. It showed that there were other ways to liberalise an economy than by sticking entirely to deregulation.
In parallel to this privatization programme, the Thatcher administration deliberately copied the US by injecting competition into its airline, telecommunications and financial services sectors. The motivation was ideological, but with a clear sense of national self- interest. It was believed that Britain would gain a competitive advantage over the rest of continental Europe by deregulating early. In airlines, where bilateral deals were necessary, the UK searched hard for equally liberal countries such as Ireland and the Netherlands.
Lesson number 5: the American deregulatory experience was channeled into Europe by Thatcher's UK. In so far as it is useful to talk about an Anglo-American approach to industrial policy, it is this period which demonstrates the two countries working most harmoniously in friendly competition. No other country on the Continent seeks to have come anywhere near the British in spontaneously understanding the economic importance of the deregulation under way in the USA.
Because it is unfashionable to recognise that Japan has been liberalising in its own right, it is easy to forget that it, too, was moving ahead during this period. What is difficult for foreigners to assess is how much change came as a result of internal evolution, and how much as a result of American pressure.
Within financial services, the Dollar-Yen accord of 1984 clearly followed a period of intense pressure from the USA, including specific pressure from then Vice-President Bush. By the standards of Wall Street or the City of London the progress made was very limited.
In telecommunications, the picture is different. In 1985, NTT (Japan's equivalent to AT&T) was both partially privatized and deregulated. By the end of the decade a competitive fringe had been added to the dominant NTT and KDD (which monopolised international telecommunications traffic); in particular, foreign companies could take a stake in consortia to handle international traffic.
In this particular case, there had been consistent US pressure over the years, but this was not crucial, though it did ensure that US developments during the 1960s (when deregulatory pressures first grew) and onwards fed through into the Japanese debate. What is clear is that in opposition to both NTT and the relevant Ministry of Posts and Telecommunications, there were important forces pushing for liberalization which focussed round the Ministry of International Trade and Industry and the general electronic supply industry. (Gow, 1991).
Lesson Number 6: hard diplomatic pressure from the USA has been important in opening up parts of the Japanese industrial scene. There are forces within Japan (MITI in particular) which will concede quite liberal regulation, in the interests of the equipment supply industry. Clearly, though, there are sectors of the Japanese bureacuracy (the Finance Ministry, and the MPT) which are far from liberal in their thinking. Foreign pressure (Mrs Thatcher was to weigh in publicly later on in the decade on telecommunication issues) is clearly need to keep up the deregulatory process.
By the mid-1980s, a considerable head of steam had built up behind the liberalisation of key sectors - using both dregulation and privatization as tools.
The USA generally acted as the catalyst, reflecting the fact that it probably possesses one of the most sophisticated regulatory regimes in the world which routinely do try to inject competition into the industries under regulation. Some of the key pressures in telecoms and financial services came from companies which reckoned they were getting a raw deal from the existing regulated environment.
In Japan, the US has generally found it necessary to apply considerable diplomatic pressure to get significant liberalisation in sectors which matter to the outside world.
In Europe, there was a possible fleeting historical moment when the radical Mrs Thatcher both respoonded to American deregulatory developments, but also took them one stage further through the concept of privatization (which made little sense in the USA, which had such a limited experience in nationalised industries). What Mrs Thatcher's Britain did was to act as a beachhead for the US emphasis on liberalization. A question we will ask later is the extent to which the 1992 process and the collapse of the old Soviet system were affected by the liberalization developments of the first half fo the 1980s.
For the global economy, these political developments matter. On the ond hand, the dismemberment of AT&T and the privatization of giants like British Telecom and NTT has ushered a new set of giant players onto the world scene. At the same time, the deregulatory process has also had an international angle to it. In most cases, deregulation has given greater market access to foreign companies than they had hitherto. This is starting to prove important as the newly liberated companies start to define a world role for themselves.
So political liberalisation and deregulation has been an important development which will facilitate the globalization of companies which the IT revoltuion has been making ever easier. Economic nationalism can still act as a barrier, but these liberal trends are making life easier for the globalizers.
John Andrews, "Privatization-an emerging force", 1987 BRITANNICA BOOK OF THE YEAR (Chicago, Encyclopaedia Britannica Inc, 1987)
Ian Gow, "Reregulation, Competition and New Industries in Japanese Telecommunications" in Wilks and Wright (ed) 1991, pp. 256-285.
Stephen Wilks & Maurice Wright (eds), THE PROMOTION AND REGULATION OF INDUSTRY IN JAPAN (Basingstoke, Macmillan: 1991)
The quintessential global shopping centre used to be Anchorage airport in Alaska.
For timezone reasons all the late-night European-bound planes from the Eastern Pacific would descend on Anchorage in the early hours of the Alaskan morning. Japanese, Koreans, Philippines, British, Germans, Italians - the whole motley crew - would disembark under the watchful eye of a stuffed polar bear.
For an hour-or-so, the weary, jet-lagged travellers would be left alone in what was
effectively one large duty-free shopping mall in the icy depths of the Alaskan winter.
Unlike typical shopping malls elsewhere in the world, this one makes few
concessions to the locals. It is, instead, a global mall selling nothing but global
brands. Scotch whiskies such as Johnny Walker Red, J&B Rare, Ballantine's, Bell's,
or Chivas Regal; perfumes by names such as Yves Saint Laurent, Chanel, Givenchy
and Christian Dior; cigarettes like the ubiquitous Marlboro, but also including Camel,
Winston, Benson & Hedges and Kent; luxury goods such as bags and scarves by
Hermes, or watches from classic Swiss names such as Rolex [#@], but also
including the new Japanese challengers, Casio ...... [#@]. This is the Aladdin's Cave
world of the duty free store. Nothing is stocked unless it is has a brand name
instantly recognisable to the vanguard of the Global Citizen - the inter-continental air
traveller, ranging from business executives, to classic tourists - including the free-
Putting aside the more unearthly parts of the Anchorage experience (the below-freezing weather and the communal jet-lagged disorientation of the consumers) it actually reflects the way that world consumer markets are globalizing. It is the end product of the technological and political trends described in previous chapters.
This is a consumerist world in which brands and products fight for display space with an intensity never experienced before. Successful national brands are becoming continental ones, with a handful breaking out to become global brands of the potency of Marlboro, Coca-Cola, the Walkman, Heineken, Holiday Inn, Lipton's tea, Veuve Cliquot, Johnny Walker Black Label or Nike.
As the Soviet hold over Eastern Europe crumbled in the late 1980s, the market researchers moved in. One key study was of 600 Soviets, Czechs, Yugoslavs, East Germans, Hungarians. Despite decades of supposed isolation from Western influences, these potential consumers were surprisingly well-briefed on the leading western brand names. For instance, of the whole sample only 3 Poles and 1 Russian were unaware of Pepsi-Cola's name. Following Pepsi in the awareness stakes were Coca-Cola, Nescafe, Nivea, Chanel, Levi's, Johnny Walker, Maggi/Knorr, Guinness Book of Records, McDonald's, Philips and Gillette. Perhaps surprisingly, Japanese brands had not yet reached the visibility they have achieved elsewhere in the world. Despite that, Sony, Panasonic, Hitachi, Toshiba were placed 14th-17th. [[#@]MAI study [MLH/CUTTING 6.91#]
Given the depth of anti-capitalist propaganda which such consumers have been subjected to, this level of awareness of western brands was impressive. But, above all, this study symbolises the growing penetration of a limited number of brands into the global consciousness.
It is easy to be dismissive about the economic importance of brands. Somehow, the creation of a successful brand does not seem to have the glamour (one might almost say "reality") of a research-based product breakthrough like the development of a new drug or the creation of an apparently new product such as a Sony Walkman.
Instead, many of the brands we deal with are in apparently "candy-floss" sectors such as hamburger chains, cigarettes, alcohol, haute couture and whatever. There is a perception that one cannot build long-term industrial competitiveness for nations on such industries. Surely, the industries which really matter are more obviously science-based like computers, automobiles etc?
Perhaps. However many of these brands have been around for far longer than companies like IBM, Apple or Sony. Some such as Coca-Cola, Budweiser or Knorr have existed for over a century (and Aspirin dates from 1893). while many like Lux, Birds Eye, Camel ?[#@], Persil or Heineken (?[#@]) have been around for over 50 years - and there are images like that of Nipper, the dog that first listened to His Master's Voice on an early gramaphone ninety years ago, and which is still used as a commercial symbol by the Japanese electronics company. JVC, today. These are mature, but resilient brands which should be around for many more decades. How many automotive or electronic companies can be sure they will be around that long?
Obviously successful brands do not rest on the kind of technological breakthroughs which produced, say, the original transistor radio. However, one should not be overly dismissive of the technologies involved. Successful, well-managed brands will normally be sustained through continuous small-scale technological modifications over a period of decades. Take a sector like detergents, and you get regular advances such as the recent shift to superconcentrated brands which clean a lot of laundry with a very small portion of detergent. Nothing earth-shattering, but offering perceived improved performance to the customer.
What is happening in today's triad world is that the brand-driven giants - firms like Procter & Gamble, Unilever, Levi Strauss, Mars, Kellogg's, Philip Morris, Coca- Cola, Pepsi-Cola, Nestle, Grand Metropolitan, LMVH, Shiseido et al - are making a once-and-for-all grab to fill the branding vacuums exposed by the lowering of international boundaries. Since branding has been Anglo-American led, the most mature market for brands is West Europe and the USA. The battle is now quite intense for brand dominance in Japan. For many of the branders, the battle is in its early stages in emerging parts of the world like the rest of Asia, East Europe, Africa and Latin America.
....and a battle it truly is. Firms like Unilever, P&G, Philip Morris and Nestle are giant companies by any standard. They know the stability of branding patterns. They know that many of the leading brands in 1920s USA are still the leading brands today. They all therefore know that whoever can establish their brands as leaders around the globe today will go a long way to establishing a lead position for years to come in products such as cigarettes, alcohol, personal care products (shampoos etc), breakfast cereals, cosmetics, instant coffee and so on.
There is a healthy debate about the significance of such developments. On the one hand, there are gurus and executives who argue that world tastes are homogenizing - that consumers all round the world are quite rapidly becoming more similar in their tastes, thus permitting the development of genuinely global brands.
At the level of international elites there is little doubt that a homogenization of tastes is occurring. Travel is certainly one factor at work. Coca-Cola, for instance, got its initial international impetus during and after World War 2 as the US authorities made sure that their armed forces would find their creature comforts anywhere in the world where they were posted. In a more diffuse way, the development of international tourism has increasingly exposed run-of-the-mill citizens to the variety of foreign products. Thus visitors to the USA became aware of what good hamburgers were really about. Visitors to the Mediterranean picked up a liking for Ouzo, Paella, Lasagne and wine. Visitors to Japan (a much rarer breed) pick up an understanding of Sake, Sumo, Sushi, wood block prints et al; they may not rush back home to continue their acquaintance with, say, Japanese food, but they are aware of images and products which sensitises them to the next advertisement which uses a Japanese theme.
Films, television and pop music have probably been even more potent channels for spreading arresting images around the world. Where would the Marlboro cowboy now be without eighty-odd years of Hollywood westerns to create the stereotypes from which this extraordinarily potent brand image could grow? Even today, images of James Dean, Marilyn Monroe, the early Marlon Brando are used round the world for marketing purposes, once again testifying to the strength of Hollwood's iconic influence. One part of the battle between Coke and Pepsi turns around their use of the pop music.
Quite simply, an increasing number of today's consumers grow up listening to a common core of pop singers and watching a a common core of Hollywood blockbusters and hit television programmes. The more sophisticated consumer will start to share some reading tastes, perhaps some experiences in highbrow music, almost certainly some artistic knowledge. None of this means that the day-to-day life of a young executive in Tokyo, New York or Paris comes anywhere near to being identical - but it does mean that, year by year, the core of common experiences is growing.
In no way, however, do consumer tastes develop passively. The development of brands is highly influenced by competition between the consumer giants. Sure, companies like Unilever, Procter and Gamble or Kao cannot dictate world tastes, but they should be viewed like skirmishing armies, probing the defenses of world consumers to see what products are strong enough to be shifted to more than one country.
This makes sense. After all, a product which sells well in one country will generally have qualities which will make it sellable somewhere else in the world, particularly in countries with related cultures. In these circumstances, why reinvent a product which, perhaps with some modifications, can be introduced from elsewhere. What holds true for products may also then hold true for brand names and advertising strategies. For all these reasons, companies have a vested interest to push potential international brands.
The Anglo-Dutch food firm, Unilever, is the kind of company which is at the heart of this process. On the one hand it is responsive to local tastes, so that, for instance, it was, in the early 1990s, using 85 varieties of flavouring in the chicken soups it sells across Europe (it has take measures to see how far it can rationalise such diversity). On the other, it is constantly on the search for products which can be "rolled out" globally with minimal modifications. So, when it acquired Chesebrough Ponds in 1987, it was able to take that company's best-selling spaghetti sauce, Ragu, and roll it out across Europe with only one slight modification to the brand name in Germany to meet trade description rules (FINANCIAL TIMES 28 October 1991).
On a global basis, Unilever has been successful with Timotei, the best-selling shampooo outside the USA. The brand started as a failed deodorant in Finland where its name means "grass". A local Unilever executive spotted the marketing potential of a mild natural brand but transferred the formula to Shampoo. In 1975, the product was successfully launched in Sweden, where it was given a distinctive pack. The product was then lauched back in Finland and then rolled out round the rest of Europe, on an image of Scandinavian herbs and a somewhat virginal blonde model who washes her hair outside in a bucket or blows dandelion seeds into a boyfriend's face. When taken to Japan, the third modification of the basic ad produced a runaway success with Timotei taking 10% of the market.
Coca-Cola is an even clearer example of how the brand-driven companies now view the world. Coke has 46% of the world's carbonated soft drink market. Its ambitions are boundless. In the words of Roberto Goizueta, the Coca-Cola chairman: "By the year 2000, we will have Coca-Cola available within an arm's reach of desire of the 6 billion people who will be housed on this planet." (Alan Friedman, "The ascent of Everest", FINANCIAL TIMES, 16 January 1992, p.13). This is not just a question of running advertisements, it is a question of building up the bottling, manufacturing and distribution infrastructures of markets all round the world. So, in early 1992, Coke announced the creation of a privately owned business in Moscow to manufacture the famous syrup and to establish 2000 retail outlets in the city. In India, it was planning a joint venture to get itself back into one of the few countries it turned its back on in the 1970s after a dispute with the government. In Japan, it had just spent $500 million on 130,000 vending machines, which are so crucial to sales in that country. In China, it has 13 joint venture plants and is clearly getting prepared for the long haul in a country of giant potential, but limited current per capita income. All this activity is, of course, in addition to the traditional "Cola wars" with Pepsi in the USA where Coke's market lead is rather narrower. (this analysis of Coke rests heavily on Friedman, 1992)
The Coke story is one of the clearest examples of what is involved in the development of a global marketing strategy. In its case it has a global brand name which is now recognised in any part of the globe. However, advertising is only one part of the process. Establishing such a brand needs a supporting supply and distribution system, which may often have to be created from scratch. It also involves putting competitive markers down in countries such as China where western consumer patterns are still extremely weak. It involves getting ever closer to an understanding of the cultural forces at work in all a company's key markets (Coke puts an increasing effort into forecasting entertainment trends worldwide). It also involves opportunism.
On the day in November 1989 when the Berlin Wall was finally breached, Atlanta
head office ordered its Berlin colleagues to hand out free cans of Coke to the East
Germans who came through the wall to look at the consumer goods that had been
denied them so long by their communist masters. Given the way that Coke's image
has been quite consciously developed around the American way of life and, for much
of the Cold War, actually became an unofficial symbol of the capitalist system in
general, it was highly significant that Coke was actively involved on the day the
Berlin Wall - that arch symbol of the Cold War - was breached. Each can which was
consumed that day could be interpreted as a small demonstration of the victory of the
free enterprise system over communism. In its way, the power of Coke's image
(along with that of Marlboro, Pepsi, Levi Strauss and others) had actually played a
part in destroying the original allure of the Marxit ideal. Coke had paid its dues. It
had a right to be part of the celebrations on that heady day in Berlin. (Ironically, one of the more tasteless (but funny) comedies about the Cold War (Billy
Wilder's ONE, TWO, THREE) was precisely about the attempts of a Berlin-based Coca-
Despite the potency of global brands such as Coke, they are still merely the froth on the surface of the world economy. The vast majority of products that consumers currently buy are still national or regional ones. There is considerably debate about how many products are really suitable for the global branding process.
Language, for instance, is still a barrier. At a trivial level, brand names with some potency in one language have unfortunate connotations in another. Classic cases are two soft drinks, France's Pschitt [#@] and Japan's Pocari Sweat - both of which have unfortunate connotations in English. [#@] [Need a couple of other cases in other direction]
Again, life styles really do differ from country to country and it would be arrogant to assume that these differences will be totally eradicated - though some of them may be closed. To take just one example - breakfast habits. The British and Americans have long accepted pre-prepared cereals such as cornflakes as the heart of this meal. The British consume an annual 13.3 pounds per person, with the Americans slightly behind at 10.1 pounds. Continental Europeans, on the other hand, still favour breakfasts of bread, cheese, eggs and meat, so the French, for instance average only 1.8 pounds of cereals per year. ([#@] FORTUNE, July 91: precise ref needs chasing]. Over in Japan, breakfast traditions are totally different, emphasising rice, raw eggs and pickles. In these circumstances, it does not matter how powerful the marketing clout may be of General Mills, Nestle, Kelloggs etc, they have a long hard slog ahead of them to convince all cultures to adopt a cereal-based breakfast. However, what they can hope to do is increase the relative importance of cereals in each market, and to ensure that it is their brands which dominate. The brands may well be global, but their relative penetration of different cultures will be much more varied than with the case of Coke.
