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5. New Business Model as Response to Competition from Emerging Economies

5.1 Emergence of Threats Associated with Rise of Emerging Economies

Low economic growth has been estimated for developed countries, including Japan, because of decreasing population growth rate, with no future prospects for large market expansion. On the other hand, the rise of economic growth in developing countries, such as China and India, provide great opportunities for Japanese companies. However, a high rate of economic growth can be realized in developing countries only by catching up technologically with developed countries, and establishing competitive local companies that adopt modern management techniques used in developed countries. Therefore, in addition to providing opportunities for Japanese companies, the growth of developing countries indicates the threat of new competitors in international markets.

In particular, companies are technologically catching up and the shift among the players in the international high-tech market is evident. This indicates a high rate of technological innovation. For example, the dynamic random-access memory (DRAM) of Japanese electronics companies had a virtual monopoly in the international market during the 1980s and first half of the 1990s. However, in the 1990s, Japanese companies faced fierce competition from Samsung and other Korean companies, forcing them to exit the DRAM market. By 2012, Elpida, the last Japanese company in that market, sought protection under the Corporate Restructuring Act, leaving Japan with no DRAM manufacturers. Within semiconductor integrated circuits (ICs), DRAM is a relatively standardized product, and thus Japanese companies were unable to compete with Korean companies in terms of prices. Korean companies were able to lower their prices by large-scaled investments in equipment. As a backdrop, manufacturing technologies for ICs became incorporated into manufacturing equipment. The traditional model of IC manufacturers maintaining competitiveness through manufacturing technology gave way to a model of price competitiveness through investments in the most advanced manufacturing equipment.

DRAMs are manufactured on the order of microns, and technologically catching up with other manufacturers in areas such as chipset integration and yield improvement is difficult. Thus, companies from China and other developing countries are not yet at the front line of international markets. However, as stated in Chap. 1, Chinese solar panel manufacturers, such as Suntech and JA Power, already hold the highest global market share in terms of production volume. Silicon crystal-based solar panels are manufactured using processes similar to those used in the semiconductor industry, although the processes do not require highly precise technology as in DRAM. In addition, because companies can purchase turnkey production lines, cost competitiveness is more important than a manufacturer's technological capability. As a result, costs (e.g., land, buildings, wages), excluding manufacturing equipment costs, are relatively cheap in developing countries, making products manufactured there more competitive in international markets. Chinese companies have rapidly increased their market shares, leaving Japanese and German companies, formerly the world's top manufacturers, behind.

While Japan has no DRAM manufacturers within its semiconductor industry, Japanese companies are still internationally competitive in logic circuits markets used for specific applications such as electronic products and automobiles. However, similar to the flow of water from higher to lower levels, technological catch-up will eventually take place as Korean companies, followed by Chinese companies, close the gap. Accordingly, Japanese companies must differentiate their products with more advanced technology to respond to the competition from more cost competitive companies in developing countries.

Furthermore, it should be kept in mind that a high level of competitiveness alone is insufficient when competing against companies from developing countries. Using the example of the hard disk industry, Christensen showed the “Innovator's Dilemma” regarding products from companies with superior technology being driven out of a market by late entrants through “destructive innovation” (Christensen 2001). This occurs when the pace of technological innovation exceeds the technological standards demanded by customers. Companies owning advanced technology are strongly tempted to advance their own technology to differentiate themselves from the competition; however, the average consumer views these products as too advanced for their needs. At this stage, a company will not increase its competitive advantage by making further investments to increase its level of technology. Rather, providing low-cost products at the level of technology demanded by customers will maximize its value to those customers. In particular, in developing markets such as China and India, wage levels are lower than those in developed countries, requiring a product strategy that targets the “good-enough” market in the volume zone. Thus, it is likely that a product differentiation strategy based on technology will not work. For Japanese companies to respond to the threats accompanying the rise of developing countries, they must consider not only technological advancement but also the overall business model. After World War II, Japanese manufacturers rapidly caught up with their European and US counterparts and become competitive in international markets. Through that process, the guiding principle was that only by improving product performance and quality through technology can the value to the customer be improved. However, when competing with countries, such as Korea and China, that followed Japan as well as in “good-enough” markets in developing countries such as China and India, the philosophy of “make good products and they will sell” often did not apply. Two important perspectives when evaluating business models in developing countries are “maximizing value creation for customers” and “product and service design that is difficult to replicate by companies in developing countries.” After discussing the basic concepts behind these two philosophies, we discuss specific policies to realize them. Finally, we discuss infrastructure-related services as an example of system integration services structured as difficult-toreplicate products and services. In particular, we discuss the issues encountered by Japanese companies overseas in the railroad industry and possible policies in response to these issues.

 
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