21COE, University of Tokyo

MMRC Discussion Paper No. 101

MMRC
DISCUSSION PAPER SERIES

MMRC-F-101

The competition and the formation of inter-firm
differentiation following the dominant perception:
A case study of the online securities industry
Tokyo University of Science
Ayako Takai
September 2006

21COE, 21COE,
Universityof TokyoPaper
No. 101
Universityof TokyoMMRC
MMRC Discussion
Discussion Paper
No. 101

The competition and the formation of inter-firm
differentiation following the dominant perception-a case study of the online securities industryTokyo University of Science
Ayako Takai
September 2006

Abstract
In this paper, in order to answer the question: “In an industry where the imitation by othercompetitors is easy, how has a differentiation between companies been created and maintained?” weprovide a new framework, based on a Dynamic Capability-Based View of the Firm and the Action
System Theory. On the basis of this framework, we analyze the early stages of competition in the
online securities industry in Japan. We found that when a Dominant Perception created in theindustry is strengthened by the action between companies, the strategy of a successful company is notimitated for several years and consequently that an expansion in differentiation between companies
may occur.

Key words
online securities industry
internet business
innovation
dynamic capability-based view of the firm
action system theory1

Takai

1. Introduction
Why does differentiation among companies arise and persist in an industry where imitation iseasy? In the online securities industry １, business is basically conducted on the Internet, eachcompany’s products and services are shown in real time and some major companies disclose theircorporate performance. Therefore, the inducement to imitate a strategy that has succeeded in anothercompany is relatively strong. In addition, as will be stated later, even though there are problems with
the information system, it is not very difficult to follow the strategy of others. However, in the earlystages of the Japanese online securities industry, Matsui Securities was visibly successful but others,
despite knowing this, did not imitate their strategy for two years, which allowed Matsui Securities tobuild a dominant position. This paper aims to analyze the mechanism of this phenomenon, from a
dynamic viewpoint, with a discussion of the Dynamic Capability-based View of the Firm and of the
Action System Theory.

In researching strategic management theory, to answer the question why some companies thatbelong to the same industry have different competencies and keep performing differently, two major
theories of defining the resources of competitive advantage occurred after the 1980s. The first is
Strategic Positioning, which focuses on the external elements of a company and the other is a
Resource-based View of the Firm (RBV), which focuses on a company’s internal elements (e.g., Katoand Aoshima, 2000). Both explained the concept of differentiation among companies thoroughly andtheoretically, however, there was little or nothing mentioned about the cause, process or mechanismof how such differentiation occurs. More specifically, the two views mentioned above have theirlimitations in that they are both statistical models. This has led to an increased interest in a Dynamic
Capability-Based View of the Firm, which focuses on researching the dynamic process (e.g.,
Levinthal, 1995; Foss, 1997; Noda, 2001), however, research based on this approach is stilldeveloping and there is a lack of available reference material.
In this situation, Noda and Collis (2001) attempted to build a universal framework to analyze thedynamic process. In their research, they showed a thorough framework, focusing on the strength of
three forces: 1. Initial Conditions, which generate the seeds of differentiation among companies; 2.
Divergence Forces, which extend the differentiation; 3. Convergence Forces, which counter
differentiation and; Sustainability Conditions that prevent convergence and sustain differentiation.
The researchers also studied the correlation of these components, in an attempt to build a strategic
theory about the evolution of differentiation between companies in the same industry.
2

The competition and the formation of inter-firm differentiation following the dominant perception
One company’s success always invites imitation by other companies and competitive
differences among companies tend to decrease over time (Williams, 1994). Today especially, withsevere competition on a global scale, even core resources or competencies that are difficult to imitate,
are likely to diffuse to other companies (Teece, Pisano and Shuen, 1997). Nevertheless, their
explanations of the mechanism of creating and maintaining differentiation can be said to beincomplete because of too much reliance on Coincidence and on the aspect of Initial Conditions.
On the other hand, current research is increasingly being based on the Action System Theory,
which considers the dynamic process at an early stage of an industry as being the intended action of anumber of players and as a combined process of these (e.g., Numagami, 2000). Generally, manytechnologies and services are offered at the beginning of a market’s formation, then emergence of thedominant design consolidates them (Abernathy, 1978). The action system school of thought insiststhat it is also important to focus on Unintended Results, which are generated by the social andpolitical interaction processes in the environment in which the company exists and not only on linear
cause-and-result relationships, such as superior technology and service being the cause of market
choice in this process. For example: “A company’s persistence in core technology and preceding
research in the United States” (Fukushima, 1999); “Technology policy of the government”(Shimamoto, 2001) and; “Technology performance presented at academic society” (Fujii, 2002)
reported on those cases that are influenced largely by the innovation process and competition in theearly stages of a market, after Unintended Results have occurred in consequence of the players’social interaction.
However, the major interest of that research was to clarify the logic behind what kind ofinteresting situation could occur in the innovation or competition process and to reinforce theprobability of logic by using those cases, given that the environment surrounding a company (i.e.,competition and technology) is not objective, but rather comprises actions by the players that
influence each other. Therefore, the research question of this paper: “how differentiation among
companies can be formed and maintained in an environment where imitation is relatively easy”, has
not yet been answered.

As we have seen, the dynamic capability-based view and the action system theory is deeply
involved with the main theme of this paper, but we do not yet have a complete answer. This leads tothe necessity of building a new viewpoint by adding to the discussions on the action system theory as
to how differentiation among companies is formed and maintained in the early stages of an industry
3

Takaiwhere imitation is relatively easy, based on the framework of Noda and Collis (2001) and by
showing its adequacy in cases analyzed in this paper.

