In In the 1980s, Japan stood astride global business like a colossus, as the rest of the world stood in awe. Pundits praised Japanese-style government intervention in the economy as the model for a new capitalist future. Western companies scrambled to master lean production, just-in-time manufacturing, and other management practices pioneered by leading Japanese firms. But that was then; this is now. With Japan mired in a severe, decade-long economic slump, the question arises: How could the Japanese formula for competitive success have failed so spectacularly?

University Professor Michael Porter and two colleagues - Hirotaka Takeuchi, dean of the Graduate School of International Corporate Strategy at Japan's Hitotsubashi University, and Mariko Sakakibara, an assistant professor at The Anderson School at UCLA-present a provocative answer to that question. In their new book, Can Japan Compete? (Perseus Publishing), these scholars argue that the conventional explanations for Japanese competitive success are seriously defective. For one thing, the truth about the government's role in fostering Japanese competitiveness in the seventies and eighties bears little relation to most people's perceptions. For another, the same Japanese managerial approach that once terrified competitors is, in fact, no longer efficient in today's global economy.

Research for the book began more than a decade ago, when Porter was working on what would become The Competitive Advantage of Nations (Free Press, 1990). "It was clear that more work needed to be done on Japan," he says, "because the country was a study in contrasts-what my colleagues and I call 'the two Japans.'" Alongside highly competitive industries such as autos, consumer electronics, and robotics, Porter explains, Japan has many uncompetitive sectors-chemicals, aircraft, software, and financial services, for instance-that most observers ignored in painting their portraits of an economic paragon.

What Porter and his coauthors found in studying these two groups of industries turned conventional wisdom about Japanese "bureaucratic capitalism" on its head. While this model-characterized by an industrial policy that targeted particular industries for investment and growth, controlled competition, selective protection of the home market, and government-sponsored corporate research-has long been regarded as the reason for Japan's economic success, it actually had the opposite effect. "Government has, in fact, played a surprisingly small role in many of Japan's most internationally competitive industries," Porter says. "Instead, the most significant factor is the intensity of competition in the home market, as well as a strong network of clusters of local suppliers and related industries-just as we found in our research in other nations. On the other hand, where the government has intervened extensively, a weak competitive position has resulted."

Beyond this, note Porter and his colleagues, Japan suffers from management's tendency to think of competition only in terms of operational effectiveness. Focusing on doing the same thing better, they say, rather than on the unique positioning and differentiation that come from thinking strategically, made many Japanese companies globally competitive only until the rest of the world caught up by learning to imitate their best practices. "Japanese companies end up competing on the same dimensions," Porter explains, "which makes it impossible for them to separate themselves from the pack and thereby sustain profitability."

The task before the Japanese government, the authors conclude, is to stop trying to manage the competitive process and start providing a dynamic context for it. Their recommendations include reinvigorating antitrust policy, opening up trade, lifting restraints on foreign investments, creating greater corporate accountability, and improving the research capabilities of the country's universities. In addition, the Japanese government must promote the modernization of inefficient domestic sectors such as retailing and wholesaling, while encouraging economic development beyond the overcrowded confines of Tokyo and Osaka.

	Chances are, the competition between the United States and Japan isn't over.

Meanwhile, Japanese companies need to rethink their fundamental approach to competition. In short, they must begin using strategy to carve out true competitive advantages. "Some newer companies that are outside the interrelated networks of the keiretsu system are already doing this by competing with truly distinctive strategies," says Porter. "They illustrate the advantage that firms can create by combining a clear strategy and profit orientation-rather than a philosophy of dominant-market-share-at-any-cost-with traditional Japanese strengths such as setting long time horizons and treating employees as assets."

Taken together, the recommendations in Can Japan Compete? amount to a prescription for systemic changes in Japanese government, business, and even society. "I've talked to many people who believe it's going to take a long time for Japan to substantially embrace a new model," Porter notes. "But I'm more optimistic, because Japan has shown that it can change rapidly once there is a consensus to act-as it did during the oil shocks of the seventies when it became a global leader in energy conservation." And now that the current economic crisis has lasted so long, he adds, the Japanese may finally be ready to reject easy explanations and confront the need for structural reform.

When that happens, the rest of the world had better take notice, say the authors. "A revitalized Japan could challenge the United States to deal with its own set of weaknesses, including a poor educational system, the breakdown of organizational loyalty, and short time horizons in both business and government," according to Porter. "These are all areas where Japan has real strengths. Chances are, the competition between the United States and Japan isn't over."

by Daniel J. Penrice

Unconventional Wisdom
From Can Japan Compete?

Because they face little pressure from shareholders, large Japanese companies tended to maintain unprofitable businesses indefinitely instead of redeploying capital to more productive uses. Japanese executives euphemistically call their poorly performing businesses "healthy red divisions." The persistent inability to produce a good return on investment is the most fundamental sign of the flaws in the Japanese system

The second most important sign was the concentration of Japanese success to a limited array of fields and industries for a nation of its size. The Japanese model worked only in certain fields. These were enough to boost the nation's productivity and standard of living for a time, but the limits eventually became compelling. Clearly, the Japanese corporate model was incomplete.

The fact that Japanese market positions in many competitive industries peaked in the 1980s was another warning signal. Since that time, a wide range of formerly successful industries, ranging from semiconductors to shipbuilding, have experienced declines in their international positions. Even those industries where the Japanese competitive approach had been successful were showing their limitations.

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