Cultural patterns affect global marketing in more complex ways. Again, just to pick one example, take the impact of land prices. At one extreme, there is the USA where land is cheap, thus allowing everything from houses to automobiles to be large. At the other extreme, there is Japan which is desperately short of space, with families crammed into apartments which are tiny even by European standards, and where one cannot, for instance, in Tokyo buy a car unless one has a parking space availoable for it.
Such extremes immediately make it difficult to develop standard products. It is, for instance, far from accidental that the Detroit automakers have found it much more difficult to break into the Japanese market than the luxury European autom-makers who work in an automotive market which has more of the space constraints which are found in Japan.
Once one moves on to products like consumer durables for the home, then space constraints become one very obvious barrier to the development of global products. Refrigerators made for the American life-style have very little place in Europe, let alone within Japan.
But space is only one factor affecting the would-be global marketer. With washing machines, housewives round the world are used to different water temperatures, with the Japanese, for instance, using cold water [#@], which not only demands a specific type of washing action, but needs detergents with different chemical formulations than those used with warmer water elsewhere in the West. On top of complications like this, there are different stylistic preferences, with the Germans liking designs which give the impression of engineering quality, while the French value chicness over apparent functionality.
But such indicators only scratch at the surface. Deeper, more subtle national characteristics can still play havoc with the marketer's instinctive desire to standardise marketing strategies. There are problems with humour - the British enjoy humorous ads, while the Germans dont; race - Benetton got themselves into serious problems in the USA with a campaign which seemed innocuous in Europe which involved a naked Black lady holding a white baby; sex - US ads are notoriously strait-laced while the French are currently getting away with the greatest nipple count in the Western world.
An extra level of complexity is provided by different regulatory approaches to advertising in general, and how different products can be handled. The occasional country still bans television advertising or insists that all adverts are carried between certain hours. Some countries disapprove of comparative advertising ("knocking copy"), while an increasing number restrict the advertising of tobacco (Japanese friends cannot comprehend the shock felt by British or American visitors who see television ads for cigarettes in which an actor may be seen coming from a work-out in a gym and then reaching for a pack of cigarettes.)
None of these differences is particularly serious, though they may tell us something about the deeper cultures of the countries concerned. The row about the allegedly racist Benetton ad, for instance, graphically illustrates how sensitive by world standards the US political culture is to racial and gender slurs. Non-American politicians ignore this fact at their peril as Japan's ex-Premier Nakasone found when he bemoaned the lack of racial purity in the USA [#@][check].
After a period in which an enthusiasm for global marketing moved to the fore, the tendency now is to emphasize the importance of borad regional differences. A major exposition of this approach was an article in HARVARD BUSINESS REVIEW [[#@] precise ref? May-June 1991] which summarised a survey of 12,000 executives in 25 different countries. Using cluster analysis, the authors identified a a set of distinctive managerial attitudes.
They identified three main groups of cultural allies. Group 1 included the classic "anglo-saxons" (Australia, Canada, Britain, New Zealand, the USA) and Singapore: these countries came out as least cosmopolitan of the sample (though one can argue about whether a lack of languages in an increasingly English-speaking actually tells one a great deal about whether a management has global vision or not).
Group 2 is, with the exception of France, based round the romance languages (Spanish, Portuguese and Italian). Taking in Argentina, Brazil, Italy, Mexico, Spain and Venezuela, there was, amongst other characteristics a relatively high reliance on trade policy for industry protection.
Group 3 includes the representatives from the German-speaking world, France, the Netherlands and Scandinavia. It was this group which was most cosmopolitan (on the criteria used in this survey).
Then there are cultural islands of Japan (strong emphasis on the work ethic), South Korea (protectionist, putting country ahead of company), India (protectionist) and Hungary (very focussed on economic regeneration).
Such a study is not of massive use to a would-be marketer, but it does serve to remind one that the world is still beset with cultural differences. On the other hand, it does show that it is possible to group countries in terms of cultural similarities, with linguistic links being particularly important. The search for international marketing patterns becomes an intermediate position on a spectrum which will range from purely local marketing at one end. to global marketing strategies at the other.
First of all, just using purely economic analysis, one can identify some simple patterns. As societies grow richer, the pattern of their consumer needs will change. African peasants will need basic foodstuffs, clothes and products like seeds and hoes - what they will not need is hamburger chains, Gucci shoes or Mercedes Benz cars (the occasional pickup truck is another matter). At a richer level of development, consumers will start to become interested in convenience foods, shampoos, video-recorders and the like. At the richest levels, consumers get the taste for fancy brands of Scotch whisky, fashionable holidays, powerful autos and so on.
What the marketer can do is take information about per capita wealth and decide at what point a particular country is likely to move into the kind of consumer patterns which, say, the USA adopted ten years ago. Products and marketing strategies which worked well in the USA can then be used as a benchmark when considering how best to tackle the emerging needs of the newly-rich consumers. Even if products have to be modified to meet local cultural needs, and if advertising campaigns be designed from new, the global marketers will know that an underlying susceptibility to a particular type of product will tend to emerge at a particular level of development. They will know advertising campaigns which have worked in the past, elsewhere in the world. These can be used as a basis for experimentation.
What we therefore see is the development of marketing strategies which may target 10-15 countries simultaneously, as Unilever did with Ragu. Global marketing today is, then, not best typified by Coca-Cola or McDonalds, but by intermediate cases where the corporate giants are starting to try rolling out marketing campaigns which have worked well on one continent to other parts of the Triad world.
A nice example is breakfast cereals where Kellogg's, Nestle and General Mills are shaping up for a Coke-vs-Pepsi-style global slugfest which will leave the world eating a great deal more of branded, pre-prepared cereals - a need which is not always self-evident in cultures which have treated breakfast in a different way.
In this sector, Nestle - strong in Europe, but weak in cereals - and General Mills - strong in cereals in the USA, but weak elsewhere - have formed a joint venture Cereal Partners Worldwide (CPW) to internationalise General Mills' cereal brands such as Cheerios and Golden Grahams (plus Shredded Wheat and Shreddies which the joint venture picked up from a smaller competitor along the way). In Europe, the venture is starting well away from traditional Kellogg's territory in the UK, and has started with France, Spain and Portugal first. In future, the idea is to build on Nestle's strength in Asia, Africa and Latin America to roll these products into relatively untapped markets which can only grow in the future.
There are two angles to this story which are worth noting. Firstly, this is a classic example of a global roll-out of brands which had been nurtured in the USA. The joint venture was put together hurriedly over 1989-9 because both partners knew they had little time to lose. The second lesson from this story is that it is far faster to license or buy brands than it is to build new ones from scratch. Nestle is a big, self-confident company with at least one mega-brand, Nescafe, under its control (in the late 1980s, Nestle was producing 200 blends of coffee to satisfy its markets worldwide). Despite that, it could not conceive of developing its own cereal brands; even if it found the right magic formula, it would take ten to thirty years to establish a totally new brand in an already oligopolistic market. Far better to do what it did with General Mills and buy into existing, under-exploited brands. At this point, Nestle can concentrate on the global marketing which it knows well.
It is this potential of internationalising existing brands which is behind a series of major acquisitions in brand-driven industries such as alcohol and perfumes. In food, the big players have been Nestle (with its acquisitions of Rowntreeand Buitoni), Philip Morris (Jacobs Suchard) and France's BSN (a variety of smaller European ventures) with Unilever staying on the sidelines. The latter company has, however, been moving in perfumes (buying Calvin Klein and Elizabeth Arden), along with the French luxury goods company, LVMH (Christian Dior, Givenchy plus a stake in Guerlain), L'Oreal (Helena Rubinstein and a stake in Lanvin) and Procter and Gamble (Max Factor). As one looks into whiskies, beers and wines one finds the same picture - of the giants circling their smaller competitors, picking them off one by one.
What is now starting to happen is that the brand-led giants are upping the stakes. Just as their high-tech competitors are spending more on research and are increasing the number of product launches, so the branders are moving in an equivalent direction. In perfumes, for instance, the giants are using their financial market to launch an increasing number of new products, and to relaunch old ones ever more aggressively. The sums of money are, for a perfume, nowhere near the sums needed for launching a new automobile ($40 million is the range of money that a Unilever or an Estee Lauder could currently spend launching a new perfume in the USA alone). But the principle is well recognised. The stakes for staying in the game are being consistently raised. As M Antoine Riboud, chairman of BSN which is in the brand-led food sector has been quoted as saying: "In this business, the number one makes a lot of money, the numbder two can make a decent living, the number three just suffers." (FINANCIAL TIMES, 27 January 1992, p.12).
....and that sums up what the global branding battles are all about. It does not particularly matter to the global giants if the brands they are selling are true global brands or not; what does matter is that they control the top two or three brands in as many countries in the world as is possible. For some, the battle is still to get fully established throughout the triad world. The real giants, however, are wll ahead of that particular game. The Cokes, the Pepsis, the Unilevers, Nestles and the Philip Morris' are starting to lock up the next generation of consumers - the Indians, Chinese, the East Europeans and the former Soviet Union.
One final note: in all this discussion of brands, the Japanese have been conspicuously under-represented. Yes, they do have firms which are slugging it out in the brand- driven sectors. Suntory is no mean competitor in whiskies; firms like Shiseido and Kao are up against the Unilevers of the world. Yes, their manufacturing companies have shown brilliant marketing skills as they have driven their automobiles and consumer electronics goods worldwide. However, Japan has not had a history of branding in consumer goods, generally relying on the overall name of the producing company. Thus the coming of Asahi's "Super Dry" beer, which doubled Asahi's market share almost overnight, was one of the first times that the vigorous promotion of a brand really worked (Fields, 1989, p 65). On top of this inexperience back in Japan is the problem of handling cultural diversity overseas, for there is no way that any company is going to maintain a global brand for decades unless they are fully sensitive to the cultural variations with which the world is filled.
Perhaps a sign of the times is the way that it is Nestle and Coca-Cola who are seeking to globalise canned ready to drink coffee, despite the fact that, through UCC, this is a Japanese development - originally sold in vending machines outside railway stations. Nestle and Coke have entered a joint venture in Japan to compete in this market. The lessons they learn from this experience will immediately be fed back into their own global networks. There is little sign that there are any Japanese companies in the position to compete against them outside Japan.
So different from the competitive position in autobiles and consumer electronics. But then the culture behind branding is (primarily) American .. and culture can still provide competitive advantages to nations.
George Fields, THE JAPANESE MARKET CULTURE (1989: Japan Times) (2nd Ed)
Alan Friedman, "The ascent of Everest: Coca-Cola's plans for a new global sales assault", FINANCIAL TIMES, 16 January 1992, p.13)
HARVARD BUSINESS REVIEW, May-June 1991 [#@] [article on cultural islands etc]
There is no hiding place for the corporate giants. The twin revolutions (Needs to be squared with earlier chapter: how many revolutions are we talking about?) are rewriting the rules governing global competition at every conceivable level. Executives do not just have to focus on producing the right products at the right time. They are having to restructure their product development and manufacturing systems. In some cases, they are even having to redefine the industry in which they are in. Simultaneously, they are having to develop strategies for each of the major continents, which is pushing them into problems of managing in a multi-cultural world. On top of all this, many of them are moving into the political unknown. Industrialists who could once count on a cosy relationship with their parent governments are being cast loose as the concept of protected national champions increasingly becomes taboo.
..... and all these challenges are hitting executives at an increasing speed and intensity. To hesitate is to lose competitive momentum. In many cases, delays in coming up with strategic responses to this more brutal world can be terminally fatal.
This is an environment which renders many past strategies irrelevant. The world of Henry Ford is dead - as is the world of Alfred Sloan, whose multi-divisional structure turned General Motors into a colossus which bestrode the world scene for so long.
Executives are having to feel their way into a future in which classic industrial organizations are ripe for tearing apart. Just as the model of the command economy has failed the competitive test at the national level, so is the classic Detroit-style, hierarchically-organised approach faltering at the level of the corporation.
New models are emerging, but their relevance to tomorrow's information-abundant world still has to be demonstrated. Executives still have an immense amount to learn from Japan's lean production methods; however, serious questions still remain about how far one can generalise from the experience of Toyota and the other Japanese corporate giants. Again, the model of Japan and Germany suggests that "families" of companies may give their members a competitive advantage over those companies which come from a more arms-length competitive environment. At the same time, the structural change occurring both within and around American giants such as IBM raises the possibility that the classic multinational company is dying, and that new more flexible structures of competition and cooperation may be emerging.
The truth, though, is that executives and management gurus round the world are all just guessing what the strategies and structures are which will guarantee survival in the coming century. The only certainties are that executives must assume that the emerging battle ground will be a multi-cultural one; that information barriers will continue to fall; and that lessons from the past will be of limited use to those seeking to plot a strategy which will stand the test of the coming decades.
A symbol of what is happening is the fate of Motown - Detroit.
For three quarters of a century, Detroit was a symbol of all that was powerful in the American industrial sector. First, there was Henry Ford who perfected the classic mass- assembly factory. His approach was then perfected by Alfred Sloan who, in putting together General Motors, perfected the system of decentralised divisions, sharing a reasonable proportion of mechanical parts and joined in a coherent marketing strategy. (Womack et al pp 39-41) For decades, this formula worked well. In 1952, the then President of General Motors, "Engine Charlie" Wilson, went on record as saying that what was good for the country was good for General Motors. Detroit was then at the zenith of its dominance of the world automotive industry.
During the 1960s, this classically simple organizational structure became more complex
as computers allowed corporate headquarters to start coordinating activities which - pre-
For a while, Ford and GM were able to make their global strategy work. They saw off the competition from European upstarts like Volkswagen and Renault. They even saw off the competition from Chrysler which, weak within the US, was unable to build itself a sustainable operation in Europe and was forced to retreat back to the Americas in the 1970s. In so doing, Chrysler became one of the first of the corporate giants to fail in the attempt to establish a genuinely inter-Continental presence.
However, it is what has happened to Detroit's Big Three in the 1980s which is of particular significance for this book. Both Chrysler and Ford faced major crises in the early 1980s from which Ford, in particular, drew important lessons. By studying Mazda, the Japanese company in which it took a 25% stake in 1979, it realised just how far ahead the Japanese industry had moved ahead of Detroit in the field of lean production. The American company launched a crash "PJ" ("Post-Japan") programme which focused on slimming Ford down, speeding development times, drastically improving quality performance and improving relationships with suppliers. Although this has not saved Ford from losses in the early 1990s, the company has learned significant lessons, such as with the building of its plant in Hermosilla in Mexico in the mid-1980s. Ford drew heavily on Mazda's Japanese experience and produced a plant with the best quality record of all the world's mass-assembly auto plants surveyed by the MIT team (Womack et al p.87; Business Week 10 Feb 1992 pp.38-43).
GM took longer to learn its lessons. Like Ford, it had links with one of the smaller Japanese auto manufacturers (Isuzu) but, unlike Ford, it never put a serious effort into building serious links with its partner. Instead, it did some learning from the Japanese, though the NUMMI joint venture with Toyota. In general, though, it drew the wrong conclusions in the early 1980s, assuming that salvation would come primarily from the application of advanced electronics (when the Japanese were showing that this was only partly the answer; good production engineering and the development of teamwork were also part of the solution). So, GM invested heavily in high-tech companies; and, in creating its Saturn division, it sought to demonstrate that the application of advanced automation in a freshly created division could lead to an operation which is fully competitive with the Japanese.
Effectively GM failed. After losing $2 billion in 1990 and $4.5 billion in 1991, GM finally had to bite the bullet. It announced that it would be closing six assembly plants and 15 other facilities by 1995, losing along the way some 74,000 blue and white collar jobs. Overall, this would mean that the workforce will end up just half of its 1985 size (FORTUNE 13.Jan.92). This can only be described as a massive down-sizing in response to a general strategic failure in the face of growing competition from Japan and faster-reacting competitors such as Ford.
GM is only one of a long line of companies throughout the USA and Europe which have been forced to announce similar slash-and-burn rationalisations. Within the USA, there are cases such as Firestone which, during the mid-1980s, while trying to remain independent, lopped 50,000 from its workforce (which was roughly halved), but still ended up being acquired by the Japanese competitor, Bridgestone. IBM cut 53,000 jobs in the late 1980s, and announced in late 1991 that another 20,000 would have to go, some of them forcibly. In 1990, McDonnell Douglas (@#sp) announced it would be shedding 11% of its workforce. In early 1992, another aerospace company, United Technologies, announced the elimination of 13,900 jobs and the closure or consolidation of more than 100 facilities around the world.
Within Europe, British Steel cut its labour force by 112,000 between 1980 and 1990, ending with just over 50,000 employees. In October 1990, the Dutch electronics company, Philips, announced cuts of between 45,000 and 55,000 from a global workforce of 285,000, and disposed of 24,200 of them in the first nine months of 1991. Other significant announcements have included 35,000 lay-offs by Fiat (1990), 15,000 by Electrolux (1990), 6000 by Anglo-Dutch Unilever (1991) and 3,400 by the Dutch automotive company DAF (1990).
Such deep rationalizations have been the typical first response by companies finally becoming aware of how desperately their competitive position has slipped. Although tragic in terms of individual employees and, often, whole communities, such butchery is often the first desperate step toward staunching financial losses, and thus buying time as survival plans are put into place.
Philips is a good example of how such rationalizations can be managed. Once the company had faced up to how badly it had fallen behind the Japanese competition, it rethought its overall strategy and shifted its focus more purely toward consumer electronics. It thus got out of a number of sectors such as information technology, white goods (where it had a joint venture with the American company Whirlpool), and telecommunications (where it had a joint venture with AT&T). It also pulled out of some of the pan-European collaborative research efforts it had got involved in. For European industrial policy, all this was an apparent disaster, since Philips was one of the few local companies which could conceivably be a significant player in such strategic sectors. On the other hand, this intensive restructuring at least pulled the company back into the black over 1991, thus buying it time to see if one of its new consumer-oriented products would come good over the subsequent couple of years. As with all such rationalisations, the easy steps come first. Cutting back on "non-core" activities and pruning the dead wood are relatively simple (if unpleasant). However, once that is done, management has to have product strategies in place which will produce the next generation of profits needed to sustain growth. In the case of Philips (a company with a strong research tradition), the odds are that it will pull itself around. One cannot be so optimistic about a number of the other companies which have been slashing employment since the turn of the decade.
