The Japanese miracle:

Japan's success was in spite of government industrial policies - not because of them.

  The authors hammer their points home with a repetitive format that covers each theme several times in several different but related perspectives. They provide hard nosed analytical work of which there is currently much too little in the fields of economics, politics and sociology.
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  The authors assert that "Japan's bureaucratic capitalism explains its competitive failures much better than it explains its successes." Japan's success was in spite of government industrial policies - not because of them.

  "The policies widely believed to explain Japan's success were far more prevalent in the nation's failures than in its successes. Instead of encouraging productivity, exports, and national prosperity, they worked against them."

  There was little government input in the Japanese industries that are currently most internationally competitive. In motorcycles, cars, video recorders, robotics, musical instruments, cameras and video games, "there was little intervention in competition, few subsidies or cartels, and little cooperative research." The authors studied 20 such industries. Industrial policies were most evident in uncompetitive sectors like chemicals, civil aircraft, financial services, software, non electronic consumer goods, and foods other than soy sauce and instant noodles.
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  Governments in the United States and around the world - and many academics - drew the wrong lessons and sought to emulate Japan's failed industrial policies (which of course continue to fail wherever applied).

The Japanese government industrial policy model:

 Several mercantilist notions guide Japanese industrial policies:

• Exports drive growth, and government can target the industries whose growth will best favor export growth and economic prosperity.

• Various aspects of competition are wasteful and destructive and should be avoided.

• Industries have to be sheltered to allow them to gain the scale needed to compete internationally.

It is difficult to tell how much Japan's supportive government policies contributed even where applied to industries that achieved some success.

  While such policies did in fact successfully shield and facilitate growth in coal (1950s), steel and shipbuilding (1960s), semiconductors (1970s), and computers (1980s), they did not play any role in the success of such industries as motorcycles (1960s), audio equipment (1970s), cars (1980s), and game software (1990s). Government support has favored many failed industries. "It also led to a huge and unproductive domestic sector that has grown to be a profound drag on the economy overall."
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  Indeed, because Japan has great competitive strengths - such as a well educated workforce, ample managerial and technical skills, high rates of investment, and rapid rates of technological improvement - it is difficult to tell how much Japan's supportive government policies contributed even where applied to industries that achieved some success.

Japanese industrial policy included:

• An activist government with a stable, almost autonomous policymaking bureaucracy whose members frequently retired early to take high positions in the private firms they had regulated.

• Targeting priority industries for economic growth.

• Mercantilist policies to promote exports and protect the home market by inhibiting imports.

• Restrictions on foreign direct investment.

• Extensive government "guidance," approval requirements, and regulations.

• Acceptance of cartels and many private restraints on competition.

• Government led restructuring for declining industries.

• Government sponsored cooperative R&D projects.

• Fixed financial brokerage commission rates to assure profitability and survival for even the least efficient brokerage entities.

• Sound macroeconomic policies.

  (There have been some changes lately - some for the better and some - especially with respect to macroeconomic policies - for the worse.)

  Assistance for targeted industries included subsidies and tax incentives proportionate to export growth, credit allocation at below market rates, and loans at below market rates for parts and material production, and artificially low yen exchange rates to encourage exports and increase the cost of imports. The government also coordinated the allocation of investment in new plants to minimize overcapacity and "excessive" competition - permitted coordinated bid rigging for government construction contracts - and seldom enforced its antitrust laws. To increase the size of targeted individual entities and limit competition, mergers were sometimes actively facilitated and product lines were divided up with government encouragement.
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  More broadly applicable industrial policies included artificially low yen exchange rates to encourage exports and increase the cost of imports, the acceptance of cartels, cooperative R&D directed by government without competition for individual projects, price controls, favorable incentives and government loans, restrictions on the entry of new competitors, restrictions on and coordination of capacity expansion to limit competition, restraints on foreign competition, subsidies, and loan guarantees.
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  In declining businesses, the allocation of reductions in production and capacity was regulated by government. This was done to protect employment, which was a higher priority than avoidance of cartels.
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Cartels:

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  The authors note that many of the most successful Japanese industries received little of such assistance and - especially after about 1970 - were not protected from domestic or foreign competition. However, the authors surprisingly do not deal with the notorious informal restraints in this context. These have been especially burdensome for foreign competitors seeking to break into the Japanese market.