2. Dynamic Framework of Differentiation by Competition among Companies
Noda and Collis (2001) define the first forces that create differentiation as the Initial Business
Experiences and the company’s Initial Conditions. Each company has different Initial Business
Experiences when they start business and then move their strategy in a different direction, whichcauses differentiation among competitors. That is, the Initial Conditions, being the premise of theInitial Business Experience, is the key to the origins of differentiation among companies. Examplesof this are: internal elements, such as different priorities when acquiring resources; leadership at the
top and their fortune, or; external elements such as the nature of the local market in which companies
compete, and; the environment at the commencement of business. Anyhow, these various elements,
whether internal or external, work interactively and comprise the Initial Conditions, which affect thedirection and priority of company’s future.
The second element is Divergence Forces, which extend the initial differentiation among
companies. The motivation to extend business, along with the direction set after the Initial Business
Experience, comes from positive feedback, which means success at the beginning of business affects
later resource allocation and as a result, the strategy position goes higher. For example, scale meritand resource allocation according to past performance (the batting average) to develop business
preferentially, or a biased perception of top management, tend to see a business follow a positive
success route. These elements extend the differentiation of business in each company (e.g., Noda andBower, 1996).
The third element is Convergence Forces, which reduce the differentiation among companies
and Sustainability Conditions which counter the Convergence Forces. One company’s success leads
other companies to imitate it and differentiation among companies will converge as time goes by(e.g., Williams, 1994). Therefore, it is important to prevent strategic imitation in order to sustain acompetitive advantage. Some examples of Sustainability Conditions contained in past research is:patents to prevent imitation of resources and information adherence (Teece, Pisano, and Shuen, 1986),
and; causal ambiguity, that is, the causes of superior company performance are not well understood(Lippman and Rumelt, 1982). However, looking at the real world, these elements are not sufficient to
explain a mechanism that sustains a competitive advantage over a long period.
4The competition and the formation of inter-firm differentiation following the dominant perception
Discussions have arisen to compensate for these unexplained elements and current research calls
this Isomorphism Power, based on the action system theory. Primarily, many strategic options
compete with each other to obtain the limited resources in a company (Burgelman, 1991). Therefore,
in order to invest resource in line with the strategy, it is essential that legitimacy for this one strategy
and not others be approved internally (Hannan and Freeman, 1984; Kagono, 1988). Many criteria for
legitimacy are conceivable, but in the early stages of the market, where there is extremely highuncertainty and vague evaluation criteria for technology and services, a company is not necessarily
confident about its strategy. This makes it easier to secure legitimacy by insisting internally thatreasonable procedures have been followed, for example, laws, upper organization, anothercompany’s strategy that looks to be performing well and the opinions of researchers or experts. This
process is called isomorphism (DiMagio and Powell, 1983).
The process of isomorphism develops in an environment, called the Ecologies of Learning by
Levitt and March (1988), in which one company imitates another’s behavior. That means that when
one strategy has been adopted by a leading company or group of companies, even thought thestrategy turns out to be unreasonable afterwards, it is possible for it to become the dominant
perception through the isomorphism process, just because the leading company has adopted it or
because many companies do the same thing. Once this has happened, it becomes more and moredifficult to secure legitimacy for strategic ideas that run against the dominant perception internallyand an original strategy will be prevented (e.g., Fukushima, 1999).
Moreover, once a company follows a dominant perception-based strategy with the isomorphism
process, then various internal elements prevent a change in strategy. There are two major methods oforganizational learning. One is Exploitation, which focuses on conventional routine work and theother is Exploration which focuses on a new routine that shows possibility. Usually, Exploitation haspriority because it performs better (March, 1991). On the other hand, when the external environmentchanges rapidly and significantly, like in the early stages of the market, a company should change
learning away from Exploitation to Exploration to seek a new optimal routine. However, as people
are used to the Exploitation way with its internal daily routine and their thoughts and behavior are
fixed, they tend to take the familiar route and stick to conventional routines (Kagono, 1988; Nelson
and Winter, 1982; Levitt and March, 1988). Furthermore, when conventional routine is thought to be
a competitive resource or is connected to the political power of managers, resistance to change will
be even larger and make it more difficult to adjust to the new environment (Leonard-Barton, 1992).

5

Takai

The development of each company’s strategy and of the differentiation among companies
formed in consequence of this is determined by the strength of these three forces. That is, a balancein the strength of these three elements may occur, causing a situation whereby each company pursues
legitimacy of its strategy, formed by isomorphism to the external environment. So, many companies
may adopt similar strategies and become resistant to internal change, competing endlessly with eachother with an unreasonable axis, but neglecting to imitate the unique strategy of a successfulcompany.
In the next section, the probability of the above viewpoints will be examined by looking at theonline securities industry, where even in an environment where the evaluation and imitation ofanother’s strategy was relatively easy, a number of companies held to the Dominant Perception,
which was afterwards shown to be unreasonable and the company that was not imitated succeeded asa result.