One can, in fact, see the current wave of rationalizations in terms of Shumpeter's cycles of creative destruction. In this case, companies are responding to two challenges - the rise of Japan and the coming to age of the information revolution. In particularly, the application of computers, fax machines, photocopiers et al has meant that it has become possible to shrink managerial bureaucracies by hacking out whole layers of management which, in earlier, pre-electronic days were essential to coordinate the activities of complex operations. The need for coordination is still there, but the electronic neural paths of the modern corporation are now sufficiently robust that decision-makers can communicate with each other with a speed and precision which previous generations of executives could only dream of. At the simplest level, the word- processor has meant that the automatic assumption that each executive had his/her own secretary is now invalid. Similarly, the fax machine and direct overseas dialling means that complex international divisions are needed increasingly less as an intermediary between company headquarters and decision-makers scattered throughout the globe.
So, when GM et the others reach for the axe, they are not necessarily damaging themselves. Instead, they are often coming belatedly coming to terms with the organizational realities of today's world. Today's organizations can be run on a much leaner basis than was true in the past. Just as the clerks of the 19th century who would transcribe document after document with quill pens were eradicated by the advent of the typewriter; so the middle manager of the post-1945 era is being eradicated by the electronic wave which is transforming the way that any organization - let alone global ones - is being run.
On the other hand, cutting out layers of bureaucracy does not guarantee that the creativity of the executives who are left will improve. Managements who have their eyes turned to the wrong competitive targets will go under, however much they may have hacked away at their bureaucracies.
IBM is like General Motors, one of those bellwether companies by which the health of the US economy has recently been judged. To those of us writing about corporate issues in the 1960s and 1970s, IBM's onward march seemed unstoppable - but it, too, is in crisis. The big difference to GM is that IBM's response has been very much more sophisticated - and it tells us a great deal about how the world is changing.
IBM is a classic example of how the IT revolution has redefined the nature of competition in key industrial sectors. Quite simply, over the course of the post-war era, IBM came to dominate the world of mainframe computer - and "dominate" is the correct word to use. Throughout the 1970s and early 1980s its share of the world's data processing market came close to 40%. For a lot of that time, IBM was under heavy pressure from the anti-Trust authorities both in the USA and Europe to demonstrate that it was not abusing its position of dominance. Both in Japan and West Europe, industrial policy was aimed at producing companies which at least might survive in the face of IBM's competitive challenge. Few thought that anything would stop IBM pulling ahead of older industrial giants such as GM and Exxon.
Ironically, IBM has proven to be a victim of the technologies which gave it so much wealth for so long. As microelectronic developments put ever greater computing power onto microchips, the role of mainframe computers came under steady attack. IBM was forced to legitimize this development when it launched its Personal Computer in 1981. This was a major commercial success, but IBM was unable to control the wave of competitors which it unleashed, and it was thus unable to engineer a controlled shift away from mainframe computing toward the decentralised computing power which came from each office desk increasingly having its own PC.
Effectively, IBM misjudged the speed at which developments in computing technology would hit at its strategic core. First, it was very slow to realise that the switch to desk top computing was unleashing an avalanche of competition from (often small) companies which had low overheads, could move extremely fast and, in the case of companies like Compaq, produce higher quality products than IBM envisioned. This failure of vision meant that IBM spent a decade in which it slowed its decision-making and produced unattractive commercial compromises in an effort to maintain the kind of industry control that it once had in mainframes. The result was that IBM's share of the world computer industry fell from 36% to 23% in the 1980s - and to compound this disastrous performance, it even failed to maintain its hold on the Personal Computer market, dropping from 27% market share to 16.5% by the early 1990s (Business Week 16 Dec 1991, p.38).
Its response has been two-fold.
First, realising that it no longer has the in-house skills or cultures to keep the lead in all parts of the industry, it has become one of the foremost exponents of the strategic alliance concept, whereby companies enter alliances with other independent companies (normally to cooperate in one or two very distinctive areas). In IBM's case, this has involved entering alliances with companies such as Apple (primarily for the creation of new imaginative software), France's Groupe Bull (in which IBM is taking a small equity stake), Germany's Siemens (collaboration on the production of 16- and 64- megabit DRAM chips). In addition, in Europe alone, over 1990-91, IBM spent $100 million to buy into some 200 software and computer-service companies. Elsewhere in its empire, it was starting to make computers for Wang and Mitsubishi. In chips, it forged an agreement with Intel [@# check] to push the downsizing of computers toward the goal of getting a computer on a chip.
Secondly, in late 1991, it announced a programme of radical decentralization of power within its system to give considerable autonomy to business units such as Personal Computers and Workstations ($14 billion revenue in 1991), Storage Products (tape and disk drives: $10.8 billion), Software ($10.6 billion) and a number of other activities, possibly including its semiconductor business.
The idea is that IBM headquarters at Armonk will retreat from making operating decisions and will become much more of a holding company. The autonomous business units will be given profit-and-loss responsibility, will be expected to hit financial targets, but will increasingly be free to choose how closely they will work with other parts of the IBM family, and could even be allowed to float some of their shares off into the markets thus winning an even greater sense of independence.
The full implications of this reorganization will be dealt with later. For the moment, what matters about it is that IBM is facing up to global competition in an even more ambitious way than firms like, say, Ford started to do in the mid-1980s. Both companies have realised that rebuilding competitiveness is not just about slashing costs. It is about redefining the very way in which even (perhaps, particularly) the corporate giants do business. There is an urgency within today's executive elite. Massive competitive change is inevitable and irresistible. All one can do is take some initial defensive steps, and then redirect executive attention to the real springs of global competition, while redesigning the structures within which they work.
Accepting that companies are having to develop strategies for an extremely fast-moving world, are there any general patterns which can be identified?
Firstly, it is clear that all companies must continuously monitor the impact that new technologies are having on their industries.
In some cases, one is literally talking about technologies redefining the business sector in which a company is doing business. IBM's experience with the computing world is a graphic example of the way in which IT has revolutionised one key sector. Another example concerns the British company Reuters which has developed a world lead in the field of computerised financial trading systems. Originally, Reuters was a conventional newswire service feeding worldwide news to the British newspaper industry. As newspapers gradually lost ground to television, it seemed that Reuters would fade away gently. In fact, it discovered that it had developed a lead in the electronic transmission of financial information, and worked hard to build up a global network of terminals through which currency movements could be tracked and then traded. At the time we write, 40% of foreign currency trades are made through a Reuters system. This company is moving on from mere currencies, and is aiming to develop a system which will allow clients to trade stocks, options and futures on a single screen. In so evolving, Reuters has been at the very heart of the development of 24 hour financial markets. It has come a long way from its mundane beginnings.
Sticking with financial services, there are other examples of the way that IT developments are blurring industry boundaries. In particular, the development of electronic money-transfer systems, credit cards and automatic teller machines (ie "hole- in-the-wall" cashpoint machines) have been destroying the boundaries around the classic banks. Technologies such as these have allowed non-banks such as Sears Roebuck, General Motors Finance Corp (@# check) or a number of savings and loans operation ("building societies" in the UK) to become major financial institutions carrying out most of the transactions which used to be a banking monopoly.
Even if technology does not produce completely new sectors, it is proving a potent force in blurring boundaries between apparently distinct industries. When this happens, established companies on either side of the blurring divide are forced to act, even if there is no guaranteed route to survival. As we write, the erosion of the barriers between telephone systems (carrying voice messages), telex-style systems (carrying information), television (carrying sound and pictures) is well under way. Effectively, the digital revolution is moving toward a world in which a single transmission media - whether it be high capacity cable - can simultaneously carry television signals, complex computer interactions and telephone conversations.
There is a lively debate about how comprehensively companies should respond to this convergence of computing and telecommunications. The Japanese electronic giant NEC has a specific strategy {CCC? [#@]] C&CC?] in which it seeks to foster the convergence of its computer and communications equipment activities. Fujitsu is another Japanese company which seeks to combine these two sectors. Various western companies have sought to achieve such results via strategic alliances with apparently complementary companies. Thus AT&T tried first to enter Europe via two doomed alliances - one with Philips (with a consumer electronics bias) and Olivetti (a company with a computing tradition). Canada's Northern Telecom formed similar alliances with computer companies such as Apple, DEC and Hewlett-Packard.
In another kind of intelligent response to technological developments, company can use technology to rejuvenate old products or effectively create new ones. Sony has been at the centre of a number of such breakthroughs made possible by developments in solid- state electronics. The original transistor radio, for instance, was a classic example of how an apparently mature product could be rejuvenated by the application of microelectronics. Then again, there was the video recorder which, it its initial guise was a bulky, expensive product aimed at professional television studios. What Sony (and Philips and the Matsushita Group) did was to miniaturise the product by applying microelectronics until, in the 1970s, they had a product which was both cheap and compact enough to become a staple product within the home. Finally, Sony had the genius to produce the Sony Walkman, a product which was in its way as brilliant a conception as the original transistor radio. Once again, the miniaturization made possible by electronic developments allowed the development of a totally new consumer product. Sony had once again hit the jackpot.
In today's world, though, the intelligent application of new technologies has to be far more pervasive than merely to help the production of conceptually brilliant new consumer products. All the lessons from Japan's development of the Lean Production system are that technology is now being used to speed development times, to increase the flexibility of production systems, without in any way compromising their overall dedication to quality.
It is important to stress that the Japanese lead in Lean Production has not just been developed by the application of new, flexible technologies. There is, after all, some important social organization underpinning this Post-Ford era. Having conceded this, the challenge to western companies has been extreme. The challenge has been most obvious in the automotive sector, but throughout other key sectors such as consumer electronics, semiconductors et al, other Japanese companies have been showing their mastery of contemporary industrial production techniques.
There are other, non-Japanese cases of companies which have gained considerable competitive advantage by discovering creative ways of applying new technologies to their businesses.
Italy's Benetton is a neat example. Founded in 1965 in a disused henhouse in north- east Italy it had, by 1990, become the world's largest consumer of raw wool, selling imaginatively designed woolen garments through 5,900 shops in 82 countries. Originally a knitwear manufacturer, it eventually moved into retailing, where it realised that by electronically linking the stores to the design, manufacturing and warehousing operations, it could gain an advantage over its competitors by producing garments in undyed wool, then dying them at the last moment to hit the changing fashion requirements of end-markets. The intensive use of electronics allows management to monitor what is happening in each market (by the late 1980s, the world was divided into 70 areas), and to shorten the time needed for orders to be scheduled through factories. The current generation of electronic equipment allows Benetton to capture the model, colour and size of all garments sold in key shops round the world. This gives Benetton advance warning of changing demand patterns, and thus permits optimum scheduling of production. The use of computer-aided design means that the company can produce a much greater variety of products than would otherwise be the case. By the end of the 1980s, its annual production of 50 million garments came in the form of 3000 designs using around 200 different colours. (The Guardian 27 July 1989 p. 25: The European 7 September 1990 p.19).
From the airline industry, there is the example of the way that assorted airlines realised that there was competitive advantage to be won from moving early into computerised reservation systems. American (the Sabre system) and United (Apollo) moved early into this business, and positively sought to include other companies into them. For a while (until the competition authorities caught up with them), they were able to play competitive games with which airline's flights were shown most prominently. Ultimately, though, these reservations systems have just proved a good investment. In 1990, for instance, American was earning more from the Sabre system than it was from its conventional airline business.
A further way in which corporate strategy interacts with technology is in the area of standards, because, just as companies win by getting their brands accepted globally, so can companies win by getting their technological standards accepted.
There is nothing particularly new about this. After all, if one thinks back over the history of, say, recorded music, there were no guarantee that consumers would ultimately settle on, first, 78 revolutions-per-minute records, then 33 rpm long-playing records and, finally, 45 rpm singles. In each case, the format which won out did so over alternative ones of which few of us are even conscious.
What had happened is that the increasing pace of technological change means that companies are faced with standards-determined marketing at decreasing intervals. Thus the long-playing record has been superceded not just with one product but with a variety. Not only have both the audio tape and the compact disk been competing to replace the LP, but they have been evolving in their turn, with Philips and Sony both trying to establish their variants of digital compact cassettes as an alternative to CDs.
One only has to look back to the development of video recorders to see the importance of such battles. This was a case of three different standards struggling for recognition on world markets. Philips was into the field early, but too slightly too long to settle on one fixed standard. Sony was recognised as having the most sophisticated product (Betamax), but was too restrictive in whom they would license the technology to. It was therefore left to JVC (and its Matushita parent company) to walk off with the prize through the VHS system, which it licensed widely, thus developing a critical mass of software dependent on the VHS system. As consumers increasingly bought or rented VHS tapes, they became increasingly dependent on VHS hardware, which further strengthened the demand for VHS tapes, which ..... . It is this video recorder case which explains why Japanese consumer electronics firms like Sony are so determined to lock up the Hollywood film and record catlogues. The argument goes that this will allow them to give their next generation electronic products a competitive initial kick by simultaneously launching attractive films and records on the relevant software.
Sony, Philips and, to a lesser extent, Matsushita have been key players in these standards wars. The first two, in particular, have cooperated quite closely in setting mutually beneficial standards, starting with the initial audio tape cassette, and taking in a lot of developments in compact disk technology. They both know that a product which can be given solid initial support simultaneously in Japan, West Europe and the USA (which now has no real consumer electronics champion in its own right) will tend to win over products which have to establish themselves sequentially in the three centres of the Triad World. Although they will still find themselves pushing some mutually- incompatible products (digital compact cassettes are a case in point), in general, they know the importance of working together where possible to develop mutually-acceptable standards as often as possible.
What has happened in consumer electronics, has been happening in different ways in a variety of other sectors. In Personal Computers, IBM pulled off the trick of creating a standard to which the bulk of the world's computer manufacturers had to come to accept. IBM's tragedy is that its standard actually helped fleeter-footed competitors catch up with and then move ahead of IBM - but this is more a condemnation of IBM's slowness of reaction than of its underlying strategy. Since the original PC case, IBM and its competitors have been in an interesting competition, whereby IBM has been trying to make subsequent proprietary standards stick with greater force, while the competition has been aiming to develop "Open" standards which would effectively allow equipment and software from different sources to link together without any one company trying to dictate on what terms this connection should be made.
General Motors has pioneered an equivalent approach to factory automation with MAP (Manufacturing Automation Protocol) which is designed to let equipment from a variety of manufacturers be used together.
Elsewhere, governments can come into the standards-setting arena. Sometimes, they simply have to be the key setters of standards because, for instance, no one is going to start manufacturing television sets until it is clear how the broadcast signals will operate. Increasingly, though, such standards setting is seen to have a place to play in industrial policy. In the first wave of television standards creation, the fact that Europe and the USA ended with three distinct standards was of commercial importance - particularly in Europe where the French could use the SECAM standards to protect French industrial interests, and where the PAL license used elsewhere in Europe was used positively to force Japanese television manufacturers to show competitive restraint. As we write, there is a complicated battle taking place around High-Definition Television (HDTV) standards, with the USA, Japan and Europe all aware that the precise standards chosen will affect the competitive position of Japanese consumer electronics companies against the rest - though there is the convincing argument that today's consumer electronics companies are so globally alert that they will adapt quite easily to whatever standards are set on each continent.
Most industrial sectors will have some standards which are of commercial significance. From the foregoing, one can see it is sometimes up to the companies concerned to find ways to get their standards accepted as de facto global ones. In other cases, it is still up to governments to set standards, but they will normally do so, with an eye to improving the competitive position of indigenous companies. In either case, either company or government is motivated by a knowledge that standards are an important weapon in the search for global competitive supremacy.
Mastering high-technology is not the only route to a global presence. The testimony of firms such as Coca-Cola, Philip Morris, McDonald's, Nestle, Unilever, Grand Metropolitan, Kellogg, General Mills, Levi Strauss, Walt Disney, Guinness, Heineken, Seagram, Suntory, Nintendo and Kao is that a dedication to the black art of marketing can be just as effective in breaking into global markets as producing a series of research and development breakthroughs - and often a successful brand may be far more durable than products which rest on a relatively short-lived patent.
In an earlier chapter we have touched on the issue of global brands. Although we sided with the sceptics who challenge the idea that the majority of products are ever going to be suitable for global branding, their can be no doubt that all companies should examine their marketing strategies to see how far they should at least start to go down this route. This is because the lesson from brands is that, once one is established as one of the leading two or three in its field, it becomes a potent force which can often be maintained as a leading brand for decades on end - providing the company behind the brands is astute enough.
What we are seeing today is a rush by consumer products companies to stimulate consumer markets in the economies which are currently edging into some form of prosperity, while establishing brands wherever this is possible.
An example of this process is the joint venture called Cereal Partners Worldwide (CPW) formed between General Mills and Nestle in the late 1980s. General Mills was seeking to take its American expertise in breakfast cereals into a world where Kellogg had often arrived first. Nestle had a very strong global presence with products like Nescafe, but was weak in cereals. Hence the purpose of the joint venture was to roll-out General Mills' branded products through Nestle's global marketing networks. Within Europe, they have been spreading Cheerios, Golden Grahams and (a recent acquisition) Shredded Wheat through southern European countries like France, Spain and Portugal, which have been relatively unaffected by the Kellogg cereal breakfast offensive which has been so effective in North European countries like the UK. In the future, such products can be rolled out through Nestle's marketing channels in Asia, Africa and Latin America. (Fortune: July 91)
This is a classic case of two companies setting out to cover the world with established brands and their variants in one particular market sector. What is happening in breakfast cereals is being replicated in cigarettes, razors, detergents, alcohol, fast foods, clothes, instant coffees, perfumes, lavatory cleansers, margarines, hotels, soaps, confectionary, shampoos, toothpastes and so on. Where products can be branded, they are eased into the awareness of the global citizen. Once in the global consciousness, they will be hard to eradicate.
