Industrial Structural Reform and the Rejuvenation of Japanese Companies

1
Industrial Structural Reform and the
Rejuvenation of Japanese Companies
March 1999 Ministry of International Trade
and Industry International Trade and Industry
2
Approaches
Conventional approach of IT projects
New approach
- Use of existing classification of industries -
Technology and commodity oriented (i.e. what can
be done with IT?) - Qualitative
- Inter-industry crossover - Management
oriented (i.e. How can IT be used?) -
Quantitative
Analysis
- Grounded in management theory - Directed at
CEOs, CIOs and other top executives - Designed
to assist implementation - Directed at key
industries and leading firms (studies focus on
automotive, electrical equipment, healthcare,
finance, logistics and retail sectors)
- Technological and business orientation -
Aimed at corporate IT officers and those
planning new business projects - Educative -
Aimed at emerging industries and businesses
Recommendations
- Introduction of technology - Drive toward
overall standardization of technologies
- Commercial test bedding - Early successes
Practice
3
Main gist of recommendations
3. Growth opportunities created through evolution
4. Approach to realizing growth
Japanese corporate and economic recovery
1. Essentials of IT
2. Industrial structural reform (IPR)
4
3. Growth opportunities created through evolution
4. Approach to realizing growth
2. Industrial structural reform (IPR)
Japanese corporate and economic recovery
1. Essentials of IT
5
Breakdown of labor costs by type of work ()
30
42
55
Direct hands-on work
19
12
Analytic work
9
Interpersonal negotiating work - Data
retrieval - Coordination - Supervision of progress
51
46
36
US
Germany
India
Source MITI, Global Forces.
6
IT workers by industry in the US ()

• Agriculture, forestry and fishery

• Catering

lt 30

• Construction
• Food
• Other manufacturing industries

• Transport
• Industry goods

3040

• Transport equipment
• Printing

• Business services
• Mining
• Healthcare
• Other services

4050

• Wholesale
• General retail
• Government
• Education
• Finance

• Department stores
• Auto dealers
• Telecoms and utilities
• Engineering and general business

gt 50
Source MITI, Global Forces.
7
Time required for communication (minutes)
Data retrieval (e.g. accessing information
externally)
Coordination (e.g. taking and placing orders)
Supervision of progress (e.g. investment
portfolio management)
25
3.7
1/25
1/12
1/10
1.6
10
0.3
1
Phone
Web sites
Web site agents
E-mail
EDI
Newspapers
Web sites
Web sites for specific individuals
Letters
Source MITI, Global Forces.
8
Changes resulting from increased communication
Optimum balance
Communication costs
Specialization
Industries companies
Communication costs
Segmentation
Organizations
Communication costs
Selectivity
Clients
Source MITI, Global Forces.
9
3. Growth opportunities created through evolution
4. Approach to realizing growth
2. Industrial structural reform (IPR)
Japanese corporate and economic recovery
1. Essentials of IT
- Industrial structural reform (IPR) is achieved
through a three-step process of
division/expansion, recompilation and
reconstruction. - In this process, a new type of
business based on value packagers and customer
agents emerges.
10
Industrial structure as industry process the
auto industry
Resale
Used auto dealers
Servicing and maintenance
Ancillary goods and services
Service stations
Insurance
Insurance firms
Auto loans
Auto loan providers



Spread of value added for client
Nissan group
Nissan group
Toyota dealers
Shin Nittetsu, etc.
Nissan

• Toyota group
• Denso
• Aisin, etc.

• Toyota group
• Asumo
• Shimizu Manufactur-ing, etc.

