The Mind of the Strategist

The Art of Japanese Business

Focus Take-Aways

Leadership & Mgt. • The purpose of business strategy is to cause events to favor your strengths. Strategy • Identify your strengths and build on them. Sales & Marketing

Corporate Finance • Every industry has a key success factor — know yours.

Human Resources • Penetrate appearances.

Technology & Production • Address the problem, not the symptoms. Small Business • Know what separates winners from losers in your industry and your market. Economics & Politics

Industries & Regions • Analyze potential improvements in terms of cost, beneﬁ t and strategic advantage.

Career Development • Keep track of customer and market trends — even though customers may not Personal Finance know what they want.

Concepts & Trends • Know the difference between a “business” and a “product.”

• Think like an entrepreneur, but think.

Rating (10 is best)

Overall Applicability Innovation Style 9 9 9 9

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What You Will Learn In this Abstract, you will learn: 1) How Japanese business people think about strategy; and 2) How you should conceptualize and execute your strategy. Recommendation This book, fi rst published in Japan in 1975, is a somewhat dated classic, since the fi rst edition appeared at the high water mark of Japanese competitiveness. Japan’s economic doldrums since 1990 probably ensure that few business people will emulate it now. In a way, the fact that the bloom is off Japan’s chrysanthemum makes this book more useful and relevant than it was a quarter-century ago. Now that people aren’t starry-eyed about Japan, it’s possible to sort through the recommendations, take them with a grain of salt and fi nd their deeper usefulness. The author is a famous McKinsey consultant, so the book is packed with charts and jargon. Ignore the jargon, the obsolete observations about how U.S. companies organize themselves and the anachronisms about Soviet-style central planning, now a relic. Focus instead on the examples and asides. getAbstract.com also notes that this is a must-read for anyone working in Japan or competing against Japanese companies, if only because so many Japanese managers give it to their new hires as part of their training programs.

Abstract

The Point of Beginning Japanese companies have astounded the world with their competitive drive and success, so everyone wonders what their secret is. Surely such remarkable achievement must derive from some equally remarkable formula or insight. How paradoxical it is that these world- “Strategic success beating ﬁ rms have no formal processes of strategic planning, lean or nonexistent planning cannot be reduced to a formula, nor staffs and rudimentary technologies. With all these deﬁ ciencies, they still manage to can anyone be- penetrate new markets and establish dominance in a wide range of industries. come a strategic thinker merely by In fact, although Japanese companies don’t usually have an army of strategic planners, reading a book.” they do have some remarkable strategic insights. Usually those insights reside in one person, often the person who founded the company, perhaps a man with scant formal education. Instead of a thorough grounding in analytical methodologies, this man usually has an intuitive understanding of how the market works and where the company must position itself. These insights are creative, usually unorthodox and often radically new. This kind of strategic visionary leader is becoming obsolete. In both the East and the West, the pressure of organization and institution overwhelms the individual, “Everyone thinks pushing aside the prophetic visionary, exalting the number-crunching rationalist. U.S. the Japanese pos- sess some special corporations, in fact, look like the Soviet economy. They’re full of central planners who magic that enables attempt to control every detail of policy, procedure, resource allocation, risk and return. them to run rings This sort of thing does not make for strategic success. Strategy is always and everywhere around their com- the product of an attitude and a way of thinking, not of an analysis or a set of facts. Great petitors in world markets.” strategists are like great artists. Recognize that strategy begins with analysis. The strategist analyzes a set of facts, in the sense of taking the set apart, and then reassembling it in an order that makes