Of course, extending the geographical boundaries of the consumer society is the territory of the truly giant consumer goods multinationals - the Unilevers, Procter & Gambles and Coca-Colas of the world. Where consumer markets are already well developed, more subtle strategies are developing. All sane marketers are aware of the dangers of over-standardisation, but still the competitive pressures are on the multinationals to rationalise their marketing campaigns. The kind of development now found is that whereby Gillette will launch a new razor like the Sensor (in 1989) with a common name and marketing strategy in 19 countries on both sides of the Atlantic. On the other hand, one can find companies in the same industrial sector which take different positions on whether to go for global or regional brands. In domestic appliances for instance, the American company, Whirlpool is tending to go the global route, while its European competitor, Electrolux, is keeping local brands in existence, alongside its pan-European ones. (Guardian, 11 Jan 1992, p.11).
However, even if brands are not standardised, it is still possible to take a marketing strategy from one country and apply it to an equivalent product in a second country. One such example is the campaign run for Nestle freeze dried coffees in the UK (Nescafe) and the USA (Taster's Choice), in which a sophisticated man about town and his attractive neighbour borrow the relevant coffee off each other and, over a sequence of advertisements, develop a romantic relationship - keeping the coffee link active. Although not to everyone's taste, these serial advertisements worked well in the UK and so were adapted to work in the USA for a similarly positioned product.
Of course, marketing is not just about devising the correct branding strategy. It is also about devising marketing strategies which keep the pressure on the competition. Once again, the Japanese seem to be leading the way in they key area where technology and marketing intersect - that is in the number of products put on the market, and the speed with which they can be developed.
Japanese companies put much less emphasis than their western competitors on formal market research. Instead, they follow a "scatter-shot" approach, in which companies follow hunches, cover their competitors' products through reverse engineering, throw a wide variety of products at the market, with the minimum "time-to-market" possible, and then wait to see which products succeed or fall by the wayside. Special "antennae" shops are developed which are monitored closely so that products can be launched in them, and consumer reactions almost instantaneously monitored. Successful products can then be reinforced by clusters of related products, and unsuccessful ones can be quickly dropped.
Production technology comes into the equation, because if one is dealing with products of the complexity of the automobile, one needs the kind of production flexibility produced by the Lean System to produce models in the shorter, more idiosyncratic, runs which today's individualistic consumer demands.
Speeding product development is not, however, just a question of good technology, as the case of the British pharmaceutical company, Glaxo, shows. This is a company whose success with one anti-ulcer drug called Zantac turned it into Britain's largest company by capitalization (1991). Zantac was not the first anti-ulcer drug to hit world markets, but the Glaxo management gambled that, by shortening the time-to-market for Zantac from the normal ten years to five, then they would ultimately win the global marketing battle. So, the scientists carried out all the development stages in laboratory simultaneously (speed was increased at the expense of increased cost and risk). Secondly, the drug was launched in every large market in the world at the same time, instead of being rolled out one by one. Third, it was priced at a premium to strengthen the impression that this was a distinctive product. Everything in this strategy worked smoothly, and Glaxo became the second largest drugs company in the world (Lynn 1991).
This is a very clear example of the rewards that are potentially there for companies which can speed development times, while simultaneously marketing globally. The financial risks may grow. But then the rewards grow higher too.
Technology and products are only part of the picture. Equally important is knowing how to position the company round the globe.
The emerging conventional wisdom is that companies must establish themselves throughout the triad world. This is the basic thrust of an author like Kenichi Ohmae. If companies are not established throughout the globe, then they fail to gain the scale economies needed to sustain the company in an era of intensified competition.
There is much truth in this argument, and one can identify at least three different kinds of companies which have to consider globalization as a major strand in their strategy.
There are the technologically-driven ones, which need to spread research and product development costs across as wide a set of markets as they can develop. The aircraft and aero-engine manufacturers are a classic example of the forces at work here, with Boeing, McDonnell Douglas and Airbus in the former sector, and General Electric, Pratt & Whitney and Rolls-Royce (with Snecma as a bit player) in the latter, fighting a global battle for survival. There are immense barriers to entry into both industries, and the Japanese have no immediate prospects of breaking into them as an independent player. Despite that, all the western aerospace companies are being forced to develop strategies which include some form of partnerships or alliances with Japanese and other Asian companies in order to improve their chances of picking up a decent share of the fast-growing Pacific Rim market.
In the commercial jet sector, the mighty Boeing has found it sensible to bring in Japanese risk-sharing partners in the development of the 777 wide-bodied jet. Behind Boeing, McDonnell-Douglas entered the 1990s faced with the prospect of being driven into a poor third place behind Boeing and Airbus by the mid-1990s. Its reaction has been to look for equity investors and risk-sharing sub-contractors in Taiwan, Japan, Korea, Singapore and Indonesia. There is a possibility that at least part of McDonnell- Douglas' operations could become an Asian equivalent of Airbus Industrie - a regional champion for a range of governments.
All these aerospace companies know that success in North America and West Europe is not enough. If they fail also to establish themselves in Pacific Rim markets, they will lose the scale economies which are critical to long-term survival.
It is a moot point how many other industries are driven so purely by scale economies in production and development. Semi-conductors, pharmaceuticals, much of computing and telecommunications equipment manufacturing, automobiles and consumer electronics would all seem to be sufficiently scale-led to require some form of triad strategy. In a number of these sectors, the Japanese have an advantage in that they are moving outward from a market which has, until recently, been extremely difficult to penetrate - originally for protectionist reasons, now primarily for cultural ones. Inevitably, this has given industries such as the Japanese automotive and consumer electronics ones an extra competitive edge, particularly when western companies have been extremely slow to react competitively within Europe and North America.
A second reason for adopting a triad strategy is where companies are market driven in sectors where tastes are homogenizing. Even with brands, there are scale economies. It matters, for instance, to Pepsico that Coca-Cola has traditionally been much stronger globally, controlling 46% of the international soft-drinks market, and deriving 80% of its profit from selling Coke, Sprite and Fanta sodas in non-US markets (IHT, 8 November 1991 p.11). By failing to slug it out with Coke on an equal basis all round the world, Pepsi has been ceding its competitor the lion's share of the faster-growing, most profitable markets, thus endangering its competitive position back within the USA.
In cases like the Pepsi-Coke or the Kellogg-Nestle/General Mills battles we are dealing with competitive global roll-outs: large parts of the globe are still under-exploited in branding terms. Competition between the brand-led giants turns around the comparative speed and effectiveness in which they can establish their presence in successive countries and regions. If, within the USA, the leading brand in 1925 was still, within 19 out of 22 standard products, in the same position today (Asker cited Economist 7 Sept 1991 p 89), the rewards for winning global brand leadership today can only be described as immense.
A third reason for developing a global strategy is to follow one's clients. If they go global, or if the centre of gravity of one's chosen industrial sector shifts as new competitors move to the fore, then component suppliers have to adapt their strategies. In the past, this was why American auto-component companies like Borg-Warner moved abroad. Today, it explains why the Japanese component suppliers like Bridgestone (tires), Nippondenso (automotive electronics) and Calsonic (catalytic converters etc) have moved so actively into the USA. They have been following the key customers, the Japanese automotive giants, as the latter have set up transplant factories in North America. One can find similar developments in any industrial sector. It is even starting to happen in telecommunications where the more ambitious telecoms players feel that the giant multinationals would increasingly like to buy all their global telecoms business through one company. Sprint, the third largest long-distance carrier in the USA, is now offering such services. On the purely data front, in 1991, it won the contract to run Unilever's entire European data network, beating off competition from AT&T, British Telecom [#@ "BT"?] and computer consultancy firms like Digital Equipment and EDS. (Economist, 19 October 1991, p.130).
In industries like automobiles and consumer electronics, where the centre of gravity has moved to Japan, non-Japanese component suppliers have an interesting dilemma. Japanese transplant operations - particularly in Europe - are not completely closed to indigenous component suppliers. However, overall product design and, thus, a great deal of purchasing policy is carried out in Japan. An initial way to break into this system is to form joint ventures with Japanese component suppliers close to the transplant assembly lines, but this may merely legitimise the presence of the Japanese suppliers. The more ambitious approach is to seek to supply the Japanese assemblers anywhere in the world, including within Japan itself. Thus, a British component company, GKN, finds that it is selling products to the Japanese transplant community in North America. Another such British company, Lucas, has entered a joint venture with Sumitomo to make brakes in the USA, and is signing licensing deals with the Japanese in a bid to win business back in Japan. The occasional company has gone further to cement relations with the Japanese corporate headquarters. The British chemical company, ICI, has put down a technical centre in Japan at least in part because it missed the chance of getting close to the Japanese consumer electronic companies as they started to dominate the electronic media: through the establishment of its technical centre in Tsukuba Science City, it hopes to demonstrate that it is a serious, quality-driven player in the plastic films needed in this fast-moving market which is now driven from Japan. The argument is that by working more closely with product designers in Japan, the outsider companies increase their chances of winning contracts throughout the global operations of the Japanese giants.
This brings us to one other reason for selective investments round the globe. Quite simply, the world's most innovative markets now vary between different product sectors. In many cases, US markets are still the most innovative. So, if one wants to monitor environmental, life-style or movie developments, then a presence in California is essential. Although there were other reasons why Sony invested in Columbia Pictures, it was all part of a history in which the Japanese company has responded to life-style developments in this opinion-forming state.
Michael Porter developed this argument in his book THE COMPETITIVE ADVANTAGE OF NATIONS in which he developed the argument that different countries develop the early movers in a particular industry. Thus, in agricultural chemicals, Du Pont moved its European headquarters from Geneva to Paris to get closer to the major agricultural centre in Europe. In small copiers, Xerox' involvement in Fuji-Xerox has allowed it to take part an industry which now breaks technically from Japan. In domestic appliances, Philips moved its relevant headquarters to Italy (Porter 1990 pp 611-5).
From the Fuji-Xerox and earlier ICI example, one can see the growing strategic importance of Japan. In consumer electronics, for instance, Japan has become the prime source of innovation, and Philips, the main European presence in this sector, has responded by strengthening its presence there. In a related move, it has been using Taiwan as its main focus on the residual black and white television sector. This reflects the way that the whole East Asian Pacific rim has become the world's lead centre for low cost electronic assembly.
Within Europe, the UK has become a world centre for the hotel industry, and the Inter- Continental chain switched its headquarters from the USA to reflect this fact. The UK has also quite consciously used deregulation policies to stimulate competition within the telecommunications and financial services sectors. This paid off when IBM switched the headquarters of its [[#@ check] telecommunications] division out of the USA (the first time IBM had ever let this happen). Within the world telecommunication sector, it is generally acknowledged that the UK is now providing the world's most competitive market in regards to mobile telephony and other telecommunications developments. The result is that companies like the American Baby Bells (the offshoots of AT&T's divestiture) are investing in the UK to explore branches of business which regulators in the USA still deny them.
Not all companies will be able to sustain a truly global presence, and some very interesting questions are going to be thrown up by those who decide they are going to have to build their future strategy on a presence in only one or two continents. This limited geographical strategy may be permissible because of the particular logic of the relevant industrial sector in which the company finds itself. Retailing, for instance, may be one of those industries where it is genuinely difficult to transfer experience across national borders, let alone across oceans.
In most cases, though, we are going to see companies retreating from an inter- continental strategy because they are, quite simply, unable to establish themselves competitively outside their home economy. Chrysler is a classic case of a company which has beaten a geographical retreat, having failed to establish itself in Europe during the 1960s and 1970s. More recently, there have been other significant retreats within the automotive industry. Both Rover and Peugeot have withdrawn from the American market. Volkswagen still sells there but [#@ check] has stopped manufacturing in the US, having failed to consolidate its early marketing success with the VW Beetle model. As a company, VW can still supply the US market from production facilities in Mexico, Canada, Brazil or Argentina, but the fact that it is clearly putting considerable trust in the importance of cheap labour assembly is not particularly reassuring when the Japanese are showing it is possible to invest in the USA and be competitive.
Having said that, it is not possible to adjudge corporate strategies as being successes or failures until some years after they key decisions have been made. Some of these retreats (those of Peugeot, Chrysler and Rover) have clearly been moves by companies which have decided they no longer have the strength to be world players. Volkswagen can still argue that it has potential export platforms in countries like Mexico, Canada, Brazil and Argentina, and that it has not totally given up marketing in the USA. Only time will tell whether its export platforms are indeed sturdy enough to compete with the Japanese transplants which seem to be performing more effectively than VW was able to do on US soil.
The main question is, though, whether there is any room in an industry like automobiles for independent players of the size of Fiat, Peugeot or Chrysler which increasingly seem to have continental ambitions only. Our guess has to be no. In industries of this technological complexity, a purely continental player will just not sell enough cars to allow the development of a product range broad enough to fight off the world players. Such questions even have to be raised of a company such as BMW which has been notably successful in developing a global niche of high-performance, relatively luxurious cars. As we write, sales are dropping in Japan in the face of intensified competition from the indigenous Japanese auto companies which have been moving up-market on the back of their success in standard models.
What is true for automobiles, seems equally true for most of the electronics sector and other research-intensive industries such as chemicals, pharmaceuticals, aerospace etc. Yes, of course, there will be industries where regional and other niche strategies are possible. At the level of the industrial commanding heights, though, such sectors look as if they will be the exception, and not the rule.
The one thing which is in common for all companies contemplating their international strategies is a sense of urgency. Barriers to international expansion are falling fast. Competition can come from any part of the world. Those who are left in their starting blocks will find it very difficult to make up the lost ground.
The slowest way to expand is through greenfield plants - the building of new facilities in key markets. This has tended to be the Japanese way of expansion. It has the virtue of being politically reasonably uncontroversial, but each plant does take time to plan, build and then expand. Particularly when the investment is in a new territory whose political or market potential is unclear, the temptation is to build the plant in stages. Inevitably the first investment will tend to be relatively small, probably less than is economically viable in the long term. It may well take an expansion of the initial investment to reach a truly economic size. All this may well take a decade or more. Given the number of countries in the world, such a greenfield expansion route is for the very cautious.
At the other extreme is the route favoured by the Anglo-Americans - expansion by acquisition of existing companies. This is a politically high-risk strategy which has the benefit of buying management, production facilities and market share in one fell swoop. It avoids the risk that a greenfield investment may run into resistance at the planning and construction stage. Because a company is normally buying a going concern, some of the market uncertainties are reduced.
Politically, though, this strategy runs the risk of considerable local outcry, as American companies used to find in Europe and as Japanese companies have found, as Fujitsu found when it tried to buy Schlumberger. In addition, there is a long scholarly literature which suggests that the purchasing company often pays far too much for its acquisition. After all, the reason why a company may be vulnerable to a bid is that its management has somehow or other fallen down on its job. Sure, in buying a company, one is buying its market share - but one is also buying a management which may be incompetent or hostile or both. If one is not careful, one may often be buying unexpected liabilities, such as the property and third world debts which European banks incurred when they bought into the American financial system in the late 1970s and early 1980s. Britain's Midland Bank became a potential takeover victim in its own right when its purchase of California's Crocker Bank went disastrously wrong.
Given the financial liberalization which took place in the 1980s, the global acquisition route suddenly became extremely attractive to a set of "financial engineers" who proved just how fast it could allow one to move. In fact, the 1980s were marked by a set of Australian and British companies who appeared, seemingly from nowhere, to become global forces.
Although many of these "meteors" fell to earth around the turn of the decade, there were some spectacular performances. The most extreme case was, probably, that of the British advertising agency, Saatchi and Saatchi, which was created in the 1970s, won some notoriety (and acclaim) for its political advertising on behalf of Mrs Thatcher's conservative party in 1979, then went on a global acquisition spree. By the mid-1980s, they had turned themselves into the largest advertising network in the world, having acquired American giants such as {Ted Bates? Young & Rubicam? [#@]]. Having reached that position, the structure started to fall apart as they proved incapable of managing the conglomeration of companies they had acquired. That, however, is not the point. The main lesson of this episode was the fact that Saatchi and Saatchi built themselves into the world's largest presence in their chosen industrial sector within fifteen years of their creation.
What the Saatchis were up to was part of a wider movement. From Australia, there was a set of entrepreneurs such as Rupert Murdoch (News International), Alan Bond, Robert Holmes a Court, Warren Anderson and Kerry Packer who played many of the same games, though only Rupert Murdoch (who, in the process, turned himself into an American citizen) finally survived on the global scene. In Britain, the equivalent figures were Robert Maxwell, Sir James Goldsmith and Lord Hanson (of Hanson Trust). Maxwell eventually made the classic mistake of paying too much for his acquisitions, mysteriously fell over the side of his yacht, after embezzling over $1 billion from his companies round the world (including the pension fund of one of the authors' wives!). On the other hand, Hanson Trust is a case of a company which has grown almost entirely by acquisition, but which has survived and has won its way into lists of the top 100 non-American industrial companies purely by playing the international acquisition game in an extremely disciplined way. Others such as Murdoch's News International got themselves badly overstretched financially but, providing they do keep their bankers happy, will end up as substantial global empires which have primarily been built by skilled financial engineers.
Put like this, the acquisition route will seem of dubious validity. Many of these meteors were children of the same era which produced junk bonds, Michael Milken and the Savings and Loans disaster. A number of the edifices they raised proved insubstantial, and were swept away as the financial tide turned in the late 1980s.
