CHOOSE AND FOCUS: Japanese Business Strategies for the 21st Century | By Ulrike Schaede

Ulrike Schaede, in her insightful book, sets out to dispel what she regards as the myth of a “lost decade” of Japanese business. She views the period of 1998-2006 as Japan’s strategic inflection point, a point in time (or a period in this case) when industry dynamics were altered in irreversible ways, such that newly emerging competitive environments force changes in the ways of doing business.

Schaede argues that the triggers to the shifts in the Japanese business environment were a banking crisis and recession, the deepening of globalization, social crisis and emerging new political visions with regard to the role of markets in the economy. She asserts that the banking reforms of 1998 marked the tipping point for a regulatory reform process that created a new strategic context for Japanese firms as well as a new industrial architecture.

Schaede identifies the following as the core elements of the Japanese business system that characterized “Old Japan” (that is, post-war Japan to 1998): business groups, a main bank system, internal processes of corporate governance, subcontracting hierarchies, restricted distribution systems and relational pricing as well as difficult entry of foreign competitors to the Japanese economy. She shows how each of these elements has changed as a response to the events that took place in Japan from 1998-2006. These changes reflected an increasing role for markets in shaping the way business is done and the new strategic paradigm of large Japanese corporations. For example, the banking crisis and consequent banking reform have led to the demise of the main bank system of financing and governance. Similarly cross-shareholding by business group members, which served as a glue to hold business groups together, was also reduced, changing the role and importance of business groups as sources of stability but which also isolated firms from markets.

The emergence of institutional investors, who manage their investments with an eye to performance, shifted business goals from an emphasis on sales and growth to one of profit. Globalization increased competition and led a shift to a cost emphasis in supply chain relations, undermining the notion of long-term, protective supply relations characteristics of “Old Japan.” In the New Japan spot market pricing has become the norm and retail competition has turned to price. The lifetime employment system was also transformed to accommodate the new context of market competition, becoming more flexible, transparent and efficient. The adjustment of corporate Japan to the new business context required a critical strategic shift: a move from unbridled diversification to a paradigm of “choose and focus.”

Choose and focus led to a transformation of Japanese firms from large and inflexible entities to nimble competitors. The top priority shifted from sales to profitability. Firms have spun off non-core activities, aggressively building the areas in which they excel. Achieving profitability required innovation and differentiation in “expensive” Japan and/or an efficient global outsourcing system. Focused growth was targeted at building market power through industrial consolidation and realization of economies of scale. This shift, argues Schaede, put Japanese firms once again on a path of renewal resulting in a combined record pretax profit for six years in a row, until 2007, and an increase in the Nikkei 225 stock market index by 100 percent from January 2003 to 2007.

Schaede’s clear and convincing articulation of the transformation of the Japanese corporate system provides a new perspective on both Old and New Japan. Her discussion about business transformation has solid roots in strategic management theory and shows a deep understanding of Japanese political and economic history. The core of her argument is valid, though her assessment of the new business context in Japan is somewhat optimistic. Rigidities in the political and economic system remain; hence changes in corporate adaptations are slow to come. As well, her story is only partial since she focuses on the largest industrial corporations neglecting the crucial symbiotic role of middle-size and small firms in Japan in providing flexibility to the large firms. To have a complete picture of Japan’s business system, I look forward to a book which will explore how the rest of Japan’s business sector (that is, the medium-size and small firms) has been transformed during the shift from the Old to the New Japan and show what role they now play in the architecture of the business system. I also wonder how the “choose and focus” strategic paradigm measures up in the post-global financial crisis world.

In conclusion, the book is informative and thought provoking. It is a must-read for serious scholars of Japanese business and economics and business people interested in Japan.

Ilan Vertinsky
The University of British Columbia, Vancouver, Canada 

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