"The future of Japanese business: Competing through innovation"

Read the complete article from The Economist. December 14th 2005. (Subscription required.)

"Japan's style of innovation failed it in software and biotechnology in the 1990s. It might work better in robotics, aerospace and other burgeoning technologies."

"Japanese firms have not counted for much in software, the internet, biotechnology and other high-growth industries over the past decade. Japan can boast no equivalent of Microsoft, Google, Amazon or eBay. Its entire software industry has failed to make an impression on the world......Although a handful of Japanese pharmaceutical firms have developed a few profitable drugs, Japanese companies are also far behind the rest in biotechnology and medical devices. Japan's lack of success is not for want of trying. The country continues to lead the world in research and development, investing 3.2% of its GDP in R&D, compared with 2.6% in America and 2% in the European Union. Moreover, unlike western countries, where government and university labs generate lots of breakthroughs, Japan performs more of its R&D in big companies."

"Instead, the country's failure has much to do with its method of management and organisation. This won extravagant praise in the 1980s, when western writers and businessmen flocked to Japan for answers, and when the “lean” production manufacturing techniques pioneered by the likes of Toyota changed the world. The Japanese way of running companies has since fallen out of fashion, however."

"A few Japanese bankers have set up funds to promote venture capital (or at least what passes for it in Japan). The government has also converted all of Japan's national universities into public corporations, in a bid to shake up scientists' civil-service mentality and make them more flexible and innovative. New clusters and consortia are popping up all over the Japanese islands, to promote better links between university laboratories, government budgets and corporate R&D. Between 2000 and 2003 the number of start-ups created to commercialise discoveries at Japanese universities rose from 315 to 800."

"Yet to focus on the slow pace of reform in Japan is to miss an important point: that there are many ways to innovate, and no single approach is “right” for all times and technologies. Japanese companies are already very good at—indeed, lead the world in—many types of innovation. The reason they lost their edge in the 1990s is not so much because their approach to innovation was “wrong”, as because it was ill-suited to the sectors dominating that decade. The next few years could easily be different, since the battle over next-generation technologies may well be in areas that suit the Japanese far better than biotech and software ever did." (Emphasis added.)

"In biotech and software America gained a clear edge from its ability to let lots of start-ups experiment with new techniques and business models, and to commercialise ideas from university research laboratories as quickly as possible. America's other advantage is in basic scientific research. Its universities dominate rankings of the best in the world and are well integrated with government and business laboratories. In other technology-heavy sectors, however, including several that Japanese companies are betting on, the university laboratory and the entrepreneur's garage have less of an advantage over a big Japanese corporation with extensive business experience and a giant R&D budget.

"The American start-up method works very well when hundreds or thousands of potential business models might succeed—and the best way to find out which is to allow each brave or disgruntled genius to try out his own approach. Many fail, but a few succeed.

"In other industries and technologies—such as cars and electronics in the 1970s and 1980s—a better way to innovate is to learn by doing. If 100 start-ups try, all might fail before they learn anything useful or before they come up with a product or service they can sell. A big company is often better suited to such fields. Not only can it offer its innovators a more reliable source of investment capital, but it also has links to consumers, which it can use quickly to improve the next generation of whatever it is making. A big company in a new field can afford to make products with initial drawbacks, provided it learns quickly to overcome them.

"As they once did in cars and electronics, Japanese companies are today pursuing future technologies in several industries by making things first and only then pausing to think about how to improve them or put them to new uses. This leaves them at a familiar disadvantage in blue-sky research. But the idea—which has worked well enough in other industries to turn Japan into the world's second-biggest economy—is to keep getting better, eliminating costs and boosting quality, while rivals in America and Europe waste precious time at the drawing board. When Japanese companies do it right, they can innovate so quickly that they leave western competitors gasping for air."