However, substantial, mainstream companies can also play this game. There will be disasters such as Ford's quixotic purchase of Britain's specialist car manufacturer Jaguar for a vastly inflated sum. On the other hand, in the right hands, acquisitions can be used to buy a company into that global number one or two slot which indicates they may have the scale to survive global competition. The battle between consumer products companies like Procter and Gamble and the Anglo-Dutch Unilever has at least in part been fought through tactical acquisitions on either side. Procter and Gamble, for instance, outbid Unilever for Richardson Vicks, while the European company subsequently went on to purchase Cheseborough-Pond [#@ spelling]. Unilever has also used acquisition to build itself into one of the world leaders in cosmetics - specifically, its 1989 purchase of Faberge and Elizabeth Arden allowed it to run neck and neck with L'Oreal. In a different sector, the British chemical company, ICI, hauled itself into the world's number one slot in coatings (ie paints) via its 1986 purchase of the American giant, Glidden.
Both the ICI and Unilever moves show that acquisitions can be used to give a company world leadership in specific industrial sectors - and that such acquisitions can seem to be made to work. The alternative strategy of internal, organic growth might eventually have achieved the same result but, first, a competitor might have moved to the fore by acquiring the target companies instead. Secondly, organic growth might well have taken decades to achieve a position which an overnight acquisition in fact achieved.
A further point which needs making is that mastery of financial engineering techniques is just as much a strategic skill as learning the secrets of Japan's Lean Production system. This is where companies from the Anglo-American financial tradition currently do have a lead over Japanese and, probably, continental European competitors. Coming from open financial markets in which any company can both instigate or be the target of a hostile bid, all sizeable companies learn how to play the acquisition game. Even when the financial activity seems to have no clear industrial logic, alert companies can still benefit.
An example is ICI's/Unilever [#@ full story: was it Chesebrough Pond? Was Hanson involved?]..Unilever successfully bid for Chesebrough, but immediately got rid of Stauffer Chemical which was part of Chesebrough's diversification: @# check]
The moral of this story is that being fully integrated into a lively financial centre such as the City of London can give inherent strategic advantages. This may be one of the reasons why British companies seem to perform on the global scene rather more strongly than the troubled history of the British economy would seem to predict. In many cases, their technological strengths may be suspect, but they come from a deal-making culture. As nationalistic barriers are falling fast, this speed of reaction may allow them to (in boxing parlance) "more than punch their weight".
Now, of course, there are a variety of ways to expand which fall somewhere between the greenfield and acquisition routes. One such intermediate route is franchising, whereby a company allows foreign investors to operate facilities (be they a hotel or hamburger joint) under the parent company's guidance. The advantage of this strategy is speed of expansion, but it can lead to problems with quality control. McDonald's, for instance, franchises widely within the USA, but has been much more cautious as it has moved overseas, since it has felt the necessity to ensure that US-style standards are maintained, even when moving into strange industrial cultures which may not value US- style service so highly, and may have to experiment to find (or supplement) local produce to look, for instance, the potatoes which produce the require quality of french fries. On the other hand, Coca-Cola has used franchising techniques quite extensively in expanding globally so fast. This has saved it from having to establish new bottling plants and marketing teams all round the world.
Licensing of technology is another strategy, though this can sometimes act as a two- edged sword. Historically, this was how western companies tried to exploit the Japanese market. In the face of Japanese cultural and legal resistance to inward direct investments, many foreign companies licensed their products or technologies to Japanese companies which may now be major global competitors to them. Thus, for instance, the post-1945 Japanese automotive industry was revived around models built under license from France's Renault and two long-defunct British companies, Rootes and Austin. A number of western companies now regret the casualness with which they licensed their technology in the 1960s and 1970s when Japanese competitive capabilities were becoming apparent.
Despite this caveat, licensing will continue to have a legitimate role in corporate strategy. For instance, there will be an increasing number of sectors where a new competitive balance will emerge in each part of the triad world. Inevitably there will be companies which are profitably established in one continent, but which do not feel they could successfully establish themselves as a major force on another. In these circumstances, licensing one's more successful products makes perfectly good sense.
Undoubtedly, the hardest decisions any company will have to make is how to organize for a world of global competition.
In theory, the picture is clear. There is clearly some sort of continuum from a purely nationally-focussed strategy to some kind of "transnational" approach in which executives are drawn from all round the world, and decision-making becomes "polycentric" - that is when business activities are run from wherever in the world decision-making seems most logical. To some extent, this debate about the ideal organizational structure is a battle between management school gurus such as Christopher Bartlett and Sumantra Ghoshal (Harvard and Insead) or Michael Porter who differ about the relative importance which should be given by a company to locating in strongly competitive home bases.
But this is also a debate in which the Japanese are involved, which is hardly surprising since Japanese companies are late-comers to the international scene and are having to shoe-horn a process of organizational change, which older-established "western" multinationals took decades to perfect, into a much shorter timeframe. In this debate, Kenichi Ohmae, the managing director of McKinsey in Japan and Sony's Akio Morita have been particularly influential. Their emphasis is on companies becoming "insiders" in key global markets by replicating the systems (including research and development, and engineering) which they have developed at home (effectively, this is a "cloning" strategy). Beyond that, though, they see a further stage in which the company is effectively denationalised. Morita talks of "global localisation", the ability of a company both to think globally while taking the needs of local markets and cultures into account.
In practise, this trick of melding the scale economies of going global with the needs of local markets is extremely difficult, and tends to be both time-consuming (when global competition requires speed of decision-making) and likely to require compromises which satisfy noone. An example of the problems faced is the way Honda ran into trouble with its 1990 Accord model. The 1986 model had been successful in both Japan and the USA, but in subsequent years demand patterns in these two key markets diverged. US consumers increasingly wanted a reliable, high quality means of everyday transport, while Japanese consumers wanted a status symbol. Effectively, Honda's engineers were required to produce two different cars, but did not have the resources to do so (you can be the ninth biggest auto producer in the world and still be too small). The result was a compromise design which sold well in the US, but did disappointingly in Japan. Any executive with global responsibilities will know Honda's dilemma, and there is no single blueprint which will work for all companies. One can, however, point to some trends.
First, there seems to be a swing away from over-powerful geographical divisions. Increasingly, product divisions are being given global responsibilities, sometimes even to the extent of shifting the headquarters of the relevant divisions out of the home country (Nestle, Unilever, Procter & Gamble and IBM have all gone some way down this road). This may on occasion lead to insensitive product development, but the thinking is that it is easier for strong product development and marketing teams to build cultural sensitivity into their operations, than it is for a geographical division to master all the nuances of the formation of product strategies.
At the same time, there is a pressing need to de-nationalise management structures. At a superficial level, this is is sometimes started by the adoption of English as the common working language throughout a company - which is, of course, a form of cultural imperialism by the Anglo-Americans, but also reflects the fact that "Broken english" has become the language of international business and diplomacy. Automatic interpretation devices will undoubtedly reduce the need for common linguistic skills in decades to come. For the moment, though, language is a barrier - particularly for Japanese companies seeking to integrate non-Japanese executives into their systems.
The de-nationalization of executive structures has to be worked from both ends of the executive spectrum. At the level of boards of directors (or, at the very least, international advisory boards), there is a strong case for involving a variety of nationals. In older established multinationals such as Unilever, ICI, IBM (@# examples need strengthening) this process has gone quite some way. [@# more text to follow]. Japanese companies are lagging in this area. Sony has appointed a German and American to its board. By 1990, Kyocera had three non-Japanese on its board.
What is more difficult is to give non-home national executives a decent career structure, which will give them a chance to influence the overall direction of the company. All too often there is a "glass ceiling" to their careers, whereby they will be considered for top posts in the relevant national subsidiary, but will find it very difficult to fight their way upward to positions of real responsibility in the overall corporate headquarters. This is not just a stricture on newer multinational players such as the Japanese. Very few non- Americans have made it to board level in American multinationals (@# more text to follow), and the picture is no better when looking at European companies (@# Unilever case: text to follow). It may be that Japanese companies will be best advised to internationalise the boards of key subsidiaries. Thus, for instance, ICL, the British computer company which is 80% owned by Fujitsu has representatives from Fujitsu (Japan), ICL (UK), Northern Telecom (Canadian), Nokia (Finland) as well as Viscount Davignon (Belgian), a former European Community Commissioner. No one can complain that that board is too dominated by the Japanese hierarchy.
On the financial front, there is a trend toward getting listings on a number of overseas stock exchanges. This is still very much a minority strategy, but has to be seen as an indicator of how seriously a company genuinely holds global ambitions. The advantages are that it is one step forward in the internationalization of a company's equity ownership and will give a company access to a larger potential pool of capital than a purely national base will. A leading British company, ICI, now has about 11% of its equity in US hands, as a result of its decision to get a listing in New York. In theory, such listings should lead to a higher price for the company's shares, which can have both offensive and defensive importance.
The disadvantages are, of course, an immense amount of paper-work, particularly if the company is seeking a listing in the USA, where the SEC is a particularly demanding regulator. This immediately discourages companies from countries like Germany, France and Switzerland where disclosure requirements fall some way behind American standards. However, in a world where financial skills are one weapon in a company's competitive armoury, an unwillingness to accept such scrutiny will hamper companies in their search for the cheapest, most flexible sources of capital. As long as companies believe that technological competitivenss is all that matters, this lack of financial flexibility may not matter. If, however, one believes that "financial engineering" is another area bestowing global competitive strengths, then slowness in internationalising one's financial strategies will be a competitive disadvantage.
For a large number of companies, the options are more limited. For a variety of reasons, their global coverage is limited. Their problems are less with how to internationalise their management structure, but more with how they turn themselves into global players when they currently may be no more than significant players within one continent.
Many such companies feel they do not have the time to expand through a succession of greenfield investments. On the other hand, they may well feel inhibited from playing the mergers and acquisitions game. In these circumstances, a large number of managements start thinking of strategic alliances - that is links between independent companies which fall short of a full equity relationship.
Now, some companies may have such a strategy forced upon them because they are in sectors where foreign ownership is either forbidden or is highly controversial. This is certainly true of industries with a security dimension - defence industries, much of aerospace, airlines etc. It is also true of many of the industries which are in the process of being deregulated such as financial services and telecommunications. In such sectors, there are whole clusters of companies which are either state-owned or are clearly marked as being out of bounds to foreigners. In these circumstances, a company wanting to develop a global strategy is forced to work with overseas competitors in a variety of ways which fall short of an acquisition of one company by another. These can include initiatives such as the creation of joint ventures, one company taking a minority stake in the other, collaborative research or just straight marketing collaborations.
To the unitiated, the results can often appear as a set of rather arbitrary corporate links. Just to scratch the surface, in airlines, one has links between SAS, Swissair and Austrian Airlines; Lufthansa and JAL; and between KLM and Northwest. In computing, one can point to IBM and Groupe Bull; the unsuccessful 1986 reciprocal marketing agreement between AT&T and Olivetti; AT&T and Sun Microsystems (to develop software); Intel, AT&T and Olivetti (development of a multi-processor version of Unix); and Sony and Apple (the development of multi-media computers). In automobiles VW and Ford have a deal to develop a van; Renault and Volvo have an active joint venture. In aerospace, British Aerospace and General Dynamics set up a wide-ranging collaboration in 1990; while Pratt & Whitney, Rolls-Royce, Mitsubishi Heavy Industries and others are working together to produce aero engines. In telecommunications, British Telecom, Deutsche Telekom, France Telecom and NTT (@# check) are working together in Syncordia, a venture to provide, in more than 50 countries, one-stop telecommunications service to the multinational business community. At a more general level, Daimler-Benz and Mitsubishi sought to develop a deepening relationship across their entire corporate environments.
It would be possible to fill whole pages with lists of such alliances. The important question is how significant they actually are.
On the one hand, one can quote an Olivetti executive: "In the 1990s, competition will no longer be between individual companies, but between new, complex corporate groupings. A company's competitive position no longer depends only on its internal capabilities; it also depends on the type of relationships it has been able to establish with other firms and the scope of these relationships." (Mr Umberto Busolati Dell'Orto, Olivetti's Vice-President of corporate development, cited Financial Times 29 May 1990 mp.24). Given the significance of many of the players in such alliances (IBM, NTT, VW et al) one cannot dismiss the phenomenon too easily.
On the other hand, there is a long literature on joint-ventures and other such initiatives which fall short of full mergers, and the conclusions are generally cautious. Any such alliance is bound to be fragile as the balance of power between partners varies over time. The alliances which work best are ones where the partners have strictly complementary strengths.
However, many of the alliances in industries such as telecommunications, airlines or computing do not promise well. They are alliances between companies which are, ultimately, competitors, even if they can hide from this fact because they are currently strong in different continents. The trouble with such alliances is that they are often seen as alternatives to full mergers which would leave one set of managers in a dominant position. Ultimately, even in industries such as telecommunications, a narrow range of companies will win out on a global basis. Most of today's wave of alliances should be seen as purely temporary moves in industrial sectors where the full rigours of global competition have still to be fully accepted. In sectors such as telecoms, it will take take decades for governments to accept the full logic of such competition. In others like automobiles one is probably much closer to the period in which there will be an intense restructuring of the industry. The Volvo-Renault deal is one of the last-gasp plays of companies which are ultimately unable to stay competitive even within their home continents. The VW-Ford deal is a reminder that even the true giants cannot be guaranteed continued independence over the next couple of decades. As companies move through the period of alliances, we will see a corporate shakeout not just within continents, but between them. The current wave of alliances gives us some idea of who the players will be. Watching the ebb and flow of negotiations between partners will tell us who will emerge as the ultimate victors.
Patterns are starting to emerge.
In particular one is starting to see the emergence of a group of companies which dominate particular clusters of lesser players - as a sun will be surrounded by dependent planets. In computing, IBM is quite clearly emerging as a central node for a wide range of alliances, as is Fujitsu through its links with Amdahl, ICL and Siemens. In airlines, alliances seem to be coalescing round a handful of companies - Delta, United and American in the USA, JAL in Japan, some combination of British Airways, Lufthansa and (perhaps) Air France in Europe, with companies such as Singapore Airlines in the rest of the world. In Aerospace. Boeing, McDonnell Douglas, Pratt & Whitney, General Electric and (just possibly) Rolls-Royce are developing a similar role. In automobiles, it is the big three in Japan, Ford (rather than the less agile General Motors), perhaps Volkswagen in Europe which are emerging as the dominant players.
What one is in fact seeing is the emergence of a select group of giant companies which are becoming global systems integrators. Sometimes, they will actually acquire companies dependent upon them. However, just as often, they will leave these companies apparently independent but, in reality, increasingly bound by the fate of the ultimate integrator. Sometimes, the subordinate companies will be left "independent" because economic nationalism is still strong enough to block transnational mergers which might otherwise make strategic sense. In a number of other cases, they will be left alone because the information technology revolution is permitting the development of "virtual" corporations - that is, groups of companies, working towards a common goal, linked not by common ownership but by shared electronic systems which allow them to plan and work in unison.
This is particularly common in the defence industry, in which a major project such as the development of a new bomber may involve the activities of upwards of 2000 companies. (Madnick p.32). One can see the emergence of similar clusters of companies around a whole series of major global projects, such as a new Boeing passenger jet (which increasingly will involve Japanese sub-contractors) or a transnational collaboration such as Europe's Tornado aircraft and its planned successor, the European Fighter Aircraft. Within automobiles, one finds firms like Nissan putting in place global communications networks linking suppliers from all round the world into the central design process.
As the electronic networks at the heart of such developments become increasingly sophisticated the traditional logic of vertical integration (the buying up one one's suppliers) is increasingly undercut. Control is exercised less and less through formal ownership relationships, but by a voluntary shared commitment, aided by modern electronics, to achieve a certain goal which will be set by a systems integrator. As companies work together on one major project, they will inevitably find it easier working together on subsequent ones. Sometimes this will lead to mergers between key players. However, in today's world, this is not essential. Companies can work together on a long- term basis without necessarily losing their formal independence. However, at the end of the day, they will all be dependent on the economic health of the "virtual corporation" to which they belong.
We thus live in a world in which all the past certainties of executives are under challenge. The pace of competition is increasing, as is the range of countries from which that competition may come. In a wide number of industries, there are clearly far too many companies seeking to be global players - a corporate bloodbath is thus inevitable. At the same time, the information technology revolution which is responsible for these changes in the external competitive environment is also changing the nature of internal corporate organization. In a negative sense, this explains some of the massive shakeouts taking place within long-established multinational companies. In a different sense, it is permitting companies to manage their relationships with both customers and suppliers in a new, apparently more flexible, way.
The intensity and variety of the challenges being made on management and its workforces are actually very frightening. Managers can no longer be single-dimension figures, good merely at technology or financial control or whatever. Companies which survive will be run by executives who can fine-tune corporate systems to the multi- dimensional challenges of today's competitive environment. Understanding the full range of ways in which technology is affecting the global business environment is probably the single most important task of today's managers. However, their responses to these challenges must be culturally and financially sophisticated.
....and at all times, they have to respond at a speed which executives in past decades could only have guessed at.
David A Asker, MANAGING BRAND EQUITY, (1991: Free Press)
Bartlett & Ghoshal
Matthew Lynn, THE BILLION DOLLAR BATTLE: MERCK V GLAXO (London: Heinemann, 1991)
Stuart E Madnick, "The Information Technology Platform" in Michael S Scott Morton (ed), THE CORPORATION OF THE 1990s (New York, Oxford University Press, 1991) pp 27-60.
Kenichi Ohmae, THE BORDERLESS WORLD: POWER AND STRATEGY IN THE INTERLINKED ECONOMY (London: Collins, 1990)
Porter, Michael E, THE COMPETITIVE ADVANTAGE OF NATIONS (NY: Free Press, 1990)
James P.Womack, Daniel T Jones and Daniel Roos, THE MACHINE THAT CHANGED THE WORLD (New York, Rawson Associates, 1990)
Visiting state-of-the-art Japanese factories is to visit the temples of modern capitalism. To appreciate them, however, one must put oneself in a contemporary state of mind. In a religious shrine the emphasis is on unchanging ritual with roots going back many centuries. The spectator must therefore approach them with an acute sense of continuity over time. In a factory, the secret is very different, It is to spot the significant technological changes which have taken place since one's last visit - to see how the pace and variety of operations has changed. For non-engineers, this appreciation can be difficult.