The Mind of the Strategist © Copyright 2003 getAbstract 2 of 5 sound strategic sense. The purpose of strategy is to maximize one’s advantage. On a battlefi eld, this means picking the right place to fi ght, the right time to attack, the “Over time, man- right time to retreat — weighing and re-assessing as circumstances change, but always agement pro- with maximum advantage in mind. Strategy is intuitive, but it is also analytical; it is cesses and analytical, but also intuitive. systems tend to shape and form Main Issue the culture of the corporation.” The fi rst step in strategy is to identify the one issue that matters most —• the critical issue. To do this, you must frame the question properly. Suppose a company is incurring high costs for overtime work. What is the correct question? Could it be, “How can we reduce overtime?” or maybe, “Do we have enough staff?” or perhaps, “Does our staff have the necessary skills to do the work in a timely manner?” Each question would elicit a different response. Clearly, though, it is necessary to answer the third question before “In Japanese eyes a corporation is moving to the second, and then the fi rst. nothing but an assembly of Unfortunately, many business people would simply assume away the two most critical people, each questions and focus on the fi rst. It takes a certain disciplined creativity to question what known as a sha-in, everyone else takes for granted. Some people can intuit the critical issue, but they are or member (not an employee) of the scarce. Fortunately, a disciplined method can help anyone arrive at a workable defi nition corporation.” of the critical issue. This methodology can apply to a broad spectrum of business issues: • Diagram the issue or question (e.g., Can we lower costs on this product?). • Identify the issue components (e.g., Fixed costs, variable costs, design specs). • Question each component (e.g., Can we change the design specs to use cheaper mate- rials?). Look at the advantages and disadvantages of changing that component. “Without competitors there would • Offer a specifi c plan of action for each issue component. be no need for strategy, for the Four Strategic Paths sole purpose of Strategy is about achieving competitive advantage. If there were no competitors, there strategic planning would be no strategy. No one would need it. This suggests that the most important is to enable the company to gain, strategic issue is competitiveness. A company can tolerate certain internal defi ciencies, as effi ciently as but fi rms cannot survive competitive inadequacy. Allowing the company to deteriorate vis possible, a sus- a vis its competitors means putting the company’s fate in the hands of the competition. tainable edge over its competitors.” People think differently when they face competitive survival. This changes their focus. They recognize that the best is the enemy of the good, and possibly the friend of the competition. Good enough is good enough. There’s no point looking for the perfect strategy or the perfect competitive situation. The point is to gain an advantage over the competition at a reasonable cost. Do that often enough and you will win. This can be accomplished four ways: “If you can identify the areas which 1. Re-allocate resources. really hold the key 2. Focus on one’s relative strength. to success in your industry and apply 3. Redefi ne the key issue of the business by a bold stroke. the right mix of 4. Be free. resources to them, you may be able Now, let’s look at each path separately: to put yourself into a position of real Re-allocate Resources competitive superi- As noted earlier, every industry has one or two factors that determine success. No matter ority.” how complicated the industry may seem, at its heart it is simple. Banking, for example, is about collecting money at a low cost and lending it at a higher return.

The Mind of the Strategist © Copyright 2003 getAbstract 3 of 5 The critical factors in an industry can be identifi ed several ways. One is to analyze the industry, looking at each segment, defi ning how competitors in each area behave “It is hard to over- and drawing some overall conclusions about the success factors. Another is to examine state the import- the conduct of winners and losers to defi ne the behavior, advantages or resources that ance of formulat- made the difference. Once you have identifi ed the key factor for success (KFS) in your ing the question correctly.” industry, re-deploy your resources to focus on building strength in that key factor. If it is service, focus your resources on developing outstanding service. If product design is a key factor, focus on that.

Relative Strength Examine your product and identify areas where you can focus on achieving a relative advantage. This may mean literally taking your product apart, taking your competitor’s product apart and comparing the two. For example, Fuji and Sakura competed in the market for photographic fi lm. Their “The strategist’s quality was comparable, but Fuji had an advantage in its name, which suggested the weapons are stra- sharp colors and contrasts of Japan’s scenic, holy mountain. Sakura means “cherry tegic thinking, consistency and blossom,” and connotes a vague, hazy sort of beauty. Sakura analyzed the market to fi nd coherence.” out whether it could reverse its loss of market share to Fuji, and found that consumers were becoming more concerned about cost and often tried to squeeze an extra shot or two onto a roll of 20 exposure fi lm. Sakura decided to introduce a 24 exposure fi lm at the same price as Fuji’s 20 exposure fi lm. Strategically, this made sense. Sakura could not win the image contest — Fuji had relative strength there. But Sakura could develop relative strength on the basis of cost. The corporate strategist who relies on relative strength should think through competitors’ likely reactions to each move, and prepare to defend against those reactions.

