Creating Strong Business Models That Discourage Catch Up

We have discussed market efforts in developing countries and the use of management resources such as personnel within developing countries. However, as preparation for the eventual rise of local companies in developing countries, Japanese companies must create strong business structures that make it difficult for local companies to catch up. First, in terms of technology, every method possible should be exploited to increase the exclusivity of a company's proprietary technology. Policies that enable this exclusivity are as follows: (1) protection by intellectual property rights, (2) protection by know-how (trade secrets), (3) protection by product design complexity, and (4) improvement in the speed of product development. None of these measures fully protect a company's proprietary technology; therefore, inevitably, companies in developing countries will catch up in terms of technology. Therefore, while “product development speed” is critical, generally, open innovation via outsourcing some aspects of development or external partnerships must be used to increase the speed of development. When doing so, companies must provide an overall balance because exclusivity of company's proprietary technology via know-how or design complexity decreases along with outsourcing or partnerships.

The manner in which companies create technology management policies differ in each industry and according to company size. For example, differences in the ability to maintain exclusivity of proprietary technology vary by industry and have been researched in Japanese National Innovation Survey by the Ministry of Education, Culture, Sports, Science and Technology. In this study, “protection by intellectual property rights” was effective for pharmaceutical companies, whereas “product complexity” and “development speed” were important for electronics firms (National Institute of Science and Technology Policy 2004). In addition, smalland medium-sized businesses find it difficult to exercise rights even when they have intellectual property rights for their technology. For example, when a company becomes aware of its patents being violated in China, it becomes difficult for small companies to negotiate with IP violating company, litigate in court as necessary, and then win in court with the implementation of a cease-and-desist order or the payment of licensing fees. In these cases, it is more rational to focus on know-how or other methods rather than intellectual property rights.

In addition, protecting technology is not the only requirement to delay catch up by companies in developing countries. International innovation competition involves multiple players and is not conducted on a one-on-one basis with firms in developing countries. International mergers and acquisitions (M&As) are more active; for example, Sanyo Electric sold its consumer electronics division to Haier in July 2011, one of China's largest consumer electronics manufacturers. Sanyo Electric became a wholly owned subsidiary of Panasonic in 2010. The selling decision was made by Panasonic as it already owned a consumer electronics division and was merely rationalizing the overlap of management resources. However, from the perspective of Panasonic and other Japanese consumer electronics manufacturers, undeniably, Haier was able to take a great technological leap through this acquisition. Consequently, even after a company's efforts to fervently protect its technology, leaking of proprietary technology and catching up may happen in various ways. Furthermore, changes in industry structure may result in an inability to differentiate technology. The solar panel case mentioned previously is one such example. Production technology for solar panels was integrated into production equipment as a full turnkey system. Therefore, Sharp, Q Cells, and other manufacturers were unable to differentiate themselves from companies in developing countries through production technology. As a result, Chinese manufacturers such as Suntech and JA Power installed large-scale production equipment and created their own general purpose solar panel market by manufacturing inexpensive products. Of course, in terms of the development of highly efficient solar batteries, companies in Japan, Europe, and the US have superior technology, but mega solar systems (i.e., systems for electric utilities that generate electric power in the megawatts) that are the mainstay of the overall market require many panels across a broad area, making cost more important than efficiency.

Such product commoditization can be observed in flat panel televisions and digital consumer electronics, where completely different business model is required to avoid this situation. To date, Japanese companies have pursued international businesses under a “product” model, in which they develop high-performance products and export them to the rest of world. However, there are some products where this product model is no more effective. In particular, electronic products have a high rate of technological innovation, and generally, latest products often have a higher level of technology than what is demanded by customers (Christensen's Innovator's Dilemma). This makes it easy for local companies to produce destructive innovation, driving Japanese companies out of markets.

Accordingly, a revision of strategies is required in terms of the product model grounded in the idea that “good products sell” to the “customer value” model, in which the proposition of the products' value is made to the customer. A product's value is only realized after its use by the consumer and as such, maximizing its value for money becomes essential. A product's value is gauged after it has been used by customers; therefore, maximization of customer value becomes essential. In the example on solar panels, the largest customers were mega solar operators. The goal of product development in maximizing customer value was not to increase electricity generation efficiency, but rather to increase product durability and simplify maintenance. Thus, the customer value model requires companies to understand their product's value from the customer perspective. In addition, the sale of a product should not signal the end of a relationship; instead, companies must maximize the value of product services through the entire lifecycle of the product. Thus, the “customer value model” is called a “service model.” In a commoditized business, in which it is difficult to have a product model with an ongoing business, a breakthrough may be possible by differentiating itself with a “service model” that goes back to the basics of customer value.

Furthermore, companies can increase competitiveness by providing multifaceted services for sets of products rather than single products. Returning again to the solar panel example, these panels cost approximately half the total cost of a mega solar system. This is because they require mounts, foundation work, and power control systems. Moreover, critical technology is required to convert the direct current generated by solar panels to alternating current and control unstable electricity to produce stable voltage and frequency. By designing an overall system that could stabilize the current for an extended period beyond the mere panels, companies are able to avoid the commoditization of a single product model. Compared with single products that are easy to copy, such complex services have the benefit of being difficult to replicate because they are large, multifaceted systems comprising multiple products. In pursuing a “customer value model,” companies make it difficult for competitors to catch up with these large, complex systems.

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