Occasionally, though, the layout of a factory tells a story even to the layman. Since early 1991 (@check) the place to visit has been Toyota's [@????] plant in Toyota City.
On the surface, this looks a conventionally impressive modern automotive plant. Plenty of industrial robots in action. Some workers on the shop floor - but not many. The key, though, lies with the automobiles being assembled. One is the Crown, an upmarket but otherwise routine Toyota model. Suddenly, though, one's eyes are drawn to a second model which is being assembled alongside it. The assembly lines are basically the same (they cross over and under each other as the two models make their way across the plant to the end of their individual assembly processes). But the second model is very different. It is the Lexus, Toyota's competitor in the luxury car market. This is the Japanese answer to Mercedes, Porsche, BMW and Rolls-Royce.
Yes, there are occasional signs that this car is something special. It is, for instance, given protective covering at certain stages on the line where its paint could get scratched. However, the true significance of this plant is that a car which is as prestigious as the Lexus is being routinely churned out on assembly lines which work every bit as fast and smoothly as those for the relatively routine model, the Crown.
To the unitiated, this may not seem much. However, it is actually the visual symbol of the "Post-Ford" revolution. Run well, today's assembly plants can produce whatever the consumer wants, in whatever quantity - however small. Japanese companies like Toyota can now deliver the craftsman's quality on mass assembly lines. The fact that the Japanese have mastered this art is a symbol of how the Japanese economy has now moved to the forefront of the world of global competition.
In 1945, Japan was a wrecked society. Cities had been fire-bombed or, in two cases, devastated by nuclear weapons. Its industry was in ruins.Its subsequent industrial rise - along with the collapse of the Soviet system - has been one of the two most important developments of the late Twentieth Century.
For the global business system, though, it is the rise of Japan which has been of crucial importance. On the one hand, Japanese companies have been redefining the very nature of global competition. On the other, a growing understanding of the system which produced Japan's success has posed questions to all competing governments. Japan has clearly benefitted from a superb industrial policy. Can competing societies copy the Japanese recipe for company-government relations?
At the same time the Japanese success story rests on peculiar foundations. Certainly, Japanese companies are emerging from a very introverted and nationalistic business culture. Has this actually given them an unfair advantage in world markets? How much effort, then, should western competitors be putting into trying to get Japanese competitors into playing by the same rules?
The peculiarity of the Japanese management experience raises other questions. Certainly, Japanese companies have been spectacularly successful in catching up with western technology. However, can we really be sure that they will be as effective in creating the international management structures which will be needed in the next laps of the global race? Are there limits to the wider applicability of lessons learned from Japan's post-war success?
In the late 1960s, it was possible for books on multinationals to be written with minimal references to Japan (Check Tugendhat. Also Modern Capitalism.). Servan-Schreiber's THE AMERICAN CHALLENGE was an early best-seller in this field, warning the laggard Europeans of the multinational phenomenon. He only found American companies worth writing about.
However, as the 1970s progressed and trade frictions grew, awareness of Japanese competition grew. The search for an understanding of the Japanese phenomenon started.
In 1979, the first best-seller in this genre hit the bookshops. This was Ezra Vogel's JAPAN AS NUMBER ONE which noted that the world was dealing with a new phenomenon. He emphasised the close relationship between Japanese companies and relevant government bodies like MITI (the Ministry of International Trade and Industry) or the Economic Planning Agency in the more immediate post-1945 period. Although calling for a reinvigoration of US industrial policy, he also identified some of the cultural differences between Japan and the USA - particularly emphasizing the importance of group loyalties, which would be difficult to replicate elsewhere.
Since Vogel's bestseller, airport bookshops have rarely been without a couple of brisk- selling (occasionally, meretricious) studies of the Japanese phenomenon. The one common thread has been the growing sophistication of their analysis.
For a while, such studies focused on the cultural distinctiveness of Japan. Thus William Ouchi's THEORY Z argued that Japan's emphasis on group-oriented, participative decision-making was an ideal managerial style, inherently better than the more autocratic approches of Western executives.
Such studies tended to stress the importance of principles such as life-time employment, the elaborate consultation procedures within companies, and the "descent from heaven" whereby senior officials retire into high-ranking positions in the companies they have been overseeing.
An idyllic picture almost emerged of an economic superpower in which officials, managers and workers pulled together in one great happy family. It took a while for some dissenting voices to be heard.
From within Japan, itself, there were occasional cries of anger, such as those expressed in Satoshi Kamata's 1973 book, JAPAN IN THE PASSING LANE. This recorded what it was actually like to work for Toyota as a temporary assembly line worker. The picture which emerged was of a work-force which, though relatively docile, was driven hard by a somewhat oppressive management structure.
This alternative picture of a workaholic, driven society is one that is held widely outside Japan. The classic expression of this view was by the European Community's Roy Denman who caused a considerable stir when he referred to:
Within slightly less emotive political and industrial circles, attention turned increasingly to the role of the Japanese government. The role of bodies like MITI and, at an earlier stage, the Economic Planning Agency were subjected to detailed scrutiny in studies such as Chalmers Johnson's MITI AND THE JAPANESE MIRACLE. Such work stressed the importance of targeted intervention - the process whereby the government-industry network identified the next industrial sectors Japan needed to conquer. The way that allegedly competing companies were brought together into pre-competitive research consortia was equally noted.
Gradually, through the 1980s, an accumulation of studies such as this, developed into a full-fledged school which argued that the Japanese success story rested on unfair foundations. Clyde Prestowitz' TRADING PLACES (1988) was one of the more influential. Paying particular attention to the semi-conductor industry, he analyzed the methods whereby the Japanese had decimated an apparently thriving US industry. Everything from MITI's start-up aid, to unfair trading practices such as dumping, through to weak US trade negotiators were implicated.
On top of this, there was the work of Karel van Wolferen which put Japanese industrial policy into a much wider social and historical perspective. The picture he painted was of a fragmented power structure in which the bureaucrats had, since 1945, played a dominant role. However, he also stressed that this fragmentation meant that Japan was difficult to live with, in that few Japanese in a position to negotiate agreements with foreigners were ever going to be able to implement them. Thus, should foreigners seek redress for a particular trade practice, not even a prime minister could implement a commitment in Japan which ran against the interests of other competing groups. The implicit argument, therefore, was that the Japanese would remain uncomfortable commercial and diplomatic rivals.
The literature focussing on company-government relationships has tended to be read in an adversarial light. However, in parallel with such studies, other authors have been building a picture of how the Japanese managerial system actually works at the corporate level. Here, the picture is more complimentary - though no less scaring for Western competitors.
As mentioned above, this literature initially focused on the superficial differences between Japanese and western management styles. The emphasis on consultation, the lack of status differentials, the principle of life-time employment, all attracted favourable comment when put against the autocratic, status-ridden, individualistic management styles of the West.
Fairly rapidly, though, it became apparent that Japan's success rested on much more than a participatory management style.
For one thing, it was argued, the ferocious competitiveness of Japanese companies on world markets is built on a generally very competitive domestic market. Studies such as KAISHA by James Abegglen and George Stalk showed how vicious this competition could be, but also stressed how important this was in honing the adaptability of the Japanese managerial system.
.[Did Abegglen write about quality?]
One paradox quickly emerged from such studies. Certainly, Japanese companies were devastating global competitors, but the methods they used relied heavily on lessons initially learned from the West. There was, for instance, the extraordinary case of the American W Edwards Deming who, while barely known in his home country, became a Guru in Japan for his advice on the importance of quality control. It was this emphasis on quality which was to allow Japan to make such rapid inroads into Western markets from the 1970s on. Many have commented on the irony whereby one of the most prestigious awards available to Japanese companies is the Deming award named after this subtly influential American consultant.
However, it was not just the emphasis on quality which was important. What leading Japanese executives came to master was the overall secret of production management. They achieved this by visiting Detroit, then the capital dedicated to the mass production techniques initially perfected by Henry Ford. What the western competition missed was that these Japanese executives returned to Japan and there, by constant experimentation and incremental improvements, pushed the bounds of factory automation forward far beyond the vision of American masters such as Ford (or @ the GM guy).
In so doing, Japanese management has effectively pushed the world into "Post- Fordism" - the era in which factories start to reclaim some of the flexibility which pre- mass production facilities once (not very efficiently) enjoyed.
The study which tells this story so clearly is of the world auto industry - THE MACHINE WHICH CHANGED THE WORLD. By studying around half the world's automotive plants, a MIT-led team was able to demonstrate how much more effective the Japanese ones are in comparison with those in the USA or West Europe. In particular, they showed how the Japanese have both shortened development times and reduced the minimum volumes needed to produce a car economically. When combined with an emphasis on quality, and the "Just-in-Time" system for reducing inventories, these improvements have turned the Japanese into formidable competitors on the world scene.
The key point about a key study such as this is that it does not really support the classic conspiratorial view of Japan's success. Sure, MITI played a role in encouraging the industry in the 1950s. Yes. the industry was kept closed to foreigners through to the early 1970s. There's also no denying that MITI was active in the early 1980s in encouraging the industry to invest overseas to reduce trade frictions.
However, there was no MITI programme which taught [@Toyoda & ??] how to build flexibility into Henry Ford's classic Detroit mass-assembly model. Similarly, the commitments to quality, the reduction of inventories and the speeding of development times have come primarily through the actions of executives - not through government programmes.
The picture which emerges is a complex one.
Very importantly, the Japanese success story has not emerged from a vacuum. This was a nation which took modernization seriously from the moment in the 1860s when it re- emerged into the wider world. Its defeat of the Russian navy in [@1905] gave an initial indication of its potential. Its ability to wage - however misguidedly - a the 1941-45 Pacific War against the USA and its allies was not the action of a technologically primitive state.
The 1945 defeat clearly devastated the Japanese economy. However, thanks to the fact that the bureaucracy was not purged by the occupation forces to the extent the politicians and business executives were, there was a major institutional shift in favour of an activist bureaucracy.....and for the two or three decades after 1945, this bureaucracy was of paramount importance. Certainly, there was the conscious targeting and support of emerging technologies, while protection was openly given to wide swathes of the Japanese economy.
The peculiar history of Japan's post-1945 institutional history is important. Quite simply, the bureaucracy was working in a vacuum. A very weak political system meant that, even more than in other parts of the world, ministers were tools of their ministries. In addition, the breaking of the pre-war industrial groupings meant that the bureaucrats were in no danger of being thwarted by politically influential, self-concerned industrial lobbies. The bureaucrats could thus create development goals without having to worry too much about those sectors which were due to lose out (agriculture being the main exception).
The bureaucrats in MITI and the Economic Planning Agency worked well and created a much-vaunted system of "administrative guidance". They involved the Japanese corporate establishment in their planning. They set intelligent goals for the economy. They had an array of protectionist and financial tools to steer industrialists in desired directions.
It was in the mid-1960s (see Komiya et al) that Japanese goals turned to what we would now call high technology. It was in 1966 (a year before the publication of Le Defi Americain) that the need to develop a countervailing force to IBM was first laid out. Within ten years, a system for allowing Japanese companies to come together in pre- competitive research collaborations was in place. It was one of these, the VLSI Technology Research Association, which from 1976 through 1979 gave the country's electronic industry a chance to start catching the American microelectronics industry - a chance they eagerly grasped. At the time, the significance of such initiatives was not fully appreciated elsewhere in the world. It took the announcement of the Fifth Generation Computer project in 198@? to ram it home to the world that it was no longer the USA which was the dominant industrial challenger, but the Japanese.
It is totally misleading to lay all Japan's success at the door of the under-staffed ministries in Kasumigaseki (the district in which the ministries cluster). The bureaucrats may have pointed in the right direction. They needed good quality managers who could ultimately strike out on their own.
Once again, the 1945 military defeat provides a key. Having lost the war, and having had a "Peace" Constitution imposed on them, there was nothing comparable to the Military-Industrial complexes which emerged in the USA, the United Kingdom and, generally to a lesser extent, in other Western countries. In the absence of such a military-oriented sector, the best Japanese executive talent went into mainstream, commercially-oriented industrial sectors. Instead of designing products like tanks or missiles for the military, they could concentrate on products such as automobiles and consumer electronics which consumers directly wanted.
When President De Gaulle (significantly a general) called Prime Minister [@Suzuki?] a "transistor salesman", the French leader was actually illuminating an important point. To him, as to equivalent American or British leaders, a product such as a transistor radio was something unserious. Within Japan, however, such products were seen as an integral step in the worthy process of catching up with the West.
The quality of Japanese management clearly goes a long way toward explaining how Japan moved ahead of the West in key areas of product development and manufacturing technology. After all, it needed intelligent managers to see the importance of Deming's teaching about the importance of statistical quality control. Again, the creation of the Kanban ("Just-in-time") system of inventory control was the result of creative thinking. Above all, though, the success of Japanese companies in cutting development times so drastically is evidence of managerial expertise at a very high level. The ability to develop the necessary vision and to rethink classic production engineering certainties in the light of the electronic revolution, while keeping workforces well-motivated and compliant points to a mastery of the overall management process which goes far beyond that shown by the competition elsewhere. Sure, there are still some residual questions about the ability of Japanese managers to handle research creativity and to manage cultural diversity. However, even if Japanese management does have some weaknesses in such areas, the strengths it has demonstrated in recent decades are such that to raise questions like these is but to quibble.
Some observers argue that one has to look deeper - that it is the overall quality of the Japanese industrial culture which is the key, not just the quality of its management. They go on to argue that the relatively strong commitment of work-forces to their companies should be explained at the level of deep culture. Specifically, the Confucian tradition within which Japan resides is brought out to explain why this country seems naturally adapted to the rhythms of today's industrial life. This tradition, it is argued, provides a culture in which education is valued, and where respect is given to those in authority, in return for a paternalistic acceptance that those in authority have obligations to look after those below them.
Such a culture is particularly well-suited to today's industrial age. The obedience- obligation bond between worker and boss helps provide an atmosphere of peaceful industrial relations. At the same time, the emphasis given to education means that the big Japanese companies are working with a well-educated workforce. Thus, as they were move into Post-Fordism, they can rely on the flexibility of shopfloors with a much higher proportion of university graduates than would be true elsewhere in the West. This well educated workforce is relatively attuned to demands for quality and flexibility.
If one then takes into account the relative ethnic homogeneity of Japan, then one sees one more factor working toward a degree of social cohesion not often found elsewhere.
One should not scoff at such arguments. The lack of commitment to training and a relative unconcern with higher education is clearly a drag on the economic potential of most countries in Western Europe - Germany, probably excepted. Again, sociologists such as Weber long ago argued that certain ideologies were better suited to the development of capitalism than others. What this emphasis on Confucianism is doing is adding a gloss to earlier arguments. Sure, protestantism, with its emphasis on the obligation on individuals to better themselves, is well-suited to the cut-and-thrust of capitalist competition, but it may not produce executives and workforces with a natural eye for detail. What the Confucian tradition may have done is to provide a culture which is particularly suited to the large-scale, technologically-sophisticated organizations which are at the heart of today's world of global competition.
Having said all that, one can allow oneself a little scepticism. After all one should never forget that the era of industrial peace now found in Japan was won quite brutally in the late 1940s and early 1950s. In fact, Japanese labour relations were actually quite violent both between the wars and in the immediate post-1945 era. It took a period of quite conscious union-busting in the early 1950s to produce the era of compliant company unions now the norm in Japan.
This cultural homogeneity has, though, had its darker side. Certainly, there can be no disguising that the country has been motivated by a deep patriotism which has often tipped over into xenophobia. Although uncomfortable for the rest of the world, these passions have undoubtedly been beneficial for the Japanese industrial effort. Certainly, during the catch-up period, the determination to overhaul the industrial west was an important motivating force. To some extent this drive to overcome the foreign competition was well exemplified by the cases of companies like Komatsu with their well-publicised "Encircle Caterpillar" strategy.
The strength of these feelings has made Japan a difficult economic partner, because they have produced a culture with a particularly strong anti-import, anti-foreign bias. It was this culture which produced such nonsenses as the attempt to block imports of foreign skis on the grounds that Japanese snow had special characteristics.
Whatever its enthusiasm for exports and, even, investment overseas, Japanese management has not championed the opening of Japanese markets to imports. To some extent they have been able to hide behind the fact that the Japanese distribution system is particularly byzantine in its nature, and particularly hard for foreigners to crack. More generally, though, Japanese companies remain resistant to foreign products because they tend to be members of loosely-grouped families of companies - the so-called Keiretsu. These groups, which can generally trace their origins back to pre-War industrial structures, develop intra-group loyalties which make them hard to penetrate, even by other Japanese. In this case, the country's very industrial structure might almost seem to have been designed to work against foreign suppliers.
At the level of the bureaucrats, the growth of genuine internationalism has been patchy. MITI has probably moved fastest among the ministries, but foreign players were having problems as late as the late 1980s with ministries like the Ministry of Posts and Telecommunications. This ministry, for instance, fought a tough rearguard action to prevent the British company Cable and Wireless from winning a significant role in the IDC telecommunications consortium. At a non-ministerial level, bodies like the Tokyo Stock Exchange have fought fairly tenaciously to avoid accepting foreign securities traders as members - giving lack of space as their ostensible reason for refusal.
To non-Japanese, all this resistance to foreigners is reprehensible. On the other hand, a defence can be made. All countries have had xenophobic tendencies. One of the authors had a relative who, as late as the early 1980s, refused to buy any German car, and would kick any Japanese one that came his way. Throughout Western Europe, there was a period in the late 1960s and early 1970s when Anti-Americanism was roughly as strong as some of the Anti-Japanese tendencies found today. Both the authors of this book, for instance, started writing on multinational companies in the 1960s, during the general period in which Le Defi Americain was published. No European with a decent memory can complain that Japan was developing an anti-IBM strategy in that decade. The main difference is that the Japanese were effective in strengthening their indigenous competitors. The Europeans were not.
