Has the Halo Slipped from Japanese firms? - Cranfield Management Newsletter

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Has the Halo Slipped from Japanese firms?
By Dr Patrick Reinmoeller

For many years, in the UK and US in particular, Japanese companies have been held in very high esteem. However, recently Toyota's safety recall has led some people to question whether the Japanese way is indeed so strong. Where does the truth lie? There's been little fact or research to back up or deny this 'hero to zero' proposition. Much myth and little knowledge on the long term performance of the Japanese corporation cloud our understanding. How do Japanese companies compare to leading competitors in the global premier league? Together with a colleague at Erasmus University I set out to get behind the myths and examine the long-term performance and profitability of Japanese companies. We analysed global competition and the leading 500 corporations worldwide over 50 years, our premier league, and looked specifically at Japanese firms' power and positioning in comparison with their peers in five key industries. Some interesting have facts emerged.

Fact one: Japanese companies have secured a strong global position

Globally, Japanese firms have had enduring and extraordinary success in terms of revenue and market position. Japan is number two in the global league tables, with 68 firms listed in the 2009 Fortune Global 500 list, which is dominated by US companies. Japanese firms have a strong presence in global competition today, but how did their market presence change over time? Since 1990 the number of US and Japanese corporations among the top 500 has reduced; from the mid 1990s the number of Japan’s largest firms in the league tables has declined.

Fact two: profitability is considerably weaker than market position

With such clear presence as a major player on the stage of global competition established, we then analysed profitability and performance. In terms of profitability, most Japanese companies have fared much less strongly. Our research in five industries (automotive, electronics, metals, oil, and pharmaceuticals) shows wide variance in the duration of superior profitability among the firms. We have found 55 incidences of companies, with at least 10 years superior performance (relative to their peers) in a row. However, the results show that 25 years of superior performance seems to be a limit beyond which only a few firms are able to sustain that superior performance. Beyond this limit, we find a long tail with rather extreme outliers.

What stands out in terms of profitability is not the relatively poor profitability of the Japanese majority, but an exclusive group of industry leaders such as Toyota, Honda and Panasonic. Our results reflect the difficulties smaller firms face in joining this group of leading firms in the last two decades. However, also notable is that companies such as Suzuki Motors, Takeda Seiyaku, and Fujidenki were able to outperform competitors by identifying opportunities and seizing them.

While Japan's firms have been focusing on Western markets or rising China, Suzuki Motors carefully executed a unique strategy for car manufacturers, in that it entered India in a substantial way. Today Suzuki Motor Corp's local unit is India's largest car maker by revenue. It offers wide choice to consumers in the rapidly growing car market, with as many as seven small car models. Launching new models with 998cc engines, Suzuki sets its top-end model at a competitive price of about £5550, to keep large rivals such as Ford and Hyundai at bay in this huge market.

Toyota stands out

Among the ten corporations worldwide with the longest run of superior performance, from Japan Toyota has maintained its steady foothold. It remains to be seen whether or not the recent recalls crisis and its damaging public relations aftermath will permanently derail Toyota, but it seems unlikely. What will almost certainly have taken a knock is the nebulous myth of Toyota as the perfect organisation going from strength to strength, but most onlookers are likely to still see a great organisation able to sustain superior performance.

Fact three: profitability is improving

Overall profitability for all the Japanese firms in our premier league of 500 leading firms has been getting better. While their market presence may be stagnating, we found the number of Japanese firms that perform equal to, or better than, their competitors is rising. It seems that in terms of relative profitability, the last 20 years of lacklustre economic performance of the Japanese economy have not been in vain. Maintaining revenue and increasing their capability to deliver return on assets, Japanese firms still have room to improve in this respect, but possibly the developments over these last two decades indicate that Japanese firms can continue to draw on their capability to improve as profitable enterprises.

A Fresh View

Japan's companies have rewritten business history and made a striking impact on the global stage. A closer look reveals a more granular perspective. The last two decades of anaemic economic growth at home, and more recently the difficulties of its most famous Japanese firm, seem to have been finally punctured inflated ideas of the perfect Japanese corporation. Yet the fact remains that Japanese companies are a force to be reckoned with. Their powerful market presence and the innovation capabilities of the best still provide plenty to learn from.

Dr Patrick Reinmoeller is a Professor of Strategic Management.

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