Supply of automobiles
Asahi Glass, etc.
Toyota
Bridgestone, etc.
Spread of keiretsu
Sub-components
Raw materials
Flow of activities creating added value for client
11
Value-adding structure of industry processes
(\10,000, per user)
311.0
Premises - Average price \1.96 million - Figures
for auto insurance and loans based on gross
interest. - Figures for insurance and maintenance
calculated assuming that a cars lifecycle is 5
years.
6.7
11.0
21.0
After-sales service providers
37
37.0
39.1
196.0
Dealers
8
25.9
Assembly makers
77.8
25
42.5
Parts makers
20
1.0
5.6
0
11.3
Materials makers
10
32.9
Materials
Total
Trading company
Tertiary parts maker
Trading company
Secondary parts maker
Primary parts maker
Assembly maker
Dealer
Price of new car paid by consumer
Auto insurance
Auto loan
Servicing maintenance
Car supplies
Used car
Value added in provision of car
Value added in ancillary goods and services
Market size (\ trillion/year)
1.2
2.5
3.5
3.6
6.8
12.9
19.5
21
3.6
1.7
6.5
3.1
5.4
Source Financial statements of automakers and
MITIs analysis.
12
Process of industrial structural reform (IPR)
Process repeated
Division and expansion
Recompilation
Reconstruction
Value packagers
Customer agents
Specialized firms
Value slicer
Expansion
Parts
Assembly
Distribution
Use
Customer service user support
Division
- Division Emergence of specialized firms and
value slicers. - Expansion Provision of support
ranging from customers purchase of goods and
services to end of use (consumer industries) and
permeation of customer services (infrastructure
industries)

• - Emergence of services combining existing raw
  goods and services.
• Value packagers Providers of services
  combining various goods and services.
• Customer agents Customer service agents
  offering specialist skills and knowledge.

- Reconstruction of number of activities creating
added value based around value packagers and
customer agents.
13
Division and expansion liberalization of the
architecture of goods
Future developments
Parts and processes highly independent of one
another. Value created through the combination of
modules with standardized interfaces.
High level of interdependence between fields and
processes. Value created through optimization.
Closed
Open
Jumbo jet
Color TVs
Large-scale machine tools (elevators)
Autos
Automobiles (sedan)
PCs
Software
Traditional financial services
Advanced financial services
Easy for product assembly makers to continue to
control the flow of activities creating added
value.
Value slicers emerge at each step of the flow of
activities creating added value, reducing the
domination of assembly makers.
Most industries are becoming more open due to the
pursuit of economies of scale and the division of
labor.
14
Potential for unbundling in the auto industry
Present to short/medium term
Future (long-term)
- Autos are a prime example of closed goods.
Degree of openness of industrial structure
L
M
- Openness is growing due to increasing use of
electronics and modular construction.
- Considerable attention is lavished on cars, and
final fine tuning by assembly makers plays an
important role. - Varies depending on customer
segment.
Perception of cars as everyday items
LH
MH
- Growth in commodification of automobiles - Incre
ased focus on functionality
The degree of opening up remains limited.
Increased openness in the future is unavoidable.
15
Division of industry processes the auto industry
Resale
Used auto dealers
Servicing and maintenance
Ancillary goods and services
Service stations
Insurance
Insurance firms
Auto loans
Auto loan providers



Spread of value added for client
Nissan group
Nissan group
Toyota dealers
Shin Nittetsu, etc.
Nissan

• Toyota group
• Denso
• Aisin, etc.

• Toyota group
• Asumo
• Shimizu Manufactur-ing, etc.

Supply of automobiles
Asahi Glass, etc.
Toyota
Bridgestone, etc.
Spread of keiretsu
Sub-components
Raw materials
Flow of activities creating added value for client
16
Expansion of industrial processes From
supplying products to offering lifecycle support
(\ trillion)

• Entertainment
• Information
• Travel
• Leisure

• Gas stations
• Parking
• Car navigation systems
• Auto supplies

a
a
a

• Auto insurance
• Auto loans
• Servicing and maintenance
• Resale

16
20
57
Of which value added by OEM makers is 5
21
Car life support
Driving support
Provision of ancillary services
Provision of autos
Spread of value added
17
Recompilation the emergence of new types of
business in the auto industry
Entertainment information
Point terminals
Car life support
Travel information
Stations


Total car life support
Traffic information
Driving support
Spread of value added for client
Parking
Wireless communication (car navigation systems)
Customer agents
Gasoline
Gasoline

Customer
Total driving support
Resale
Servicing teams
Service stations
Provision of auto-related services
Ancillary services
Servicing
Point terminals
Auto insurance
Insurance
Card loans