3. Competition in the Online Security Industry at an Early Stage ２
3. 1. Online Security Industry and Six Companies
The history of the online securities industry in Japan dates back to April 1996, with the entry of
Daiwa Securities to the arena. Within two years, major and mid-sized companies entered the market,
with up to 20 players competing. At the same time, the so-called “Big Bang” financial market
deregulation in Japan began, which dramatically changed the competitive environment for online
securities trading (Takai, 2004a, 2005). One of the first deregulation initiatives, introduced in
December 1998, was the transition from a securities company licensing system to a registration
system. This made it possible for many companies, including overseas companies and those fromdifferent industries, to enter the market more easily (Takai, 2004c). The second change was thederegulation of commission fees, which occurred in October 1999. Security companies were able toset their commission fee at any rate, which had previously been set at a single rate by law. Thischange created new competition rules in the security industry, once seen as being differentiated onlyin scale.
At this institutional turning point of the security industry, Internet diffusion began and thenumber of companies in the security industry grew to 51 over a six month period, up from 34 in
September 1999. This includes about a quarter of the domestic security companies that entered theonline security business during the peak period. In the beginning, online securities companies only
6

The competition and the formation of inter-firm differentiation following the dominant perception
handled a limited number of products. However, they soon began to provide products at the samelevel as face-to-face retail sales (i.e., at actual shop counters) and the quality of services also
improved. As a result of such upgrading, the number of exchange transactions conducted online kept
increasing despite a depressed stock market. Within a few years, the online securities market has
grown as large as the face-to-face retail sales market (Takai 2001). With this rapid growth,companies merged or exited the market and the number of companies was reduced to 55 in
September 2003, down from 67 in March 2001 ３.

Below, we consider the competition history in the early stages, from October 1999 to June 2003,
focusing on six of the leading online security companies ４: Matsui Securities, E*trade Security, DLJ
direct SFG Security (DLJ), Monex Security, Nikko Beans Security and Kabu.com Security ５.

3. 2. Initial Business Experiences and Initial Conditions
Initial Conditions
Matsui Securities was the only company out of the six who entered the market before 1999,
when competition started, but its entry was in May, making it the 13th ６ company to enter the market,
not far ahead of the others. However, the company’s quest for a new business model started in 1992
when it announced the complete abolition of face-to-face sales activities. By 1996, Matsui hadtransformed itself into a specialized call-center securities company. President Matsui had experienceof market competition after deregulation occurred in the shipping industry where he had worked
before and he believed that the cost of sales people would not be accepted by customers once themarket had become deregulated. His belief drove the decision to spend four years eliminating thesales team completely and overcoming strong internal resistance ７ . Later, at the time of thecompany’s market entry in 1998, he added a new line, the Internet, to the single channel call-centerand after six months he abolished call-centers, to become a specialized online security company ８.
Thus, Matsui Securities prepared itself to enter the market by positioning its online security businessas security broking without sales people and by utilizing the data and know-how from its
call-centers ９. This was a completely different approach from all other companies that entered the
securities market before deregulation, who used the Internet to complement their counter sales
channel １０.
Five companies, other than Matsui, entered the market after deregulation. These were major US
discount brokers or companies financed by domestic financial institutions, which basically had no7

Takaiexperience of management in the domestic security industry １１. That meant that they hardly had theknow-how, data, potential customer base, fixed costs or resources to succeed when they started theirbusinesses.

Initial Business Experience
Each company engaged in fierce competition when deregulation occurred in October 1999.
Companies other than Matsui Securities set their fee system as a commission fee commensurate at
the time of the contract price, with little originality such as different commission fees for certain
contract price bands or setting different commissions according to the asset balance. These
companies set their management target as increasing the number of accounts held １２. Companies that
disclosed the number of accounts held, such as DLJ, Monex and E*trade, held more accounts thanMatsui Securities who had entered the deregulated market six months before them and this wasconsidered a great success at that time １３.
Matsui Securities, on the other hand, adopted a different strategy from the others who werecompeting on the number of accounts, based on its own customer data １４ on the market size of theonline security industry and its future. In fact, President Matsui at that time said: “They say a million
or two million accounts, but its nonsense… It will be 200 to 300 thousand, I guess.” １５ Competitors
had set targets of several hundred thousand accounts for each company. Based on this, Matsui
Securities set customer targets as experienced investors and index turnover rates １６. Here, turnoverrate is the index that shows a transaction rate per customer. So, while other companies were focusing
on increasing their number of accounts, only Matsui focused on experienced investors and on
maximizing their transactions. １７
In detail, Matsui Securities offered a unique fixed commission fee system (a fixed fee formultiple transactions), that is, the commission remained fixed (3,000 yen) for up to three transactions
per day, as long as the total amount did not exceed a set range (three million yen). Compared withothers who charged commission on the number of transactions, Matsui’s system cost more １８ for
only one transaction, however, it became less costly as a customer repeated transactions, so thissystem was suitable for professionals. In addition, Matsui offered services that took advantage of thereal-time processing capability of online businesses, that carry a high risk and requires specificknowledge, such as margin trading and option trading. １９As can be seen, Matsui Securities made a good start with its trading services such as a uniquecommission system worldwide and margin and option trading for experienced investors ２０. That is,
8

The competition and the formation of inter-firm differentiation following the dominant perception
Matsui Securities succeeded in attracting middle-aged investors who use margin trading frequently
with services that took their investors’ behavior and mentality into consideration. ２１

3. 3. Divergence Forces
Competition of Companies excepting Matsui Securities: Competition to Increase the
Number of Accounts
When commission fees were deregulated in October 1999, the proposed fee systems of theleading companies that specialized in online securities trading, except for Matsui Securities, werealready below the profit line. ２２ Although there was a common understanding at the time that 3,000
yen was the profitable line, the companies, other than Matsui Securities, proposed fees that were
below this line (e.g., E*Trade=2,500 yen, DLJ=1,900 yen, Monex=1,000 yen). In fact, many of thesecompanies admitted that upon deregulation they had set the fee below the profitable line, as is shownin their comments: “We are prepared to suffer a loss for three years” (Nikko Beans) and “The fee
will not cover fixed costs” (DLJ). Despite the fact that companies were already incurring losses, afierce price war soon erupted. The first company to decrease its commission fee was E*trade
Securities ２３, which was also the company that was first to trigger “price destruction” in the UnitedStates. Initially in October 1999, E*trade Securities began a free commission fee campaign for alimited period, without changing its revised price scheme that had just been set up. Following this, inMarch 2000, when E*trade Securities lowered its commission fee by 20%, this was soon followed byMonex, which lowered its commission fee for relatively high range transactions of more than two
million yen.
A movement towards expanding scale began, that is, there were various attempts to increase thenumber of accounts held, through mergers and acquisitions. In April 2001, Kabu.com announced that
it was to be incorporated through a merger ２４, followed by an announcement of acquisitions by
Nikko Beans and Monex, respectively ２５.

