Land of opportunity
IBM derives 10 per cent of its revenue from Japan and 35 per cent from the US. Based on pure GDP statistics and IT spend, this is the right split for a truly globalised company. Oracle, on the other hand, realises close to 5 per cent of its revenue from Japan and 43 per cent from the US. You might assume that IBM operates better as a global company, but it's not that simple where Japan is concerned.
The Japanese economy has seen little growth for many years but there is more positive sentiment now than there has been for the last two decades. Economic growth in Japan will not be 'double digit' but, if IBM can squeeze more than $10 billion of revenue a year out of Japan, there is certainly opportunity. Is there a key to unlocking the potential for success in Japan? For many companies, fixing their market share issue in Japan is like adding another UK market to the revenue stream.
The simple table below gives context to the scale of the Japanese economy. Interestingly, a lot of multinationals source more revenue from Australia than they do from Japan.The big issues
The big issues
Let's take a look at one of the main issues that constrains US and European companies when doing business in Japan. The key challenge, almost without exception, is the dilemma between local Japanese leadership and expatriate leadership.
In a country where relationships are still seen as a key to success, having Japanese management brings with it many advantages in selling into the C-suite. The understanding of local practices and expectations is paramount. Issues we often see include the Japanese team choosing to deliberately limit transparency – often hiding very real issues that constrain performance – and miscommunication due to limited English language ability (our estimate is 5 per cent at management level). Also, the excuse for not implementing global initiatives because “Japan is different" is randomly used to avoid changing the status quo.
These negative experiences often lead companies to consider an ex-pat to run their Japan operation. The major advantage is that alignment with HQ is usually very good, and in a number of instances employee satisfaction rates increase. A few issues remain, though. Second-level Japanese management still hides issues and a lot of matters are decided behind the back of the ex-pat MD. Unless the ex-pat MD has at least a few trusted Japanese lieutenants, little will change and, with the departure of the ex-pat, things will revert to the original situation in no time.
Another option is to hire a local non-Japanese executive. The main issue here is that there are very few individuals with enough Japan know-how and with the appropriate management and leadership competencies to lead anything more than a small to mid-size organisation. As always, the laws of supply and demand price these people at a premium.
From our observation, the companies that have made a successful turnaround in Japan, gaining better global alignment, transparency and overall revenue performance, have one main thing in common: they have all had a strong and commitment from the regional and global executive team. When you leave recruitment to local Japanese management, more opinionated or 'HQ-oriented' candidates are blocked from advancing to interviews with the global executive team. With the successful cases, we have seen the global and/or regional headquarters driving the hiring of new (internal or external) management.
A second key challenge is that the Japanese generally prefer to buy Japanese products. Why is this? For one thing, Japanese products are developed specifically for Japanese needs. While US companies might initially focus on developing products for the US market, which in most cases suit many other markets too, Japanese companies design products to match Japanese preferences.
The smartphone market is a good example. Until the iPhone was introduced, almost 100 per cent of mobile phones in Japan were manufactured locally, yet these same products had almost no market share beyond Japan.
Also, Japanese products are well known for high quality and strong support levels. Foreign companies are perceived as providing poor customer service, often relying on non-Japanese support overseas, which is not widely accepted by the Japanese customer. A key factor for both the enterprise and the consumer.
Finally, Japanese companies tend to keep each other in business. A major supplier of raw materials for toner for a specific printer manufacturer, for example, will buy printers from its biggest customer.
The keys to success
Those companies that have successfully broken into the Japanese market have a few things in common. Firstly, they are operating in relatively new markets, where major Japanese companies are not strong competitors. Secondly, they have, at HQ level, a strong commitment to Japan and a solid support structure in Japan. Thirdly, they are willing to localise or customise their solutions to Japan.
Companies usually fail on the second and third points, along with a failure to hire the right kind of people who know how to manage, as opposed to being managed by local distributors and end customers.
Unlike most overseas markets, Japan is unique in that it provides serious local competition to global vendors. Success in Japan requires companies to deviate from the typical globalised 'cookie-cutter' approach. The needs of each company doing business in Japan will be different but the two fundamental steps that are clear from studying the success stories are this. Firstly, establish clear localised differentiators against Japanese competition in terms of both product offering and of support in building the go-to-market strategy. Secondly, ensure regional and global involvement in selecting, then building, commitment and communication from the first two layers of Japanese management.
Illustration: Michael O'Shaugnessy
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