Cooperative R&D:

Weaknesses in cooperative R&D methods include communication difficulties, cultural differences, incentive problems, and fear of benefiting rivals.

  237 government sponsored cooperative R&D programs - costing about $10.5 billion over a 34 year period - are noted by the authors. One widely cited project - the VLSI semiconductor project - was an acknowledged success.
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  However, most of the rest had only modest results, and there were many failures. This is hardly strange, considering how many of the projects took place in uncompetitive industries like food and beverages and petroleum and chemicals. There were none in the highly competitive office products industry, and just two in entertainment and leisure. Notable failures include analog HDTV ($110 million) and the fifth generation parallel processing computer ($361 million), both of which were bypassed by superior technology developed in other countries and to which Japan could not respond due to rigidity and consensus decision making.
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  Other nations have similarly had little success with cooperative R&D efforts. U.S. efforts in semiconductor production technology, flat-panel displays, electric vehicles, and computer integrated manufacturing have had no more than mixed results. "It is notable that European companies have made little headway in most of these areas" despite investments of over $20 billion in cooperative R&D efforts.
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  The authors speculate that one reason Japan is dependent on cooperative R&D is because of weaknesses in its university research institutions and lack of diffusion of new technological knowledge. R&D methods that spread knowledge are far more important than the other advantages of cooperative R&D - avoidance of duplication and the sharing of fixed costs.
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  Weaknesses identified by the authors in cooperative R&D methods include communication difficulties, cultural differences, incentive problems, and fear of benefiting rivals. When close competitors are involved, cooperative R&D generally did not yield productive results. Indeed, the pursuit of similar research paths may be one reason why innovation is slow in Japan and Japanese companies rarely develop distinctive strategies.

Sacrificed to the needs of government industrial policy were shareholder returns and voting powers - financial market efficiency - the profitability, stability and strength of the banking industry - and accounting transparency.

Japanese firms excel in developing multi skilled employees by means of frequent job rotation, but are less effective in developing specialists.

  Education and training policies show both strengths and weaknesses. The education system produced an abundance of electrical and production engineers, but inadequate numbers of graduate chemistry students, chemical engineers, software engineers, aeronautical engineers and finance majors. Japanese firms excel in developing multi skilled employees by means of frequent job rotation, but are less effective in developing specialists. Many industries - such as securities and software - require specialization. There are weaknesses in the university research system and barriers to innovation that undermine design innovation and basic and applied research.
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Successes:

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  Facsimile and robotics technologies are cited as successes for Japanese industrial policy practices. The government offered accelerated depreciation rates, and approved a global transmission standard and the acceptance of facsimile documents for official purposes to facilitate the use of the machines. For robotics, accelerated depreciation rates, along with special financing and leasing arrangements to encourage use by smaller companies encouraged early demand for the new industry's products.
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The authors conclude that the "government model" cannot be the driver of Japanese competitiveness. Indeed, it may well be a cause of its widespread failure.

  The setting of stringent standards has also proven successful in forcing superior technology, especially in the realm of energy efficiency. The availability of "patient capital," quality education, and the encouragement of engineering students are also credited with facilitating Japanese competitive success.

"Patient capital" may be encouraged by Japan's artificially low financing costs - its low time cost of money - which in reality misdirects capital and frequently results in the maintenance of chronically unprofitable industry. The downside of some of these "patient capital" practices are now being felt in Japan's current financial morass.

  Thus, the authors conclude that the "government model" cannot be the driver of Japanese competitiveness. Indeed, it may well be a cause of its widespread failure.

    "Government did play a variety of roles in the successful Japanese industries. However, these roles were very different from what is most closely associated with Japan, and they were not the Japanese policies that have been most widely emulated."

The Japanese management model:

  Management techniques developed to a high standard by Japanese industry include teamwork, continuous quality improvement, long time horizons, total quality management, lean production, and close supplier relationships. In general, they aim for:

• High quality goods and services efficiently produced at low cost.
• The production of a variety of models and optional features.
• Rapid development cycles through parallel development processes rather than sequential development processes.
• Shorter product life cycles.
• "Just in time" low inventory practices.
• Product engineering and design for efficient manufacture.
• Close, long term supplier relationships, with continuous exchange of information and employees.
• Flexible manufacturing to reduce the size of efficient production runs and increase the variety of items that can be produced on a production line.