9Takai

These events triggered extreme discounting competitions after the latter half of the 2000
financial year, while the number of online security accounts increased by more than expected. As
stated, companies other than Matsui, competed intensely by focusing on increasing their number ofaccounts by discounting commission fees and by acquisition (Figure 1).

Matsui’s Strategy: Fixed commission and margin trading
Matsui Securities, on the other hand, maintained commission rates that were more costly for
only one transaction. Moreover, recognizing that many customers had moved and that the turnoverrate was high after actual competition had begun, Matsui had information that this strategy wascorrect. ２６ Then, in October 2001, they changed their fixed commission fee system by removing thelimitation on the number of daily transactions, from a maximum of three per day to no limit on the
Figure.1

Strategy and Merger of 6 Companies Regarding Commission Fee

1999.10 ~ 2000.9(Beginning of Price War)

2000.10 ~ 2001.9(Price War and M&A)

Following Matsui1999.9 1999.12 2000.3 2000.6 2000.9 2000.12 2001.3 2001.6 2001.9 2001.12 2002.3 2002.6 2002.9 2002.12 2003.3 2003.6

Matsui99.10
Fixed commission（up to 3 times）

E-trade99.10 99.10
New ¥0systemDFJ Direct SFG

Monex

Nikko Beans

00.9
New fixed commission(no limits)

00.3
20%
Reduction

01.3
01.9
02.1
00.10 00.11 01.2¥100 Long/ Reduced Shareholders Reduction Cred. reduction
campaign
Min.
cred.
（～03） Fixed commission Reduce fixed rate
¥800
¥800

99.10
New
system

01.8
01.10
01.12
More than More than Fixed
20 times 20 times commission
¥90
¥700

99.10
Initiation

00.4
Reduction

01.3
M&A

99.10
New
systemKabu.com

01.7
M&A

02.10
Night
time

01.6
Reduction

02.8
Fixed
commission

01.4
M&A

Revision of commission (fixed commission)
Revision of commission (system / price change)
Campaign for special commission rate
M&A

01.10
credit02.10 02.11
Physical One
shot

03.4
Fixed
commission

03.3
ReductionNote) strategy regarding commission fee is limited to physical shares here.
Source) IR materials, Press Release of each company and 4 series of news papers from Nikkei.

number of transactions for a commission of ¥3,000, as long as the total trading remained under 3
million yen. ２７10The competition and the formation of inter-firm differentiation following the dominant perception
They continued to enhance their services and products and developed an information system
within the company ２８ for purposes of realizing a strategy that focuses on turnover rates by targeting
experienced investors, such as a combination of a fixed commission system and margin trading. ２９Differentiation Expansion
Two years after the securities market competition had begun, in September 2001, when Matsui
Securities was still seen as a niche or day traders’ company, Monex ranked first with 178,000 clients,
followed by E*trade’s with 168,000, DLJ’s 111,000, Nikko Beans’ 78,000, and Kabu.com’s 76,000.
Taking second billing to the latecomers, Matsui Securities’ client base stood at only 63,000. When
comparing the number of transactions per account per day or the amount of sales of transactions perday, there was a radical difference between Matsui Securities and the others, ranging from athree-fold to ten-fold difference ３０. The ratio of operating profit to operating revenue ３１ in the fiscal
year ending March 2002 was 19%, 17%, 1% for Matsui Securities, E*trade and DLJ, respectively.
On the other hand, for Kabu.com, Nikko Beans, Monex, it was -9%, -22%, and -44%, respectively,
showing that these companies were still suffering large losses, even after three years of their market
entry. In addition, E*trade suffered losses ３２ in the stock brokerage business. This means, in reality,that only Matsui Securities was really showing a profit.
As discussed, Matsui went in a totally different direction to the other companies. While theother companies suffered from low performance because of continuous price competition in an
attempt to increase the number of accounts, only Matsui made favorable profits with its core strategy
of a fixed commission fee system and margin trading.

3. 4. Convergence Forces and Sustainability Conditions
Dominant Perception as a Sustainability Condition
Interestingly enough, most companies did not imitate Matsui’s strategy for over two
years, even though there was such a clear difference in performance. The reason for thisphenomenon is possibly the Dominant Perception formed in the industry at that time.
In the Japanese securities industry before deregulation, the only successful businessmodel was to have as many “good” customers as possible. Securities companies sought tokeep their good customers as long as possible, by providing valuable investment information
and advise, tailored to the needs of each customer under a relatively high and uniform
commission fee structure, which was not viewed as particularly onerous by the affluent,11

Takaimiddle-aged consumer groups, with their surplus assets, to which most of the securities
companies’ customers belonged ３３.