Loans
Cars
Parts
Dealers
Cars
Purchase of goods and services (support)
Parts materials
OEM
Combined goods (packaging)
Purchase of goods and services
Distribution
Particular goods
Flow of activities creating added value for
customer
18
Reconstruction the emergence of new industry
processes in the auto industry
Entertainment information
Point terminals
Car life support
Travel information
Stations


Total car life support
Traffic information
Driving support
Spread of value added for client
Parking
Wireless communication (car navigation systems)
Customer agents
Gasoline
Gasoline

Customer
Total driving support
Resale
Servicing teams
Service stations
Provision of auto-related services
Ancillary services
Servicing
Point terminals
Auto insurance
Insurance
Card loans

Loans
Cars
Parts
Dealers
Cars
Purchase of goods and services (support)
Parts materials
OEM
Combined goods (packaging)
Purchase of goods and services
Distribution
Distribution
Particular goods
Flow of activities creating added value for
customer
19
Reconstruction of the physical distribution
industry
- Business planning - Business risk-taking
(5) Services themselves
- Receipt and placing of orders - Credit account
management
Customer services
- Shipment volume forecasts - Collection of
payment - Insurance, trade finance - Selection of
suppliers of products, etc. - Call center business
(4) Non-logistical information management
Corporate client

• Corporate agents
• Personal agents
• Diagnosis
• Rating
• Service
• Procurement

(3) Logistics-related information management
(information base)
- Tracking - Logistics EDI - Customs
business - Inventory control
- Service - Marketing - Agents
Spread of value added for customer
(2) Logistics-related ancillary services
(activity base)
- Inspections - Assembly and
repairs - Product testing - Packaging and
labeling - Issuing of slips

• Examples
• Car inbound logistics
• Global apparel logistics

Physical distribution business
Personal client
Forwarders
- Car transport - Rail transport - Air
transport - Marine transport - Warehouse and
logistics center
(1) Basic logistics services (asset base)
Home delivery service offered through convenience
stores
Distribution

• Provision of services comprising logistic
  functions

• Incorporation of services to suit customer segment

• Service delivery

• Evaluation of package and components suitable for
  individual customers.

20
New types of business and growth opportunities
created by IPR
Leaders of corporate networks
Specialized firms
Solution providers
Value packagers
Growth-oriented business types
Customer agents
Value slicers
Infrastructure providers (rating and information
services, etc.)
Source of growth

• Economies of scale

• Incorporation of added value of related goods and
  services

• Creation of new added value through combination
  of goods and services

• Creation of higher value added and greater
  advantages of scale through optimum combination
  of new types of firms

21
Outline of new types of business
Definition
Value provided
KFS

• Businesses concentrating on functions at a
  particular step of the industry process

• Offer more advanced skills due to specialization

• Total concentration on specialist field
• Greater investment than rivals in specialist field

• Specialized companies

Value slicer

• Businesses providing functions on a large scale
  at a particular stage of the industry process
  unrestricted by conventional keiretsu ties

• Low prices due to advantages of scale
• High skill level due to specialization
• Determine industry standards

• All-out pursuit of advantages of scale in a
  particular field

Value packager

• Businesses that create new value by combining
  goods and services offered by various players to
  meet needs of specific customer segments

• Increase attractiveness to customer by creating
  optimum combination
• Provide feedback to providers of individual goods
  and services that enable improvements to be made

• Discernment of customer needs
• Proposal capability

Customer agent

• Good judgement
• Broad information network
• Sound understanding of needs of individual
  customers

• More able than customers to select goods and
  services
• Make purchases on behalf of customers

• Businesses that procure the optimum goods and
  services on the market to meet the needs of
  individual customers

Corporate network leader

• Competitiveness in terms of speed, cost and
  quality based on comprehensive coverage of the
  industry process

• Overwhelming domination of particular steps of
  the industry process (particularly the customer
  interface)
• Exert centripetal force on companies at other
  steps of the industry process

• Leaders of a coalition of companies providing a
  comprehensive range of functions throughout the
  industry process by organizing players such as
  packagers and customer agents

Infrastructure provider

• Businesses providing functions common to
  businesses that directly make up the industry
  process (rating, market administration and
  information services, etc.)