Most keiretsu companies are highly leveraged with favorable loans from keiretsu banks - weakening both the banks and the companies.

Freedom from shareholder expectations and immediate competitive pressures has permitted management to dangerously ignore the guidance of financial markets - ignore the need for healthy profit margins and balance sheets - and instead blindly pursue growth and market share in profitless and viciously competitive convergent and commodity manufacturing.

Studies of keiretsu organizations indicate that they tended to under perform independents even during the height of Japanese success.

  Keiretsu networks of related companies tied together by cross shareholdings and collaborative business relationships provide some real benefits but also introduce destructive weaknesses.

• Most companies are highly leveraged with favorable loans from keiretsu banks - weakening both the banks and the companies. (A broad base of equity capital is essential for stability.)
• Long term goals can be stressed by companies shielded from shareholder expectations and immediate competitive pressures. However, this has permitted management to dangerously ignore the guidance of financial markets - ignore the need for healthy profit margins and balance sheets - and instead blindly pursue growth and market share in profitless and viciously competitive convergent and commodity manufacturing.
• Most companies pursue growth into related but highly competitive high growth industries as a means of redeploying redundant employees and to overcome a lack of real entrepreneurial opportunities. Inevitably, this drive encompasses sufficiently diverse industries outside core competencies to resemble the results of conglomerate mergers.
• Competitive pressures were deflected in the domestic market by weak corporate governance requirements, weak antitrust policies, and restraints on import competition.
• Artificially low interest rates facilitated aggressive long term pursuit of market share and expansion of product lines and capacity while reducing the importance of profitability.

  This complex interrelated system was vulnerable to changing times. It could not readily readjust when individual elements of the system were no longer beneficial. After about the mid 1980s, an increasing number of the successful industries began to decline (shipbuilding, semiconductors) and there were few new success stories to take their place.
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  Indeed, studies of keiretsu organizations indicate that they tended to under perform independents even during the height of Japanese success in the 1970s. "Chronic underperformance, then, was more prevalent in the very type of company that was most identified with the nation's competitive success." Once viewed as a success, they are now in retreat.
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  The early adoption of operational innovations in the 1960s and 1970s was responsible for Japanese success in its best industries. Motorcycles and videocassette recorders were early beneficiaries.

  "In the successful industries, numerous Japanese rivals competed fiercely, rapidly matching one another's moves and driving operational improvement even faster."

The drive to emulate best practices tends to lead to "competitive convergence" - where all competitors in an industry "compete on the same dimension" - creating competitive situations similar to commodity manufacturing.

  However, there is a widespread problem of convergence. Even when Japanese companies offered different varieties of a product, they all eventually converged to offer and compete along a full product line. Initially, world markets were big enough for all of them to grow - "at least during the decade it took for the rest of the world to catch up."
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  By the mid 1980s, not only had U.S. companies begun to catch up, but they began to push productivity beyond Japanese levels - primarily by emulating best Japanese practices plus superior use of information technology, which facilitated superior supply chain management and outsourcing techniques not possible for those committed to keiretsu organizations. (Labor market flexibility, venture capital markets, and effective bankruptcy laws and practices are also HUGE competitive advantages for the U.S.)
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  Best production practices are easily emulated by competitors. Widely applicable management techniques, process technologies, and input improvements diffuse the fastest. The drive to emulate best practices tends to lead to "competitive convergence" - where all competitors in an industry "compete on the same dimension" - creating competitive situations similar to commodity manufacturing.
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  For example, where Japanese computer makers are mired in convergent manufacturing with chronically narrow profitability, U.S. producers like Dell, Gateway and Apple have adopted distinctive strategies that offer opportunities for substantial profitability. Before the recent slowdown, they achieved attractive rates of profitability unmatched by any Japanese firm - none of which were innovative enough to develop a distinctive strategy. (IBM's emphasis of a service strategy is another example.)
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  Increases in productive efficiency alone are not enough.

  "Advanced nations improve their standard of living more by driving up the value of their products and services - because of better technology, marketing, and associated services, for example - and moving into new fields through innovation than by producing standardized products at lower costs."