However, amid the public discourse of the Big Bang financial reforms in Japan, which gained
momentum from around 1997, the government decided that securities commissions would bederegulated, among other anticipated deregulatory moves in the Japanese securities industries. At thetime, there were strong expectations that the assets of general customers, who had previously not
been targeted by the securities industry, would flash into the stock market upon commissions
deregulation. Moreover, at the time, Japan was in the midst of the so-called IT Bubble economy, with
the Nikkei stock index enjoying a rising trend. ３４In the United States commissions had already been deregulated in 1975, 20 years ahead of Japan.
This triggered a new type of security company called a Discount Broker that discounted commission
fees and offered no or little investing information or consulting. This new type of companies afforded
general citizens, not only the affluent, an opportunity to invest their asset. Despite this, in the US, thenumber of accounts for online security trading increased rapidly after around 1996 because ofInternet diffusion. The Japanese security industry watched this trend with interest.
By comparison of actual data, in September 1999, just before deregulation in Japan, there were
only 130,000 online securities accounts ３５ in Japan whereas the figure in the U.S. was 13 million. ３６Thus the Japanese market was much smaller than that of the U.S., even taking into considerationdifferences in population, individual asset compositions, and total assets. ３７ Based on two
significant upcoming changes that changed the US market dramatically, namely the convenience
provided by online services and commission deregulation, securities companies held highexpectations for explosive growth of the Japanese market based on the precedent set by the UnitedStates.
Companies that specialized in online securities trading quickly became the leading players of
the online securities market. Despite their entry into the market being later than the larger securities
companies, they were capable of implementing aggressive strategies because they did not have theconstraint of existing customers. Their objective was to attract new customers from the younger
generations who had no securities transactions experience or from the large pool of businesspeople
who were too busy to visit retail outlets ３８. Each company tried to be the first to attract suchcustomers in bulk and a very competitive environment ensued.
In summary, the target customers in the Japanese securities industry had been limited to affluent,
middle-aged and elder customers for a long time. However, as expectation of an increase in the
12The competition and the formation of inter-firm differentiation following the dominant perception
customer base rose, hopes for the viability of the online channel also rose. As such, driven by the
anticipated explosive market growth, as happened in the United States and with a push from the IT
bubble economy ３９, the dominant perception that customer numbers would increase significantly
was formed. Companies other than Matsui went into competition under this perception.
The mass media paid much attention to Matsui Securities’ unique strategies and so the othercompetitors must have had a good indication of what Matsui Securities was doing. But Matsui
Securities’ commission fees remained relatively higher than the minimum commission fees of its
competitors who were engaging in price decreases after the deregulation in October 1999. Therefore
the majority of the industry thought that Matsui Securities’ performance was not enough to constitutea threat. Also, other companies held to the dominant perception, therefore even though they paid
attention to Matsui’s strategy, they kept evaluating it as targeting the limited and obsessed segmentsof the market: in other words day traders who traded stocks on a daily basis. ４０ Ultimately, they
perceived, Matsui Securities would not be able to attract the general public. ４１ Other companies
continued competing to discount commissions with the objective of increasing their number ofaccounts.

Imitation of Matsui and Consequences of the Time Lag: Convergence Forces
After two years of such competition, from around the latter half of 2001, competitors started toimitate Matsui Securities’ strategy. As mentioned, Matsui Securities maintained its unique strategy
which was completely different from the others, while other companies engaged in price competition
based on the dominant perception. The result was that it steadily increased its number of accounts toa scale much larger than that of a niche company and maintained the top profit level in the industry,
saying: “Several hundred customers a month switch from Nomura and Daiwa” (Matsui &Matsumoto, 2001). Moreover, by this time, Matsui Securities’ revenue was significantly higher thanthe others and in addition, as mentioned above, the industry became aware of the fact that in reality it
was normal for one customer to hold four to five accounts and the actual customers who trade in thecompany’s account are limited ４２. Therefore, companies with the target of explosively increasing
general customers and charging a low commission fee per transaction changed their strategy toincrease their turnover by margin trading and a fixed commission fee system, as Matsui Securities
was doing. Figure 2 shows these transitions of strategy, from competition to attain a high number ofaccounts, to the improvement of the rate of turnover.
After the strategy shift, those companies that had engaged in a fierce price competition found13

Takai1999.91999.12

2000.3

2000.6

Figure.2

Table of Strategic Follow

2000.122001.6

2000.92001.3

1999.10 ~ 2000.9

2000.10 ~ 2001.9(Beginning of Price War)(Price War and M&A)

2001.92001.12

2002.3

2002.6

2002.92002.122003.3

2003.6CompetitionforAccounts(New Customers)

T i m eL a g
E-tradeMatsui
98.5

00.11
99.10

Monex

DLJ Direct SFG

00.9

01.9
02.12
01.12

Nikko Beans

01.8

Kabu.com
01.11

Start of margin trading

03.04

Competition
for
Active Customers(Active Users)

02.8
02.11

Initiation of fixed commission fee system

Note 1) Kabu.com introduced “one-shot transaction”, which allows spending multiple days in fixed commission fee range. This isexpressed as dotted line.
Source) IR materials of each company.

that their increase in the number of accounts stopped, but they experienced a favorable turnaround in
business by following Matsui Securities’ strategy. ４３ In fact, E*trade, which had been the mostpro-active price-cutting leader, admitted that they had improved their performance with the transition
from the conventional strategy to a strategy of fixed commission fees and margin trading with small
bonds, which Matsui has invented. ４４ Monex security took another year to start imitating Matsui,conceded that they had been left behind in recovering performance figures. President Matsumoto puts
the delay down to: “A lack of insight”. ４５
Today, various companies including E*trade, DLJ, and Monex, have succeeded in attracting
Matsui Securities customers ４６ by imitating its strategy and as a result have succeeded in reducing
the revenue difference. ４７ Regarding this, President Matsui was quoted as saying; “Having been
imitated by others who have differentiated themselves from us by their lower commission fees, someof our customers have shifted to these other companies.” ４８
However, today Matsui Securities still remains the leading company in the industry (Takai,
2004b).