Having said all this, there is still a sense that the Japanese industrial culture is still more nationalist than most. For instance, when the US corporate raider, T Boone Pickens (@check) tried moving into Japan, he was met with a resistance which can only be described as visceral. Japanese culture is not yet comfortable with the concept of a hostile takeover bid. However, the reaction to an American practitioner of this art was particularly savage.
The picture which emerges is of a strong system which has borrowed widely from the West, and has proved particularly skilled at adapting and improving the most important western techniques. The lead, for instance, which Japanese managers have been taking in production engineering and product design has come from the application of skills easily identified by Western observers - once the latter became aware of how fast the Japanese were actually moving ahead in such sectors.
However, there are many aspects of Japan's industrial culture which seem alien to western observers. The questions therefore are: to what extent are we dealing with a distinctively non-Western industrial system? To the extent that we are, is the system converging toward an increasingly standardised western model? Or will the Japanese system remain culturally distinctive?
At the micro level of the company, one is dealing with institutions which are fundamentally recognisable in western terms. It is the fact that they have emerged from a distinctive environment which has led to emphases which make them seem quite remote.
The emphasis that leading Japanese companies have put on life-time employment, job rotation to produce generalists rather than specialists, elaborate consultation instead of authoritarian decision-making is distinctive. However, such traits are not always unique; for instance, young executives entering leading western companies like IBM, Royal Dutch-Shell or Volkswagen have normally had expectations of job security not much different from their Japanese equivalents entering careers with Toyota, NEC et al. Again, though few western companies have gone to Japanese lengths in fostering consultative devices such as quality circles, the evidence from books such as IN SEARCH OF EXCELLENCE is that the best American companies do in fact stress the importance of participative management to a very high degree.
Some Japanese practices do however remain distinctive. One thinks, for instance, of the Ringii institution in which proposals circulate round companies to pick up seal stamps from a wide variety of colleagues and superiors before a final decision to go ahead with a proposal can be given. One also thinks of the principles of extreme job rotation and a related respect for seniority over rewarding individual talent.
It is possible to argue that such practices contribute to the overall success of Japanese management - consultation between widely experience generalists mean that most of the implications of any particular decision are thought through before it has to be implemented. Life-time employment, it is argued, produces a loyalty to the company which guarantees a manageral dedication of particular strength.
On the other hand, one can argue that these are managerial styles which have evolved by happenstance and which have not yet been fully exposed to critical analysis. After all, the extraordinary success of the Japanese catch-up decades meant that most mainstream Japanese companies have enjoyed relatively uninterrupted financial success. Given this, they have rarely had to analyse the actual effectiveness of some of their recent traditions.
Today, though, such pressures are growing. Competition for new graduates is increasing and the quality of their industrial spirit is declining as they start to question the "5 Ks" (.@ Spell out) For the first time for decades, companies are having to look at the downside of some of these practices. For instance, life-time employment means that companies are stuck with the inefficient and the unmotivated; slowly, companies are coming to accept that they will have to start sacking people. (.@ Case) Again, there is a growing awareness that there are disadvantages to an over-emphasis on generalists who are promoted purely on seniority principles. Japanese financial institutions are, for instance, finding that the specialists in their western competitors are better able to develop innovative financial instruments. They are therefore starting to think about the need to develop specialists who may be able to innovate as well. Again, the need to promote executives on merit and not just on age is becoming apparent. To some extent this is being forced on companies as they seek for ways of improving their performance in global markets. In particular, though, there is a small seepage of indepently-minded Japanese executives to foreign companies establishing themselves in Japan. It is rare that these defectors are key players, but Japanese executives who feel themselves blocked in advancement now have alternative career structures and Japanese companies are slowly having to respond. (.@ cases: toyota?)
As we write in 1991, attention is being increasingly focussed on a wider peculiarity of the Japanese system - the way that their companies work together in industrial groupings. To some, this is a distinctive device which gives Japanese companies a major advantage over more atomistic western competitors who, in many cases, would run into anti-trust objections if they tried to replicate the Japanese system.
Once again, one can argue about precisely how distinctive this form of organization actually is. In Germany, for instance, there are clusters of companies which focus on particular universal banks. The links binding the major clients of, say, the Deutsche Bank may not as close as those binding the Mitsubishi or Mitsui family of companies - but links there are of a nature which one would not find in the US context. Secondly, as one looks round the industrial landscape of countries such as Italy or India, one finds clusters of family-based enterprises which have many similar characteristcs (bar the dynamism) to the Keiretsu. Certainly, no one can look at the Fiat-dominated Italian environment and argue that that sprawling industrial groupings are unique to Japan.
In fact, one can argue that some aspects of the Keiretsu system are hangovers from Japan's proto-capitalist, pre-world war days. Just as some of their employment practices have yet to be tested in a period of genuine global competition, one can argue that the full range of Keiretsu practices have still to be tested for their ultimate economic rationale.
Certainly, there have to be questions asked about the long-term effectiveness of the financial keiretsu. As Alan S Blinder has argued it is hard to see what synergies are derived from linking such diverse companies as a consumer electronics manufacturer, a bank and a beer company.
Where the Japanese system has proved effective is in the so-called production keiretsu, in which companies such as Toyota develop a set of interlocking long-term relationships with their main suppliers. Quite clearly, the leading Japanese companies have been able to turn this relationship to their advantage. Without guaranteeing the suppliers business in all circumstances, the big manufacturers can give their suppliers enough medium term confidence that the two can work together, sharing the kind of information which is needed if joint development of components is to really work.
As usual, it is possible to find parallels outside Japan. Within the United Kingdom, for instance, the highly successful Marks and Spencer (@spelling?) store chain has long used such supplier relationships to develop the quality products round which its success is based. (.@other international examples?) Having said that, Japanese companies have clearly developed their supplier relationships to a pitch of efficiency which is extremely distinctive. Because this system was being honed in the 1960s and 1970s when the workings of the Japanese system were relatively opaque, the effectiveness of this part of this country's success story came as a nasty shock to the western companies who had been competitively overhauled.
At the same time, there is a dark side to some of these relationships. Certainly, the weakness of the Japanese anti-trust system means that in key industries such as construction substantial cartels exist which must work against the Japanese consumer while, being purely for the Japanese, have a strong anti-foreign bias. Again, there is a consistent set of allegations by foreigners to suggest that Japanese competitors do unite to put barriers in the way of foreigners. (.@ semiconductor fabrication machinery)
Increasingly, though, these practices will raise the cost for Japanese companies of doing business globally. Sure, they would like to continue their supplier relationships as they move abroad, but that will inevitably mean that some of these suppliers will be operating on inefficient scale economies compared with leading local suppliers. If they fail to build the world supply system into their networks, they will ultimately be cutting themselves off from good healthy sources of competitive pressure. Ultimately, though, pro-Japanese collusion is bound to trigger American and, perhaps, European response. When the Japanese system was opaque, western victims could have little legal recourse. However, just as anti-dumping actions have developed a set of case law, so will accusations that collusive action back in Japan is affecting competition elsewhere in the world. At the end of the day, the disruption of legal counters in the American market will serve to speed the end of such collusion.
During the classic "catch-up" decades, Japanese companies undoubtedly benefitted from a particularly generous financial regime, whereby the savings of ordinary citizens were funneled into chosen industrial sectors at cheap rates. As late as the 1970s, real interest rates for industrialists were kept articificially low, thus allowing Japanese companies to build up their debt on terms which were generous by world standards. Then, during the economic boom of the 1980s, as the Japanese authorities tried to counter a sharp rise in the Yen, liquidity flooded into the system, leading to a boom in both stock and property prices. Japanese companies started to see themselves as financial manipulators and for a while in the late 1980s, they were able to raise over half a trillion dollars for next to no cost. While everyone seemed to benefit from a never- ending boom, observers started talking about "Zaitech".. (.@definition) and industrial enterprises such as Toyota prided themselves on their financial surpluses, jokingly referring to their company as "Toyota Bank".
For a while it looked as though the Japanese had discovered a perpetual virtuous financial cycle. Industrial success would lead to profits which would be fed back into the financial sector, guaranteeing every increasing profits to everyone. No matter that the Tokyo Stock Exchange traded on multiples found nowhere else in the industrialised world. Japan was different.
To western competitors, this all seems unfair - and to some extent it has been. In practice, the Japanese authorities in the post-1945 period installed a financial system suitable for a less-developed economy (which was fair enough, though the Germans showed there were other ways for recovering from military defeat). The key point is that the central weakness of the Japanese political system meant that this anti-consumer system was not dismantled at the point where Japanese industrialists were clearly clawing the economy out of the less-developed status.
The really important question is whether the financial system is still biassed heavily toward industrial investment - and here there are conflicting views. On the one hand, there is no denying that as late as the mid-1980s, the real capital costs in Japan were 5.9% versus 9.7% in the USA (Steven Nagourney's work for Shearson Lehman Brothers cited in ECONOMIST "Capital Conflict"). Again, the 1991 scandal whereby the giant securities companies were found to be reimbursing their key clients against losses on securities trading was clear evidence that the Japanese system remains highly collusive (and biassed against foreigners - none of whom received such guarantees). Obviously, a Japanese industrial giant, with such guarantees behind it, can plan ahead with a certainty not available to western competitors.
On the other hand, the evidence is that such disparities in real capital costs are declining quite rapidly. Financial deregulation in Japan, and the globalization of financial markets has been making it easier for foreigners to borrow in Tokyo and for Japanese to lend overseas if higher real returns can be found there. In addition, work by Timothy Luehrman and Carl Kester of Harvard Business School (ECONOMIST "Capital Conflict") is suggesting that, once one adjusts for the different structures of the US and Japanese systems, the real after-tax cost of capital was roughly equivalent where companies faced the same risks. There will still be distortions while Japanese equity investors remain relatively inexperienced in assessing the prospects of foreign companies. However, the cost of capital gap should increasingly be an irrelevancy.
Perhaps the biggest single advantage the Japanese industrial sector possesses is that the overall political system remains hopelessly biassed towards the interests of well- financed special interest groups. Inevitably this means that the corporate sector is rarely challenged by countervailing domestic political pressures. Japan has a political system unrivalled within the industrialised world in which, as the old joke says, money does not just talk; it screams.
At one level, the relationship of companies and ministries is merely an example of what other countries have often tried to create - and have failed. All that has happened in the Japanese case is that in finding a positive role for ministries such as MITI, they went about the job of indicative planning effectively, while others like the French and (pre- Thatcherite) Britain failed. The question of whether innovations such as pre-competitive research collaborations were particularly unfair is an interesting one. However, if one puts these into the context of the big transnational nuclear research or aerospace collaborative programmes which the Europeans entered have been fostering since the 1950s, the only distinctiveness of the Japanese efforts is that they proved to be more effective at identifying commercially-important work to support. Certainly, if the complaint is that the Japanese put financial support into research programmes which effectively subsidised companies in the early stages of developing new technologies, one thinks without effort of the importance that US defence spending has had for getting Boeing into the forefront of civil aviation, or the central role that the Apollo moon programme had for giving a kick start to the US micro-electronic industry. In the Japanese case, the sums of money have not been extreme. Once again, the accusations may turn mostly on the effectiveness of their financial support, not on the principle of their trying to provide any at all.
However, where the Japanese corporate sector has particularly benefitted is in the way that the interests of consumers and employees have been consistently under- represented. This explains, for instance, why there was so little consumer resistance to a financial structure which favoured industrial borrowers at the expense of corporate lenders. It explains also why there is so little public concern about levels of corporate collusion which would have raised howls of public protest in more delinieated political systems such as that of the United States.
On top of this, industrial interests have clearly captured particular ministries. The Ministry of Posts and Telecommunications is clearly very close to NTT, the Japanese telecoms giant. Similarly, the Ministry of Finance is extremely close to the financial interests it is supposed to regulate and promote. This is the ministry, par excellence, which has benefited from the "amakudari" system whereby, upon retirement, high officials "descend from heaven" into well-paid top managerial positions within the companies they have spent their careers promoting and regulating. It is thus hardly surprising that this Ministry has proved ineffective at injecting real competitive urgency into the financial services industry. Effectively, this is a ministry which has put the promotion of the financial services industry before its tight regulation.
There are, however, dangers for Japanese industrialists in working under a weak political system which is so skewed in the favour of narrow industrial interests. For one thing, narrow-minded industrialists often need protecting from themselves. To take financial services, for instance, it is clear that Tokyo is being damaged as a credible international financial centre precisely because the bias toward the big Japanese corporations is still so marked.
Secondly, the weakness of the overall system means that Japanese companies are increasingly badly represented by the Japanese diplomatic system in international disputes. Quite simply, western negotiators rarely believe that their Japanese opposite numbers can deliver change when they go back to Tokyo. So, the temptation is to promote change in Japan by relatively crude bilateral threats elswehere in the world. For instance, if aspects of the keiretsu system really are collusive against foreigners, then the increasing temptation is to take action at the level of the US anti-trust authorities. If one cannot trust the Japanese political system to put backbone into its Fair Trade Commission, then one might as well fight the damage done by such collusion in a country like the USA where one can get rulings stemming from the effects of collusion across the Pacific.
In a closed Japanese system, then, the peculiarities of the Japanese political system would not be of much interest to others. However, as Japanese trade and investment penetrate the rest of the world, the effects of the system start to be felt elsewhere. The Japanese political system is undoubtedly distinctive but, as it is biassed toward industrial special interests and against foreigners, it itself is becoming a political issue at the global level. If Japan is to be accepted at a global level, political change will have to be forced upon it - a process which is already under way.
An explanation of the Japanese success Despite all the above criticisms, Japan should be treated with understanding. It is, above everything else, the archetypical "non-western" country which has come from behind to catch up with the leading western economies, Being isolated from the rest of the world until so recently, it avoided the kind of cultural contamination experienced by countries such as India from the colonization process. Sure, it adapted a number of Western institutions in the Meiji era, but the choices were made on its own terms. (.@ where did the commercial system come from? check van Wolferen) Even when it was directly ruled by foreign powers, as it was under the post-1945 Occupation, the period was short, thus limiting the overall impact. Yes, the constitution could be re-written, some individuals could be purged, and the relative power of different institutions could be altered. However, the seven-year occupation could not make changes at the level of deep culture. So, the Japanese industrial miracle has been built on foundations which bore only a sketchy relationship to the European and American model which has initially dominated the global economy.
The sanest approach to Japan, then, is to view it as a traditionalist, non-western society which is being dragged toward some form of convergence with the West, thanks to the runaway success of its industrial sector. Put in this evolutionary context, then some of the problems it apparently poses look less serious. Sure, its bureaucrats, industrialists and consumers still view the world in relatively ethnocentric terms. On the other hand, one only has to think back to national attitudes in the USA and West Europe in the 1950s and 1960s to realize that Japanese attitudes today only really stand out because Western attitudes have moved on - though French paranoia about things non-French is not that much less than the Japanese propensity to put Japan first.
If one views Japan as a superb industrial machine constructed on idiosyncratic institutional and cultural foundations, then one starts to ask some very interesting questions indeed.
For one thing, Japan has effectively achieved its industrial catch-up campaign. In most of the main industrial sectors, its companies now rank with the world's best. To what extent are the institutions which propelled them to the fore adequate for a world in which they must stake out a claim to the future? To what extent will the Japanese system evolve to support their industrial system in its new world role?
We have earlier given some examples of how growing competition within Japan is forcing modifications of traditional employment practices, such as the principle of life- time employment. But change is coming more widely.
Starting from a very low level, there are, for instance, signs of movement at the level of corporate ownership. Up to now, mergers and acquisitions have been an insignificant part of the corporate Japanese scene - partly reflecting the importance of group relationships within keiretsu. This gentlemanly behaviour was originally made possible because post-1945 economic growth has been so sustained that all but the most inefficient managents have managed to find some part to play in it. Even if competition has been severe within Japan, there were often protected profits to be made in other parts of the world as quotas guaranteed even quite small corporate players relatively high margins. Today, that is changing, and smaller players in industries like the car industry are starting to have to turn toward their bigger brethren for help. (.@Nissan case)
As one would expect, given the Japanese tradition has stressed cooperation and non- conflictual solutions to such problems. When the American corporate raider, T Boone Pickens tried building a hostile stake in [@ company name: Kineanea?], he met a particularly hostile response. Not only was the concept of a corporate raider anathema to the Japanese business environment, but he was a foreigner as well. Eventually, he was driven from Japan by the sheer weight of hostility to everything he stood for. However, as he left the scene in [@1991?], some contested takeover bids started to emerge among Japanese companies, albeit very slowly and tentatively (.@example)
Another area where there seems to be some spontaneous movement is in the relationship of MITI (and other dominant ministries) and their client companies. Although the structures for targetted intervention are still in place, the effectiveness of this system seems to be much diminished. For one thing, the largest Japanese companies have been amassing cash mountains, so they no longer need the cheap credits which went with the classic targetted intervention process. In the second place, the nature of targetting has changed irrevocably as the Japanese have caught up with the rest of the world. No longer can they merely track the structure of the US economy, moving toward those sectors where the US were still ahead of Japan. Today, the Japanese are having to guess what the technological and commercial shape of the 21st Century will look like, just like IBM and the rest of us.
This is not to claim that Japanese analysis of technological futures is not still well- respected. What does seem clear is that Japanese companies are increasingly on their own when they formulate their strategies. MITI may advise on issues such as the desirability to internationalise their investment strategies, but this Ministry does not dominate as it did ten or twenty years ago.
Increasingly, though, movement is coming not just for domestic reasons, but because powerful foreign governments require change. It is American pressure which has been particularly important, and to some extent the USA has become the champion of the Japanese citizen which the Japanese political system has not thrown up. In financial services, telecommunications and airline regulation policies have changed significantly because of such pressure. As far as the Americans have been concerned, they have seen it is their responsibility to impose western, "Anglo-Saxon" standards on the Japanese environment. By creating "level playing fields", the US would force Japanese companies to compete on equal terms.
