VideoDid you read the news from Japan today? Oh, boy. Two years after the end of its "lost decade," the Land of the Rising Sun remains stuck in an economic slump. Stocks have plunged to levels last seen in the mid- 1980s. Real estate values have been hammered, bankruptcies are rising, unemployment has reached postwar peaks. Falling consumer prices are raising fears of a deflationary spiral. In March, Finance Minister Kiichi Miyazawa made headlines around the world with his declaration that Japan's public finances were "very near collapsing." In April, ineffective Prime Minister Yoshiro Mori resigned, while the ruling Liberal Democratic Party struggled to bail out banks massively burdened with bad loans and bloated shareholdings. Once considered an unstoppable economic juggernaut, Japan now seems (with apologies to Richard Nixon) a pitiful, helpless giant.
But is it? Japan is still the world's second-largest economy, as well as the United States's second-largest trading partner. It boasts a sizable number of highly competitive, world-class companies--the Toyotas, Hondas, Sonys, and DoCoMos. Its technological sophistication rivals America's, and its workforce is admirably well educated. Japan's strengths, in short, are considerable, and it could in short, are considerable, and the country could soon right itself if its policy makers and corporate managers took bold, decisive action.
That, at least, is the opinion of Michael E. Porter, the C. Roland Christensen Professor of Business Administration at Harvard Business School and arguably the world's foremost authority on competitive strategy. Author of seminal books and articles on competition, the 53- year-old Porter has trained his analytic eye on Japan in his latest book, Can Japan Compete?, co-written with Hirotaka Takeuchi, a dean at Japan's Hitotsubashi University, and Mariko Sakakibara, a professor at UCLA and former deputy director at Japan's Ministry of International Trade and Industry. This compact book presents the results of a long and exhaustive analysis of Japanese industries--and unlike other investigators, Porter et al. studied Japan's failures as well as its successes. Japan, they conclude, is not a special case among nations, as was widely thought, but rather a country that has prospered in spite of its government's activist policies.
And if Japanese companies generally score high on best practice, most fail when it comes to strategy--as Porter began to realize some time ago. Japan, he points out, was 1 of the 10 nations covered in his 1990 classic, The Competitive Advantage of Nations. "During my research on that book, Japanese companies began to puzzle me," he told CFO articles editor Edward Teach during a recent interview in his Cambridge, Massachusetts, office. "They just didn't seem to do the sort of things I talked about in my older work on strategy." It was the "dissonance" between the Japanese case and his other work, says Porter, "that provoked me to start down the path of doing this book"--a book whose research took nearly eight years to complete, with the help of a team of graduate students.
Can Japan Compete?, which also offers detailed prescriptions for the country's competitive ills, was published first in Japan, in 2000. How was it received? "The sales are very high," says Porter. "CEOs in Japan are enormously supportive of this [the book's recommendations] as the way to go." Whether Japan's politicians decide to follow Michael Porter's advice, however, remains to be seen.
Japan's economy has been in the doldrums for years, and nothing the Japanese government does seems to help. What's wrong with Japan?
For the first few years of the economic slowdown, the assumption was that the cause was the financial bubble, and that if the government just worked through this bubble--pumping up the economy with public- works spending, lowering interest rates to zero--the problem would be solved. Clearly, this has not worked.
Our research shows that the system is the problem. The bubble is a symptom. Until Japan starts to dismantle the traditional government approach of intervention, subsidy, protection, and so on, nobody is going to have enough confidence to move ahead.
The system must have some merits. After all, it helped create the world's second-largest economy.
The received Japanese model has two parts. On the government side, Japanese industrial policy was viewed as a new approach to management of the economy. On the corporate side, the Japanese management system was seen as a new and better way of managing companies.
We actually found that the government's activist policies explained Japan's failures better than its successes. And while the Japanese management system did lead to success in many industries in the 1970s and 1980s, the system is incomplete. Japanese companies are far less profitable than their Western counterparts.
Japan's trade surpluses have been regarded as an index of economic vitality, but you write that they are really "a staggering disadvantage." Why?
The surpluses were produced by impediments to imports of a wide variety of goods and services that Japan should be importing, in the hopes of propping up local industries. The problem was that the protected industries were grossly inefficient.
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