3. 5. Consideration for Causes of Forming and Maintaining Differentiation among

14

The competition and the formation of inter-firm differentiation following the dominant perception
Companies: Reconfirmation of the Framework
As mentioned earlier, it is basically quite easy to imitate the strategies of competitors in the
online securities industry. Despite this, Matsui Securities succeeded in establishing a predominantposition in the initial stages of this industry for two years and this phenomenon really interests us.
The next question should be: Why Matsui Securities’ strategy was not imitated for so long?
Matsui Securities was under an Initial Condition that it had derived from being a specialized
call-center security company, before the online security market had become properly established. It
learned that it was important to attract active customers who trade securities often in order to improve
its turnover rate and that there are many customers who favor a system ４９ that allows its customer(experienced investors) to engage in as many transactions as they liked – however small thetransaction amount may be. ５０ Therefore Matsui Securities succeeded in attracting affluent,
middle-aged customers by adopting a strategy to develop and offer their own services, such as the
combination of a fixed commission fee system and margin trading. These Initial Business
Experiences generated the momentum for a thorough implementation of a strategy that was targeted
at experienced investors and that improved their turnover rate in Matsui Securities. In fact, Matsui
Securities developed an original information system by removing their upper limit for the number oftransactions per day.
Companies other than Matsui Securities, on the other hand, experienced different Initial
Business Experiences, namely that their number of accounts was increased by lowering commission
fees and by company acquisition. The difference in their Initial Business Experiences formed anothermomentum: to focus more on increasing the number of accounts, which eventually expanded theirdifferentiation from Matsui as Divergence Forces.
However, this is not considered an absolute factor in maintaining persistent differentiation
between companies. Additionally, the original information system developed by Matsui to offer its
differentiated services and products played some role in preventing imitation, however, if
competitors wanted to, they could have overcome this in just a few months. ５１Strategic imitation works as a Convergence Force but the Sustainability Condition prevented it.
The fact is that companies, other than Matsui Securities, held to the Dominant Perception. In otherwords, the other companies continued to follow a dominant perception, believing that customer
numbers would increase dramatically as was case in the United States in an IT bubble economy andkept following the strategy of winning the price competition and taking customers in first, to reap
profits afterwards. This strategy seemed to be successful at first because the number of accounts did
15

Takaiincrease. Moreover, competitors saw that Matsui Securities was following a different strategy but
misunderstood the significance of Matsui Securities being a company for niche customers only, that
did not enjoy the support of the most profitable customer group. Because of this misunderstanding,even if they were left behind by Matsui Securities in terms of profit, which was not a major issue atthat time, they didn’t take it as a failure but rather a temporary phenomenon. Therefore, there was nonecessity to imitate the strategy.
Of course, the effectiveness of the strategy that Matsui Securities took during the early stages ofthe online security industry, namely the improvement of turnover rate by acquiring active users,
should have been clear to all the other companies from the published material and President Matsui’s
remarks. Nevertheless, the other companies continued to follow the dominant perception, whichindicated that customers would increase dramatically and so these companies engaged in fierce
competition, repeatedly cutting commissions whenever others did.
As stated before, it took no less than two years from the real rise of the market for the realitythat Matsui Securities grabs active users who are the core customers of this stage of the online
securities market, to replace the perception of Matsui Securities being a niche player that only attracts
day traders. This replacement was a kind of ‘Copernican Revolution’ in the industry’s view of themarket. However, by the time the change occurred, the gap between Matsui Securities and the others
was considerable. Companies other than Matsui Securities held to the dominant perception, they did
not follow Matsui Securities’ strategy, even though they knew the effectiveness of the strategy and its
intention quite well. As a result, Matsui Securities kept growing in a situation that appeared to be
similar to the so-called “gap created by concentration of several companies” (Shimamoto, 2001)(Figure 3).

16

The competition and the formation of inter-firm differentiation following the dominant perception

4. Discussion
This paper has tried to build a new framework of the issue why differentiation is formed andmaintained in an industry where imitation is relatively easy, based on a Dynamic Capability-based
View of the Firm and the Action System Theory.
Noda and Collis (2001) used conceptual images, based on a Dynamic Capacity-based Approach,Figure.3

Mechanism of Formation and Maintaining differentiation among Companies

Stronger
Company A
Divergence Forces

Company B

InitialBusiness
Experience
Strategic Commitment andStrategic Position

Dominant Perception
Inte

rac
tion
a

mo
ng
c

om
pan
i

Company C
Time
Company D
Convergence Forces andSustainment Conditiones

Weakerto show how differentiation among companies is created, with an axis of Strategic Position andCommitment and Time. In detail: when Seeds of Differentiation among Companies; Initial Conditions
is operational, Divergence Forces work to expand differentiation, however, as time passes
Conversion Power begins to reduce it by imitation, whereas Sustainability Conditions act to preserve
differentiation. This is the process that maintains differentiation among companies.
However, their logic depends too much on coincidence and Initial Conditions, it is therefore notenough to explain how differentiation among companies is created and maintained in a situation
where imitation is easy. On this point, this paper provides a framework, based on Noda and Collis(2001), with discussion of the Action System theory and with the concept of Dominant Perception as
17