The Bold Stroke “Structural changes are usually Simply put, this is about asking “Why” to test every assumption that is ordinarily slow, incremental taken for orthodox wisdom in your industry. One of the best practitioners of this processes, imper- method is Taiichi Ohno of Toyota. He asked why car companies had to keep costly-to- ceptible from year to year to those fi nance inventory on hand, and wound up inventing “just-in-time” material management inside the busi- practices. Keep asking why. Great breakthroughs come from answering this question. ness.” Be Free Specifi cally, take advantage of “strategic degrees of freedom.” Having identifi ed the key factors for success, precisely identify what courses of action may be open. In the case of an auto company, perhaps safety is a KFS. An automaker can do many things to improve safety, but can’t do all of them at once. Meanwhile, there are some things that might improve safety but that the company simply cannot do. Strategic planning and strategic action should proceed in the areas where the company is indeed free to move.

Strategic Triangle “Other things being equal, a Using the methodology above, you will avoid some of the great errors of strategy, including: lower-cost function can be a source of • Tunnel vision — You must keep alternatives in view at all times. proﬁ t if the product • All or nothing — In fact, half a loaf, even a quarter, is preferable to none. is priced on a par with competition.” Think of strategy as a triangle with three sides: company, customer and competition. Movement by any of these elements affects the market and may make it necessary to change the strategy. However, strategic change can be vexingly difﬁ cult. Here are some examples:

The Mind of the Strategist © Copyright 2003 getAbstract 4 of 5 • Company-based strategy — One Japanese air conditioner company with an outstanding reputation for engineering decided to cope with a competitive threat by developing a line of high-quality, high-priced home air conditioners. The product “If the competition went to market and fl opped. It was well-engineered, but so heavy that distributors has a clear cost were not willing to carry and install it. There’s an old saying to the effect that when advantage and chooses to refl ect the only tool you have is a hammer, every problem looks like a nail. Beware. Stra- it in price, a com- tegic planning must be broad and comprehensive; it must address not only immedi- pany with a higher ate possibilities but “what if” consequences. Companies that opt to outsource some cost structure is operations make a clear decision, a commitment, usually based on costs, to change doomed to fail if it resorts to mere what their company does and to focus their resources on what they do best. cutthroat warfare.” • Customer-based strategy — Generally, a company should identify one subset or segment of customers and focus on them, instead of trying to satisfy the entire market. This means knowing your customer segment very well and understanding why you might have a relative strength with this group. Japanese car companies adopted this type of strategy in the 1970s, when they introduced fuel-effi cient compact cars to the “Because he segment of the U.S. market that was the most receptive to them. understands the • Competitor-based strategy — Seek areas where the competitive situation allows you full range of alternatives that lie to develop a clear edge. Sony had a great reputation for quality in the U.S., but its before him and reputation in Japan was comparable to its competitors’ reputations. Sony invested constantly weighs heavily in advertising, PR and marketing, and soon commanded a price premium over the costs and benefi ts of each its Japanese competitors because it had built relative superiority on the image front. one, the true strategic thinker Business strategy concerns how best to operate in a given economic environment; it would can respond fl ex- ibly to the inevi- be foolish to ignore the implications of the overall economy. Low growth, for example, table changes in can exacerbate competitive pressures. Meanwhile, advances in technology or changes in the situation that industry structure may well derail strategies based on the assumptions of the past. confronts the company.” Be aware, use foresight and never stop asking “why?” Remember that your purpose in developing a strategy is to gain competitive advantage. Many small steps can add up to one very long lead over the competition.

About The Author

Kenichi Ohmae, a director at McKinsey & Company and co-leader of its strategy practice, has written several best-selling books on strategy and several scientiﬁ c papers on nuclear engineering.

Buzz-Words

Critical issue / Degrees of freedom / Key factor for success (KFS) / Relative strength / Strategic triangle