  With the loss of their lead in productivity, slower growth and competitive convergence have been painful for Japanese firms. Commodity and convergent manufacturing are inherently low profit cutthroat businesses. Over investment in capacity in a mindless drive for market share has made matters worse in such industries as autos, steel, shipbuilding and synthetic fiber.

  "The Japanese government model, with its widespread protection and distortion of financial markets, allowed the flaws in the corporate model to persist. Intervention, cheap capital, and lack of shareholder pressure meant that companies could cross-subsidize using domestic profits and keep investing aggressively despite low prices." 

Strategy:

Almost all U.S. producers have responded to financial market pressures by wisely withdrawing from unprofitable production of standard memory chips.

  "Distinctive strategies are much harder to imitate than operational best practices."

  In semiconductors, the Japanese producers "all fell prey to the perils of competing solely on operational effectiveness." Profits range from slim to none to losses. There has lately been some cutbacks in unprofitable lines, but still no effort to develop truly distinctive positioning.
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  Almost all U.S. producers have responded to financial market pressures by wisely withdrawing from unprofitable production of standard memory chips (something that many economists - with astounding ignorance - widely deplored at the time). They make the higher priced, branded chips - such as microprocessors, chip sets, graphic accelerators, and hard disk controls. They specialize in particular market segments, and outsource production of chips they design.
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  Japan's protected apparel industry - despite strong demand by a fashion conscious Japanese public - is neither innovative nor efficient and remains uncompetitive in international markets. They became so dependent on their domestic market and so absorbed with the peculiarities of marketing in that market, that they failed to develop any strategies for marketing outside Japan. Nor could any of them develop a winning strategy for marketing inside Japan that others didn't instantly copy. They are all mired in convergent manufacturing. "No company developed the unique styles and brand strength needed to penetrate international markets."
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  Although Japan is a substantial producer of chocolate, "no Japanese manufacturer has ventured abroad in any significant way, through exports, joint ventures, or direct foreign investment." All compete in every market segment, and none has a distinctive product line or market positioning. Again, all are mired in convergent marketing practices with low profits and minor market shares. Major international brands are able to compete in the Japanese market based on their branded specialties - even though their products, too, are copied by the Japanese manufacturers.
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Unique strategies require real innovation. Incremental improvement along an established path is insufficient. Unique products, services or business methods are required.

  "In essence, trying to be all things to all customers is the antithesis of strategy. The symmetric and imitative strategies - - - have not only undermined domestic profitability but have also precluded any international competitive advantage" such as is enjoyed by such international brands as Mars, Hershey, Suchard, Nestlé, Lindt and Godiva.

  "Operational effectiveness is just one of two ways a company pursues superior performance. The other is through strategy, or competing on the basis of a unique positioning involving a unique product or service offering." 
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  "Tailoring activities often allows a company to achieve unique cost or customer value in its chosen positioning."

  Real innovation is required. Incremental improvement along an established path is insufficient. Unique products, services or business methods are required. Harley-Davidson's big muscle bikes are a prime example. Southwest Airlines eliminated all meals to reduce costs and aircraft turnaround time. It is far less effective to serve meals to some higher fare customers and not serve them to lower fare customers. 

  "The choice of what not to do is thus central to strategy."

  Growth must be sacrificed for profitability. Without tradeoffs, competition degenerates into mutually destructive convergent manufacturing dependent on easily copied improvements in operational effectiveness. "Compromises and inconsistencies required to pursue market share and growth run a grave risk of eroding whatever competitive advantage a company originally had."
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  Wide product lines, multifunctional practices, rapid change of product styles, sales through multiple market channels, efforts to emulate all competitors - means Japanese firms produce for all but fail to achieve superiority in producing for any. "The basis for competition must shift from comparative advantage - low cost labor or natural resources - to competitive advantages created by unique products and processes guided by distinctive strategies."

The much maligned concern with quarterly return on investment to please active shareholders directs economic activity into higher value added activities - and forces management to retreat from unprofitable lines of business.

  It is effective shareholder disciplines - which Japan lacks - that impose "bottom line" constraints on unprofitable practices, and force companies to avoid becoming mired in unprofitable convergent and commodity manufacturing. The much maligned concern with quarterly return on investment to please active shareholders directs economic activity into higher value added activities - and forces management to retreat from unprofitable lines of business. It is the Japanese penchant to pursue growth and ignore profitability - much admired by certain ignorant Western scholars who are enamored with government industrial policy practices - that drives imitation and convergent manufacturing practices.