Takaia strong Sustainability Condition and successfully conceptualizes the dynamic process of how
differentiation among companies is created, as seen in Figure 3.
In Figure 3, the mechanism to create and maintain differentiation among companies originatesin the Seeds of Differentiation among Companies; Initial Conditions and in Divergence Forces toexpand it. In an industry where imitation is easy, if nothing happens, the differentiation would be
reduced rapidly as per the dotted line in Figure 3. However, once a Dominant Perception has been
formed, most companies compete under it and accelerate competition in the wrong direction byinteraction among companies. Therefore, differentiation among companies can be maintained for amuch longer period than is normally the case.
In this paper, we clarify the fact that the strategy of a successful company in the early stages ofan industry may not be imitated for years, even in the situation where competitors know the strategy
and its performance. So the validity of the strategy has been proved, because the Dominant
Perception, to which many companies adhered, was strengthened. This has enormous significance inthe field of management strategy in providing the mechanism and the reasons why strategic imitation
does not happen at once, even in an environment where information is so freely available, as it istoday.
So, what is important: to exit ex-post unreasonable competition, as in the online security
industry, or not to get involved in the first place? Firstly, the answer is that the top executive
himself/herself tries to interpret information intentionally, not merely process it automatically as partof routine work (e.g., Kuwada and Tao, 1998). The original purpose of a work routine is to eliminate
redundant information and data for efficient management, however, as a routine becomes entrenched
information and data, which seem to be unrelated to the operation, are eliminated to a greater extent(Levitt and March, 1988). However, if top executives can obtain rich information that has not been
eliminated in a work processing routine and can interpret it correctly, it is possible that high level
learning to modify the context and premises of existing behavior will be promoted (Kuwada, 1991).
It has been suggested that the best way to interpret information as a rich experience is to takeraw data in directly, which has not yet been processed in an existing information processing
procedure, by repeating a small experiment (e. g., Itami and Kagono, 2003). Thus, a company that
accumulates information itself is thought to have a chance of exiting from irrational competition
because it can judge the information from a market in alternative ways and proactively (Itami, 2004).
As stated above, in order for a top executive to interpret information as a rich experience, it isimportant to learn from other companies with a different approach to competition (Numagami, Asaba,
18

The competition and the formation of inter-firm differentiation following the dominant perception
Shintaku and Amikura, 1992). When one company succeeds with very unique strategic behavior, like
Matsui did in the online security industry, learning and watching the company carefully, gives theopportunity to expose one’s own inertia, to be noticed and to examine the rules and premises oflearning (Shintaku and Amikura, 1998). Using the unique strategy of another company as a reference
to watch oneself comparatively, such as considering why that company behaved as it did, isnecessary to get out of wrong homogeneous competition.

In this paper, we tried to analyze the mechanism of the formation and maintenance ofdifferentiation between companies from a dynamic point of view. Yet there are still some issues to besolved in order to add sophistication to this framework, such as identifying the detailed action
undertaken by the internal business process of each company. More discussion is also necessary to
clarify what the conditions are that form a Dominant Perception. We would like to build a more
universal framework in future research.

Acknowledgements
The author would like to thank Junjiro Shintaku, Takayuki Fujimoto, Nobuo Takahashi,
Tatsuyuki Negoro, Yoko Takeda, Daniel Heller, and Yoshinori Konno for helpful comments andsuggestions on earlier drafts of this paper.
This research is financially supported by Grant-in-Aid for Scientific Research from Japan
Society for the Promotion of Science (JSPS) and Research Grants from The Japan Securities
Scholarship Foundation.

19

Takai

Notes
１“Online Security Company” in this paper means companies who provide security trading services
such as stocks, debts and trust fund for individual customers via internet line. Also, Online Security
Industry means a group of those companies.
２
The case in the third paragraph is written based on description and data in published materials.
Note that the writer interviewed 15 people working in or with the industry, including the presidents
and chairpersons of surveyed companies. They admit this interpretation.
３
See ‘internet torihiki ni kansuru tyousa kekka ni tsuite (2004.9)’ (from the survey of Internet
Dealing), Japan Securities Dealers Association (2004.11.5).
４
These 6 companies hold a share of more than 80% of individual dealing amount in online
securities, and hold more than 60% of the shares of the amount handled over the counter.
(2004.4-6; “Statistical Data of TSE”, “Quarterly Settlements of Companies” and “Annual
Report of Matsui Securities”.) Therefore, it is enough to pick up those 6 in terms of theinfluences on the industry. Also, it is common to deal with those 6 companies when writing
about major companies in the industry.
５
Kabu.com security was established by the merger of Nihon Online Security and E-wing Securityin April 2004. Since the surveyed period in this paper covered more than half of the operation as
Kabu.com, I used Kabu.com in this paper, not the former two companies. Note that Nihon Online
Security entered when competition began, but the start of business was delayed from Nov. 1999 toFeb. 2000 due to a system failure (Nikkei Sangyo Shimbun, 1999.11.7). However, accounts began
to be offered from Oct. 1999, so it can be treated as they took some part in the competition
triggered by commission deregulation just like competitors (Nihon Kinyu Shimbun, 1999.9.22).
Also, DLJ Direct SFG Security changed their company name to Rakuten Security in July 2004, butthere is no problem in describing it as DFJ Direct SFG Security because the analysis period of thispaper ended in June 2003. Nikko Beans and Monex merged to establish a common holding
company by share transfer. (Nikko Beans Press Release, Monex Press Release, 2004.7.15)
６
See “Internet shoken torihiki no shinjitsu” (the Truth of Security Trading by Internet) (Osaki, 1999,
p. 173). (in Japanese).
７
This is detailed in “Harvard University Business School Pota kyoju no senryakuron sabu note”(Harvard University Business School Prof. Porter’s strategic sub-note vol.3)” (Shukan Toyo Keizai
2002.7.27) (in Japanese). Notes from contents of Takai, A. (2004a) show only sources.
８
Above “Shukan Toyo Keizai” (202.7.27).
９
See “NIKKEI BP Real Interview” (2002.5.31) (in Japanese).
１０
From the service menu just before the deregulation of commissions. Written based on products
and services of all the companies in the online security industry.
１１
E-trade was established by making Osawa Security a 100% subsidiary incorporated in E*trade in
the US (2nd largest share-deal in America in 1988, just before entering Japan) and E-trade financed bySoft Bank (Osaki, 1999, E-trade corporate history from HP). Osawa Security had suffered deficits forthe previous 7 years until then and had a small customer base. E-trade incorporated just for the
purpose of acquiring the license (Nikkei Sangyo Shimbun, 1998.10.5). Before long, Mr. Izuchi fromSoft Bank came in as a new President (Nikkei Sangyo Shimbun, 1998.10.5). Therefore, E-tradeinherited almost nothing from Osawa Security such as strategy and customer base.
１２
Each company’s management index is as follows. E-trade: “We will acquire 100,000 accounts ina year. (President Kitao).” (Nikkei Sangyo Shimbun, 1999.10.4), Nikko Beans: “BEP is 300,000
accounts. We will attract new investors like the young.” (Nikkei Kinyu Shimbun, 1999.9.27), DLJ;
“We will certainly acquire more than 100,000 accounts by the end of this year. (President
Kunishige)” (Nikkei Ryutsu Shimbun, 2000.2.12), Monex: “We aim at 200,000 accounts within this20