• Stable provision of common functions at low cost

• Scale
• Neutrality and reliability
• Cost competitiveness
• Technical capability

22
3. Growth opportunities created through evolution
4. Approach to realizing growth
1. Essentials of IT
2. Industrial structural reform (IPR)
Japanese corporate and economic recovery
23
Growth opportunities created by reform of the
auto industry
Main points
Examples
Impact on profits
(\100 million annual operating profits)

• Realization of advantages of scale
• Elimination of duplicated work and functions
• Skipping of unnecessary functions and companies

• Value slicers
• Denso (parts)
• Auto By Tel (dealer)
• Reduction of role of parts and OEM makers
• Reduction of involvement of dealers in internet
  marketing

Cost cuts
1,900
Corporate growth opportunities

• Expansion of scope of services provided
• Packaging of service content to meet individual
  customer needs
• More rapid introduction of new goods

• Driving support, car life support
• Driving packages for new drivers
• Concurrent engineering integrating parts/OEM
  makers and dealers

Revenue increases
3,900
Reduction in price paid by consumer

• Formation of open market linking numerous sellers
  and buyers (consumers)

• Recruits internet market

1,100
Total
6,900
24
Reduction of costs (elimination of duplicated and
unnecessary work)Densos joint development
promotion system (DECCS)
Denso
Suppliers
OEM (assembly makers)
Design business
Aims

• Reduction of design and development period
• Halving of design and pilot manufacturing
  assessment process
• Pilot manufacturing carried out only once

Densos suppliers
3D CAD/CAM data
O E M
DECCS
Under consideration
Design division with 85 centers overseas
Conversion of differently formatted CAD/CAM
data
Denso Engineering Comb Computing System.
Each OEM makers data formatted differently
Precision not yet increased sufficiently.
25
Fords virtual corporate net (VCN) Successful
cost reduction and revenue growth
Planning stage
Marketing
Assembly
Development
Production and procurement of parts

• Parts database
• Analysis of competition
• Parts ranking

• Sale of total car ownership service
• Loans
• Insurance
• Servicing contracts

Team Web Site
Ford
Ford extranet
Dealer
4 Blue 4 Mustang
Team Web Site
Delivery of blue seats at 1052am, May 15
Partners
Internet
Europe/Asia
Customer
Parts makers
Parts makers
Dealers PC

• Period until start of production of new model
• Before 36 months
• Now 24 months

Parts makers can instantly determine what parts
are required when.

• Period from order to delivery (in the case of a
  Mustang)
• 1996 50 days
• Early 1998 15 days

More than 50 of vehicles will be made on
demand by the end of 1999.
Results
26
Increase of revenues (provision of car life
support)Overview of integrated customer
management in the auto industry
Sale and after-sale services
Marketing
Development and procurement of products
For dealer
For customer
New cars
Core goods
Used cars
Telephone, fax
Call center
Auto supplies
Telephone, fax
Auto goods and services
Servicing and safety inspections
Web
Sheet metal
PC
PC
Merchandising database
Loan, leasing and cards
Customer database
Finance
Auto insurance
MM terminal
Camping goods
Other related goods and services
Car navigation information center
Car rental
Car navigation
Integration of car life information on individual
customers
Marketing support
Control customer interface in the interests of
customer convenience
Provision of wide range of goods and services
Installed at convenience stores and video
rental stores as well as dealers.
27
Growth opportunities created by industrial
structural reform
(\ trillion)
Total earnings growth in 6 industries
Evolutionary process
Main content
Examples
Division/ expansion
Reconstruction

• Realization of advantages of scale
• Elimination of duplicated work and functions
• Skipping of unnecessary functions and companies

• Back-office work in finance
• Elimination of overlapping inventories of makers,
  wholesalers and retailers
• Skipping of wholesaler or retailer

4
4 4
4 4
Recompilation
Cost cuts
Corporate growth opportunities

• Expansion of scope of services provided
• Packaging of service content to meet individual
  customer needs
• More rapid introduction of new goods

• Move from providing cars to offering driving
  support
• Money management programs for middle-aged and
  elderly consumers
• Concurrent engineering encompassing auto parts
  and assembly makers and dealers

4
4 4
4
Revenue increases

Fall in price paid by consumer

• Formation of open market linking numerous sellers
  and buyers (consumers)