Competitiveness in Japan - as everywhere else - depends on vigorous competition in a supportive environment, free of government direction.

  Internationally successful Japanese businesses had not only operational effectiveness - but also distinctive strategies and a domestic business environment that was "dynamic, stimulating, and intensely competitive." Unsuccessful businesses in unsuccessful industries imitated one another, competed domestically in ways that are ineffective in global markets, faced peculiar impediments, and/or operated in a business environment not conducive to innovation and productivity.

• In consumer electronics, Sony produced differentiated products for premium prices which were marketed in unique ways. It developed the trinitron television tube and was the first Japanese producer to enter the U.S. market.
• In motorcycles, Honda targeted the on-road market with quiet but powerful four stroke engines. It emphasized reliable service and produced lighter bikes that could be marketed to a different customer base than Harleys. Its unique, easy to manufacture designs and efficient manufacturing processes permitted it to offer highly engineered machines at lower prices.
• In autos, Honda entered auto production against government opposition and without government support. It concentrated on higher performance passenger cars based on superior engineering and innovative features. It spends about 5% of revenues on R&D - one of the highest rates in the industry. It avoids imitation. Advanced engines, distinctive features and styling, innovative marketing and early commitment to overseas manufacturing are all the results of constant efforts at distinctive positioning.
• In video games, Nintendo, Sega, and Sony all have distinct profitable positions and stimulate an expanding market. Nintendo specializes in home arcade style games for 7 - 14 year olds. Sega specializes in arcade games and home games for 14 year olds and up, with higher quality graphics and sound, and computer and internet functions. Sony entered the market in 1995 with its Play Station, competing on quality and cost with superior CD-ROM technology and a welcoming attitude for outside software producers to provide a wide variety of games. 

  The authors also feature a number of emerging Japanese firms that are prospering by competing on the basis of unique strategies. Most are located in Kyoto and other areas outside the traditional industrial centers of Osaka and Tokyo. They point out that competitiveness in Japan - as everywhere else - depends on vigorous competition in a supportive environment, free of government direction.
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Factor conditions:

Government must avoid playing any role in determining who the winners and losers will be.

  The chocolate industry is hampered by high costs of imported sugar and cocoa due to government trade barriers. Soy sauce, on the other hand, is favored by an absence of import restraints on soy beans, and is internationally competitive. A lack of wind tunnels and test flight facilities hampers civil aviation. The facsimile industry, on the other hand, was favored by a well developed local communications infrastructure.
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  Chocolate suffers from weaknesses in the dairy industry and food processing machinery - securities and banking suffer from regulatory impediments that prevent innovation - detergents suffer from marketing and chemical industry weakness - software suffers from weakness in microprocessors and unwillingness of Japanese to pay for intangibles.
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  An abundance of skilled electrical engineers favors such industries as robotics, consumer electronics, and facsimile machines. Artists trained in comic book production were useful as animators for video games. A shortage of chemists hurts the chemical industry. Securities, software, pharmaceuticals, biotechnology, and aircraft industries suffer from lack of essential skills.
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  The lack of risk (equity) capital hurts software and biotechnology industries where there are high risks and a lack of hard assets to collateralize bank financing. But low cost "patient" bank financing supported developments in electronics, semiconductors, and carbon fibers.
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Successful clusters of related and competitive suppliers greatly facilitate competitive operations.

  Suppliers - of materials, components, machinery, services, and information - are essential factors of efficient production. Successful clusters of related and competitive suppliers greatly facilitate competitive operations.

• Robotics - helped by cluster that includes suppliers of  numerical controls, machine tools, optical sensors, motors.
• Home air conditioners - helped by cluster that includes suppliers of converters, compressors, small motors, radiators.
• Facsimile machines - helped by cluster that includes suppliers of cameras, optics, electronics, small motors.
• Forklift trucks - helped by automotive supplier cluster. Auto companies developed their own suppliers.

The intensity of local rivalry was by far the dominant factor explaining the international success of Japanese industry. Conversely, the presence of trade protection or the existence of a cartel worked against international competitiveness.

  Local competition is "perhaps the most powerful predictor of global competitiveness. It drives innovation and continual improvement in productivity. Without competition at home, firms will never be competitive abroad."