A great deal of Japanese movement has come about because of such pressures. Even if one takes MITI, which is the ministry which has probably moved fastest, its conversion in the mid-1980s to the need to encourage imports owed much to the protectionist pressures building up in the USA and elsewhere. If Japanese companies could be persuaded to invest overseas, and if imports into Japan could be stepped up, the worst of anti-Japanese trade measures might be avoided.
Most other reforms have come under even more explicit pressure.
One very obvious area of pressure has been on Japanese financial practices. Back in 1983, a Yen-Dollar Committee was created between Japan and a United States, which was increasingly irritated (and frightened) by the heavy capital flows from Japan to the US, which threatened to undermine the value of the Yen, thus further increasing the competitive capabilities of Japanese exporters. As a result of these pressures, controls on interest rates slowly began to be dismantled thus beginning to unravel a system which had been biassed against savers in favour of industrial borrowers.
In parallel, the pressures grew to allow western financial institutions into Japan. In particular, the resistance of the Tokyo Stock Exchange was challenged, and US and European securities houses were allowed into Tokyo to compete with the Japanese financial giants, Nomura, Nikko et al.
Admittedly, it has been fashionable to argue that such financial liberalization has been a sham. In particular, it is argued that the only reason change came in the mid-1980s was that the bigger Japanese financial institutions started to need to expand overseas in their own right. If Tokyo financial markets were kept closed, then they would face resistance as they tried to move into global financial centres such as New York or London. Therefore, it is argued, the reforms which were tolerated by the Ministry of Finance were just enough to keep the foreigners happy, without really changing the nature of Tokyo's financial markets.
There may well be some initial truth in these accusation, though it should be noted that the Japanese authorities allowed western financial institutions to carry out activities in Tokyo which would not have been possible for a purely Japanese competitor. Thus western banks were helped to find a way of trading securities, in apparent contravention of Article 65 [@check] which is meant to stop such "Universal" banking.
In fact, this liberalization was to have its effect in December 1989 [@check] when the Tokyo authorities failed to avert a major collapse of Japanese stock markets which led to a near 50% fall in the Nikkei index over the following 10 months (which then put pressure on the groslly over-inflated property market). One alleged reason for the authorities' failure to manage this fall, was that foreign securities houses, though insecurely established in Tokyo, had been pioneering techniques such as programme trading which meant that the workings of market forces were both speeded and intensified. The Ministry of Finance and the Japanese securities houses finally found themselves unable to finetune the Tokyo Stock Exchange with the effectiveness they had had in the past.
At the same time, the liberalization of interest rates (though still not complete) was putting pressure on banks which were increasingly having to come to terms with the Bank of International Settlement's insistence that they work with capital reserves equivalent to those maintained by major non-Japanese competitors. As stock prices fell, the Japanese banks no longer had access to the cheap credit they had relied on in past decades, but still had to raise their capital bases to meet BIS requirements.
Telecommunications is another sector where liberalization has taken place, at least partly as a result of foreign pressure.
.[@history of NTT privatization]
This case also gives an idea of the fault lines within Japanese society regarding the liberalization process. Whatever, the legislation said about allowing foreign companies into telecommunications consortia in Japan, the Ministry of Posts and Telecommunications tried all it knew to avoid implementing the letter of the law. This particularly affected the British company, Cable and Wireless, which wanted to be an active player in the IDC (@International Digital Communications) consortia. The MPT was determined that the British should be kept to a passive role. Unusually, Cable and Wireless, refused to take such treatment quietly. High executives made speeches attacking the MPT position, while British premier, Mrs Thatcher came into the fray as well. Eventually, the MPT gave ground, but this was only after considerable external pressure had been added to the discreet opposition of MITI. Once again, it was foreign pressure which had been the key.
Like it or not, the Japanese are doomed to live with such rather galling outside pressures for some time to come. Undoubtedly, nationalistic politicians will resent these pressures and will refine the arguments about how Japan can say "No" (see Morita/Ishihara). However, these arguments are doomed to failure for the simple reason that Japanese companies need access to overseas market and investment opportunities. These will be increasingly be blocked should Japan fail to move more toward the Anglo-Saxon industrial culture.
So, the Japanese were forced to tighten their control on the exports of strategicially significant goods and materials in the aftermath of the Toshiba-Konsberg (@spelling) incident when sophisticated milling equipment got sold to the Soviet navy. Japanese executives may not have been universally happy about such restrictions, but if firms like Toshiba were not to be penalised in the more important US market, they had to come to terms with such Cold War controls.
Pressures are clearly building up in other areas. In financial services, the Japanese are under pressure to accept US standards on insider trading on securities - a concept that is very alien to the free and easy world of Japanese financial management. Similarly, the relatively casual acceptance of gangsters is another part of the corporate culture which will come under pressure. In the past, the Japanese political establishment has found it hard to get angry about such practices, but when foreigners start to react, life gets more serious. A case in point was the 1991 set of scandals involving the giant Securities Houses such as Nomura. Once international pillars of financial probity such as the World Bank started to drop the Japanese securities houses because of their links with the Yakuza, the scandal started to involve financial costs on a global scale. Similarly, the litigious US community understandably took to the law courts to argue that the special deals between the securities giants and privileged Japanese clients had effectively damaged the interests of non-Japanese outsiders. Should they prove damages in front of American courts, the dimensions of what started as a purely Japanese affair will once again be ending up costing Japanese companies financial penalties over and above the penalties imposed within Japan itself.
Again, in the area of anti-trust policy, it is pretty obvious that the Japanese will have to tighten their policies to avert yet more diplomatic rows with the American judicial system.
It is understandable that there should be some Japanese resentment to such extraterritorial pressures. However, they are becoming global players, and that means living by the standards which dominate the world economy. As explained in the next chapter, these standards are predominantly determined by the USA. The Japanese system will just have to come to terms with this unpleasent fact of life. As President Truman once put it: "If you can't stand the heat, you'ld better get out of the kitchen" (@check). As far as the global economy is concerned, the Japanese must very much be part of the kitchen. They had better get used to the heat.
Everyone must be impressed by the Japanese success story since 1945, but one can ask some questions about the extent to which this country will continue to forge ahead in the 21st Century.
It should be clear from this chapter that we are extremely impressed with the quality of Japanese management, but one can point to some weaknesses.
The first question is whether they will continue to be so technologically dynamic now that they have roughly caught up with best Western practices. Certainly, the task of mapping out the technological paths companies will need to take twenty of thirty years hence, is a great deal more complex than was needed for the technological visions which MITI put together with the Japanese industrial community over the last thrity years. An imaginative tracking of the American economy was what was needed up to now. Today, there are no firm road maps. Japanese companies are having to guess about technological futures along with the rest of the international business community. How good will their judgement be?
One cannot automatically assume their overall success will continue. For one thing, those non-Japanese companies with access to key technologies are getting much tougher on their licensing policies - and some of Japan's past success lay in getting cheap licenses from western competitors who were not fully alert to the cost of strenghtening the Japanese competition. Again, within Japan there is a considerable debate about the quality of Japanese creativity, reflecting worries with an educational system which stresses rote learning more than individual creativity. It could just be that the Japanese employment system which values continuity of employment and generalists may work against them in this area. Certainly, one hears Japanese research managers talking of the attractions of locating research in countries such as Britain where they can go out and recruit specialists in a particular field without having to worry about their loyalties to other companies.
On the other hand, it can be argued that the virtues of scientific creativity can be over- stressed. After all, the creation of most consumer-oriented products rests not on scientific breakthroughs, but on the intelligent and systematic application of known technologies to a particular business problem. In any case, Japanese companies are steadily deepening their research base. The number of patents they are filing is running at high levels. There is certainly no a priori reason why they should not be as creative as is necessary. Just as the American burst of Nobel prizes in science started after its economic strenght was established, so there is no reason to argue that Japan's economic strength will not produce the outstanding science in good time.
There are similar worries about the country's ability to master the software which is increasingly important in developing successful products. Once again, the jury must remain out. On the one hand, it is true that they have had difficulties in establishing global standards in sectors such as computing where they have considerable hardware skills. On the other hand, a lot of effort is going into mastering the automation of software development and there is no particular reason why they should not close the gap on the more individualist west, as they have done before in other sectors.
Certainly, Japanese companies will have to come to terms with a domestic society which is less dominated by corporate needs. New graduates will still be appropriately educated by western standards, but the evidence is of labour shortages and entrants into the labour force which are increasingly reluctant to accept the long hours and dehumanising conditions of their fathers. The odds are also that these companies will have to become more sensitive to short-term financial pressures than has been true in the past. As growth rates continue to fall toward OECD averages, the cost of failure in the Japanese system will continue to grow. Companies will have to take a more short- term financial view, and not all will manage to make the transition.
Perhaps the greatest question mark lies over the ability of Japanese companies to come to terms with internationalization.
Up to now, they have not really been tested. For obvious reasons, they have been latecomers as multinational investors. Even today, a giant firm like Toyota is less than ten years old as an investor in the USA, and still has to complete its first factory in West Europe. Compared with their western competitors, they are extremely inexperienced investors.
Most people have, up to now, assumed that the first wave of Japanese investment has been unequivocally successful. Certainly, one can point to the impressive initial penetration into American and European markets of the Japanese automotive industry. In consumer electronics, a firm like Sony has clearly established itself very thoroughly at the heart of the American and European markets.
.....and yet, some doubts are starting to emerge. For one thing, there is some evidence from McKinsey (qv) that Japanese investment in the USA is significantly less profitable than that of the indigenous competition. Slow decision-making and a tendency to produce over-standardised products were among the explanations given for this. Certainly, looking around the European scene, there are many small Japanese operations which must currently be of a size well below the optimum scale needed to be fully profitable.
What is only really starting to be tested is their ability to manage cultural and political complexity. Certainly, one is seeing Japanese companies starting to have to concentrate on the reorganization of overseas project. Honda is reorganizing its North American activities (@check). Sony has been pouring money into its Hollywood holdings with no obvious signs that it is going to get a decent return on its money. (Apart from making a major investment in Italy, Sony and Matsushita could not have invested in a business culture more remote from the Japanese one when they decided to invest in Hollywood). Bridgestone has still failed to turn its Firestone operations around. Western managers working for Japanese finance houses complain about the lack of career prospects, and decent autonomy.
Our bet is that the 1990s will see some quite spectacular disasters amongst Japanese overseas investors. Quite simply, we believe that the cultural coherence within Japan which is one factor which has worked in facour of the Japanese industrial machine will work against Japanese companies as they move into the wider world. The occasional Japanese company is now starting to build credible career paths for non-Japanese employees - Sony leading the way with an American and German on its main board. In general, though, however nice sounding the statements of Japanese management principles are (. Morita etc) it is rare to come across a Japanese company which convinces one it has a meaningful career parth for non-Japanese. Although American companies in the past came under attack for insensitive management practices (being anti-union), they at least were sound on practices such as treating racial minorities sympathetically, and knowing how to avoid accusations of sexual discrimination. It is precisely in areas like this that Japanese culture has values extremely different from those found in the USA. Readers must make their own minds up about the significance of the hostility of feminist and black groups to Japanese investment in the USA.
What we will predict is that Japanese investments which depend on the quality of technology and of production management will continue to be successful and will grow quite happily. We would, however, predict some investment disasters where Japanese managers have to come to terms with more culturally complex situations. The Japanese investments in Hollywood will probably go down as the first major such disasters because we see nothing in the history of Japanese management to suggest it has the vaguest idea how to manage the cultural anarchy of Hollywood. The philosophy behind the investments made great sense (helping to establish hardware standards by guaranteeing the necessary flow of movies etc). The managerial complexity of producing the necessary software flow will almost certainly prove too great, even for a manager as talented as Akio Morita.
It is irresponsible to be too pessimistic about what will happen to Japan in coming decades. The idea of a COMING WAR BETWEEN JAPAN AND THE USA (@check: qv) isa just so much junk. Yes, there will be tensions between the USA and Japan, and it is still just possible for Japan to say "No" and retreat into itself.
This pessimistic scenario is extremely unlikely. What makes much more sense is a scenario in which the coming decades see the final assimilation of Japan into the world political-economy. Obviously, there are tensions at this moment, but what we are seeing is a once and for all cross penetration which is unique in its speed and volume.
This is not just about Japanese companies going overseas. It is also about western companies establishing themselves in Japan which will almost certainly remain a culturally complex market, though a steadily less forbidding one. This penetration will be led by sectors such as computers, consumer electronics and suppliers to the auto industry since Japan has become a lead market for such products. The western companies may not erect large plants (for Japan will remain an expensive, labour-short location for investment): but they will have operations large enough for them to monitor market developments within Japan, and to be credible when they seek to establish relations with the headquarters of Japanese companies.
In the reverse direction, there will be a shakeout among Japanese overseas investors. These companies will have to learn how to come to terms with a post-Catch-up world, in which they will not just have to be masters of product development and manufacturing technology, but will have to be able to manage global operating networks. Many will flourish, but some will find they cannot master a world oc cultural diversity and will have to follow the path of many a European and American company before them, and will have to retreat to what they hope is a defnesible home base back in Japan.
Japan, itself will develop as a vibrant, innovative consumer market for products such as automobiles, consumer electronics and fashion. This will ensure the steady interest of the world's companies in these sectors. If Japan is where the "Early Movers" reside, then they must all be represented there. Tokyo will continue to develop as one of the key trend-establishing cities in the world. As Manhattan continues to decline, Tokyo will inherit its role as semi-futuristic megalopolis symbolically representing the world's most dynamic industrial economy.
A two-way assimilation process will be speeding up. Within Japan, they will start the relatively slow process of coming to terms with a world of foreign investors in Japan and where foreign executives must be given real career paths if Japanese companies are to survive. The xenophobia within Japanese society has already been heavily softened, but attitudes will still need a lot of changing before foreigners are treated reasonably routinely.
In the reverse direction, much of the emotion surrounding Japanese overseas investment will disappear. It is only natural that the initial wave of Japanese investment has stirred resentment. It has built up extremely fast compared with the equivalent expansion of American, British or Dutch multinationals. It has had to deal with pre- existing racial tensions. Above all, the Japanese transplants have been an unwelcome reminder of the USA's loss of its industrial leadership. Inevitably, there have been tensions.
These resentments will, however, pass as Japanese investors are absorbed into local cultures. After all, this is what has happened to nearly all previous cultural invasions, whether one goes back to the Barbarian Hordes who swept through Europe 1500 years ago, or to the American multinationals who moved globally in the post-1945 era. Japanese companies will increasingly become adept at internationalizing their management structures. The steady stream of innovative products from their factories will be seen as just another set of products which discerning consumers will appreciate. At the less visible level of component supplies, the Japanese penetration will concern few except direct industrial competitors. At the cultural level, Sumo wrestling, Kabuki theatre, Japanese architecture etc will be absorbed as another set of ingredients into the cultural smorgasbrod which is today's world.
Assimilation, though, requires behavioural changes both by the newcomers and the established communities. The interesting question is who will make the most adjustments - the Japanese or the outside world?
As we see it (and however unpalatable this will prove for a proud culture), it will be Japan which will have to adapt most to the new world. At the managerial level, companies will have to struggle to improve the career prospects of non-Japanese executives. At the cultural level, the Japanese will continue to learn English with relatively few foreigners bothering to master Japanese in the reverse direction. Although western managements will continue to learn from their Japanese counterparts, it will the Japanese who will be faced with the more wrenching changes as western standards of competition policy, the openness of distribution systems, equal opportunity employment policies etc are forced on them - sometimes by political pressure.
As the French have already discovered, it can be galling to possess a proud, rich, distinctive culture in a world which is partially homogenizing around the English language and American culture. The Japanese, coming from a particularly remote and nationalistic culture, will find this very difficult to stomach.
Twenty or thirty years ago, when President De Gaulle sneered about the Japanese prime minister being a "transistor salesman", the Japanese could hope to have things both ways. They could become an industrial super-power, but on their own terms. In practice, life is going to prove more complex than that. Japanese companies will remain at the forefront of the world economy - but it will be under Anglo-Saxon rules.
James C Abegglen and George Stalk Jr, KAISHA: THE JAPANESE CORPORATION (New York: Basic Books, 1985)
Alan S Blinder, "A Japanese buddy system that could benefit U.S. business", BUSINESS WEEK, 14 October 1991, p.11.
Chalmers Johnson MITI AND THE JAPANESE MIRACLE - THE GROWTH OF INDUSTRIAL POLICY 1923-1975 (Stanford: Stanford University Press, 1982)
COMING WAR ..... (@ full reference)
ECONOMIST, "Capital Conflict", 10 August 1991, p67.
Satoshi Kamata JAPAN IN THE PASSING LANE (London: Counterpoint, 1984)
Ryutaro Komiya, Masahiro Okuno, Kotaro Suzumura (eds), INDUSTRIAL POLICY OF JAPAN (Tokyo: Academic Press Inc, 1988)
McKinsey Quarterly: Japanese profitability (LT to chase@)
Akio Morita & Shintaro Ishihara, THE JAPAN THAT CAN SAY "NO": THE NEW US- JAPAN RELATIONS CARD (@ publications details
William Ouchi THEORY Z (Reading, Mass: Addison-Wesley, 1981)
Tom Peters (and Waterman) IN SEARCH OF EXCELLENCE
Clyde V Prestowitz TRADING PLACES: HOW AMERICA ALLOWED JAPAN TO TAKE THE LEAD (Tokyo, Japan: Charles E Tuttle Co, 1988)
Servan-Schreiber's THE AMERICAN CHALLENGE
Karel van Wolferen, THE ENIGMA OF JAPANESE POWER: PEOPLE AND POLITICS IN A STATELESS NATION (London: Macmillan, 1989)
Ezra Vogel's JAPAN AS NUMBER ONE (Cambridge, Mass: Harvard University Press)
[@Womack et al: MACHINE]