• Marketing via the internet of numerous makers
  new and used cars

4
4
As only quantifiable effects are included,
the actual figures would be considerably
larger. This provides the scope for service
commission for customer agents, etc.
28
Breakdown by industry and growth opportunity of
scale of earnings growth
(\100 million annual profits 20012003)
Retail (convenience stores)
Physical distribution
Healthcare
Electrical equipment
Finance
Autos
Source MITIs analysis.
29
Breakdown by industry of scale of earnings growth
over time
(\100 million annual profits)
At present
20012003
20032008
Retail (convenience stores)
Autos
Finance
Physical distribution
Healthcare
Electrical equipment
54
800
19
288
370
102
82
32
270
160
N.A.
N.A.
Operating profits (ordinary profits in the
case of financial institutions). Figures for
1995 for physical distribution and retail, 1996
for autos and electrical equipment, 1997 for
finance and healthcare. Source MITIs analysis.
30
3. Growth opportunities created through evolution
4. Approach to realizing growth
1. Essentials of IT
2. Industrial structural reform (IPR)
Japanese corporate and economic recovery

• Impediments to IPR exist in industries,
  corporations and the business environment.
• It is necessary to quantify the impact of
  motivating top executives, provide illustrations
  of best practice, and improve the business
  structure for individual companies.
• A dramatic reduction of communication costs and
  development of the telecommunications
  infrastructure are needed to eliminate
  environmental obstacles to IPR.

31
Obstacles to IPR

• Lack of problem awareness (Why?)
• Divergence of opinion regarding ways of solving
  problems (What?)
• Absence of motivation and methodology to
  implement IPR (How?)

Problems faced by individual firms and industries
Obstacles to IPR
Environmental factors

• Telecom costs too high
• Underdeveloped state of telecom infrastructure at
  the industrial level

32
Obstacles in individual firms and industries
How? (How can IPR be implemented?)
What? (What needs to be done?)
Why? (Why necessary?)
Cannot understand the need for IT (and the
effects of investment particularly) from a
management perspective Missing link between IT
and management know-how.
Individual departments left to investigate the
issue themselves. No sign of a comprehensive
solution emerging.
Concerns of top executives
Concerns about numerous bottlenecks impeding
implementation prevent actual steps being taken.
33
Approaches for overcoming obstacles to IPR
How? (How can IPR be implemented?)
What? (What needs to be done?)
Why? (Why necessary?)
Cannot understand the need for IT (and the
effects of investment particularly) from a
management perspective Missing link between IT
and management know-how.
Individual departments left to investigate the
issue themselves. No sign of a comprehensive
solution emerging.
Concerns about numerous bottlenecks impeding
implementation prevent actual steps being taken.
Concerns of top executives
Provide motivation to implement
Raise problem awareness
Lead way to a solution
- Propose unique IT approaches from a management
perspective Propose as a means of improving
management and business performance rather than
simply proposing the introduction of information
systems. - Quantification of effects on
costs IT and KPI improvement mechanism.

• Give examples of best practice (including
  practice in other industries) and emphasize
  benefits.
• Offer comprehensive solutions combining best
  practices.

• Describe actual steps toward implementation taken
  by successful companies.
• Propose pilot projects which enable risks to be
  easily controlled.

Solution
Oh, thats why!
I see, then well have to do that!
Right, well have start off by doing that!
34
Top-down IPR at firms overseas Ford
Top executives led IT-based reform of business
(Ford 2000) - In 1994 when profits were at their
height, the decision was taken to introduce a
global earnings control system encompassing
technology, production and sales
operations. - The swift decision taken on the
basis of KPI enabled Ford to halt the decline in
profits, and record profits were again posted in
1997. - Concentration and specialization of
internal and external resources through
outsourcing (e.g. all parts logistics outsourced
to ???? and I2 technologies outsourced to IBM)
and spinoffs (e.g. ?????).
Mr. ??????, CEO
Mr. ????, COO
IT division
Global consolidation at business level achieved
through IT - Formation of VC structure
accelerated by introduction of system connecting
technology, production and sales operations in
each VC. - Fragmentation of functions prevented
by introduction of integrated inter-VC
database. - Introduction of open, cutting-edge
technology through use of standard systems and
external experts.
Vehicle center(3)
Key Performance Index