  "[Statistical analysis results] were unequivocal: the intensity of local rivalry was by far the dominant factor explaining the international success of Japanese industry. Conversely, the presence of trade protection or the existence of a cartel worked against international competitiveness. Traditional comparative advantage variables, such as capital and labor intensity, had a weak or nonexistent relationship with export share. The size of the home market was also insignificant, - - -."
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  "In virtually all the Japanese failure cases we studied, domestic rivalry was constrained in some way, often by government."

  Chemicals, securities, detergents, civil aircraft - all suffer from restraints on competition. There was "vigorous local competition in all of Japan's internationally successful industries," such as air conditioners, robotics, sewing machines, facsimile machines, and VCRs.
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Factor strengths and weaknesses:

"Government's role should be to improve the environment for productivity and competition, not to get directly involved in the competitive process."

The list of important factors are the same as everywhere else. There is after all nothing unique in the Japanese model.

  However, unproductive government interventions and competitive restraints are numerous. There are hidden trade barriers - restraints on competition for public contracts - weak antitrust enforcement - weak financial markets - opaque corporate disclosure and inadequate access to business information - lack of venture capital for startups - heavy administrative burdens - and inadequate commercial law. Management education is weak, road and airport infrastructure is weak, and communications costs are high.

  "Government's role [at national, state and local levels] should be to improve the environment for productivity and competition, not to get directly involved in the competitive process."
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  "Government - through guidance, subsidies, approval requirements, and other means - inserted itself into corporate decisions instead of trusting the process of competition to sort them out."

  The productivity of local industries is also an important factor in global competitiveness, because their costs influence the costs of major industries as well as the overall cost of living. Japan faces a tough chore encouraging competition among protected local industries to force productivity increases.
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  Japanese restraints on competition distort commerce into forms that are not valued in foreign markets - render uncompetitive such vital domestic industries as distribution and transportation - and drive up input costs. Japanese consumers frequently demand custom made products (apparel fabrics, software, packaging) that restricts competitiveness in global mass production markets. Education and training policies fail to provide needed specialists.
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  The list of important factors are the same as everywhere else. There is after all nothing unique in the Japanese model.
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Recovery policies:

  Government policy must be shifted from guiding, controlling and constraining competition to facilitating competition, improving inputs and encouraging innovation.

• Continue with the things that work.
• Stop Keynesian macroeconomic stimulus that threatens to undermine stability and burden the nation with heavy debts and huge levels of government loan guarantees without providing more than temporary relief.
• Regulatory agencies must become more open in their processes and accountable for their results.
• Venture capital must be encouraged and regulatory barriers to entry must be removed for startups and small companies. Lower long-term capital gains taxes and liberal tax loss write-offs are needed.
• Consensus product standards can rationalize supply chains.
• High quality standards in energy efficiency, safety, quality, and noise levels, can force technology, and encourage innovation and productivity.
• However, the vast bulk of regulations and red tape burden productivity and are competitive disadvantages that must be minimized. Even environmental, safety, quality and similar regulations that have sometimes been a stimulant to innovation and technology, have all too often retarded new technologies and products.
• Regional specialization should be encouraged to encourage clusters of related industries to locate outside the congested Osaka and Tokyo regions. Many new businesses find it impossible to locate near vital suppliers because of this congestion. Prefecture and local leaders must be freed of central government direction and encouraged - like Kyoto - to establish their own distinctive development plans.
• Government sponsored cooperative R&D projects are usually wasteful, distort competition, "are cumbersome and encourage homogeneity of strategies" that lead to unprofitable business strategies.
• Diverse educational curricula are needed to encourage innovation and specialization.
• Research universities are needed.
• Intellectual property must be effectively protected.
• Labor market flexibility, with suitable "safety net" provisions, is needed.
• Corporate governance must be strengthened by increased transparency, independent boards of directors, modern securities law and accounting rules, favorable tax incentives, and the empowerment of shareholders to emphasize profitability and accountability
• Competition - including free trade policies - should be relied upon as the primary regulatory force.

In capitalist economies, it is profitability that counts, not mere size or even market share.

  Japanese corporations must specialize. Corporate strategy has been to respond to slow growth by diversifying into unrelated businesses instead of fixing the problems in their core businesses. They respond to poor profitability by constant efforts to lower costs. Since they all can do these same things, they descend into chronically low profit convergent and commodity manufacturing.
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  Of course, they must continue improving operational effectiveness. However, they can't be all things to all people. They must specialize.
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  They also must find distinctive, long-term strategies. They must find unique niches to distinguish themselves from their rivals.
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  They must choose what NOT to do. In capitalist economies, it is profitability that counts, not mere size or even market share.

  "In a nation where imitation has been the rule, companies need to either choose a set of activities that are different from competitors, or perform activities differently than rivals do." 

  Of course, this would mean they might not be able to continue to employ everyone currently on their staffs. Many Japanese businesses are especially overstaffed with white collar (office) workers. The authors cite one estimate that Cisco sales per employee are three times that of Fujitsu.
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Choices must be made as to which customers to serve, and which to leave to competitors - which customers needs should be addressed, and which should not.

  Choices must be made as to which customers to serve, and which to leave to competitors - which customers needs should be addressed, and which should not. This will benefit all customers, because suppliers specializing in their particular needs will serve them best.
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  Innovation and risk taking must be valued above consensus and stability. Profit center autonomy should be stressed over hierarchical decision making. Instead of egalitarian and seniority driven incentives, merit promotion and risk taking based on profitability must be rewarded. Consensus decision making stifles innovation, because change always hurts someone or some department. Consensus decision making also makes reversal of errors difficult because all have signed off on the erroneous course of action.
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  A unique view of the future must be developed by each business. This means they cannot rely on the same government studies as everyone else, and must not share their own studies.
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It is vital to have large numbers of unaffiliated shareholders who will maintain pressure to concentrate on profitability. "Profitability is the only reliable guide to developing strategy."

  Keiretsu associations tend to lock their largest organizations into inefficient unrelated diversification similar in effect to conglomerate structures. Because of cross shareholdings with keiretsu, the volume of business that can be directed to affiliated companies becomes more important than profitability. It deters focus on market segments and creates pressure toward product proliferation beyond core competencies.
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  While close cooperation on particular projects remains desirable, suppliers and major manufacturers have to begin dealing with each other more at arms length, and banks and others entities must unwind cross shareholdings. (There is currently some movement in unwinding cross shareholdings.) It is vital to have large numbers of unaffiliated shareholders who will maintain pressure to concentrate on profitability. "Profitability is the only reliable guide to developing strategy."
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  Companies that have more than one third of their shares held by foreign shareholders have developed rates of return on investment above the average for companies on the Tokyo exchange. (John Kenneth Galbraith and Lester C. Thurow to the contrary notwithstanding, the governance role of outside shareholders IS ESSENTIAL for economic productivity.)
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 The Japanese government must move broadly from a stability based system to a competition based system.

  Government interference in business decisions must be resisted. Business leaders and associations should advocate a redirection of political governance. Government should facilitate profit driven, market directed commerce - at local as well as national levels. "Japanese companies must be allowed to compete at the same time as they are forced to compete." Government must resist its instinct "to protect, cushion, and shelter companies and citizens." It must move broadly from a stability based system to a competition based system.

  The authors note the ferment of new companies and industries in Japan - including new technology and dot com startups - as indications as of 1999 of positive new developments. Many of these startups were hard hit by the recent tech wreck. However, the right to fail is as important in capitalism as the right to succeed, and such failures and setbacks in no way undermine the validity of their analysis.

Universities must be set free from the government regulation that is stifling them. They currently lack innovation or high standards.

  A decentralized and diverse educational system is vital. Creative problem solving must be emphasized over rote learning.
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  Both university and corporate training must be shifted from producing generalists to producing the specialists needed by modern industry and commerce. Universities must be set free from the government regulation that is stifling them. They currently lack innovation or high standards. There is little evaluation of performance of either students or professors. Diverse curricula offerings responding to student preferences are needed instead of the generally uniform curriculum set by the Ministry of Education.
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  University focus has been on applied work rather than original science. Faculty promotions based on seniority and homogeneous backgrounds stifles creativity. "Japan has won just five Nobel Prizes in science in the last century" - much less than even Denmark or Austria.  Graduate degree programs must be strengthened and greatly expanded to match those in the U.S. and Europe. Some progress along this line has already been made. Yes, they even need more lawyers - to facilitate modern complex commercial dealings.