The competition and the formation of inter-firm differentiation following the dominant perception
year. (President Matsumoto)” (Nikkei Ryutsu Shimbun. 2000.2.12), e-wing/ Nihon Online: “(By theend of March 2000) acquire more than 100,000 accounts” / “(same) secure 50~60,000 accounts”(Yano Research Institute, 2002)
１３
At the April 2000, the numbers of accounts were: Matsui 30,226, DLJ 51,491, Monex 56,594.
E-trade announced 79,247 in March 2000, one month ahead of the others (from their press release).
１４
See “NIKKEI BP Real Interview” (2002.5.31) (in Japanese).
１５
Comments of President of Matsui Securities, Mr. Matsui (Above “Special Seminar at Financial
Information Technology 2000”, 2000.9.22).
１６
See Matsui and Matsumoto (2001), p. 52.
１７
See Nikkei Sangyo Shimbun (2001.1.10).
１８Commission fee for contract price of ¥500,000 is: E-trade ¥800, DLJ ¥1,900, Monex ¥1,000,
Nikko Beans ¥2,400, Kabu.com ¥1,000, whereas Matsui charged ¥3,000 even for 1 transaction.
１９
See Yano Research Institute (2000), p. 149.
２０
Daily average transaction amount increased dramatically in September 1999, just before
commission deregulation, ¥1,930 million whereas in October just after the regulation, ¥4,890 million
and in March 2000, six months after, ¥11,300 million. (Press release from Matsui Securities).
２１
See Nikkei Sangyo Shimbun (2001.1.10).
２２
See Nihon Keizai Shimbun (1999.9.27), Nikkei Kinyu Shimbun (1999.9.27), Nikkei Kinyu
Shinbun (1999.8.10).
２３
See Osaki (1999), p. 16.
２４
See Nikkei Kinyu Shimbun (2000.12.6).
２５
See “Press Release from Nikko Beans” (2000.12.26), “Press Release from Monex” (2000.12.27).
２６
See Matsui and Matsumoto (2001), p. 61.
２７
See “Press Release from Matsui Securities” (2000.7.28), “Press Release from Matsui Securities”(2000.7.18).
２８
See Nikkei Sangyo Shimbun (2000.1.21).
２９
See “Press Release from Matsui Securities” (2000.4.14., 2000.5.1., 2000.6.15., 2000.7.7.,
2001.2.14).
３０
Numbers of contracts per account were, assuming Matsui as 100: DLJ 27, Monex 13, Nikko
Beans 15, Kabu.com 10. Under the same assumption, transaction amounts were: E-trade 23, DLJ 38,
Nikko Beans 9, Kabu.com 8 (Takai, 2004a).
３１
See annual IR materials from FY 2002.3.
３２
See Nikkei Kinyu Shimbun (2003.4.24).
３３
See Saga (2001).
３４
It increased continuously from ¥13,406 in September 1998 to ¥ 20,337 in March 2000, thendecreased to ¥7,831 in April 2003. (Bank of Japan HP)
３５
３６

Number of accounts in 1999 from Saga (2000)
The amount of stocks held by individuals was ¥100 trillion (6.4% of individuals’ total assets) inJapan, whereas it was ¥ 860 trillion in the States (same 24.2%) (Explanatory materials, Aug. 2001)
３８
See Nihon Keizai Shimbun (1999.11.2).
３９
From interview with Mr. Amamiya, Operating officer and general operation manager, Kabu.com
security (2004.3.25).
４０
From interview with President Kitao, E*trade, see Nikkei Sanyo Shimbun (2001.8. 9).
４１
Comments from Mr. Suda, first President of Nikko Beans and Operating Officer, in charge ofRetail Promotion at that time (Nikkei Sangyo Shimbun, 2001.8.10).
４２
See Nikkei MJ (2000.9.25).
４３
Following Matsui, initiation of combination of “margin trading” and “fixed commission fee”,
instead of number of accounts, decreased in absolute number and rate of increase, but
profitability improved (Takai, 2003a, Fig. 11 / 12). Only Monex, who were late to follow,
３７

21

Takaishowed a dramatic fall in profit.
See Nikkei Kinyu Shimbun (2003.4.24).
４５
See Nikkei Kinyu Shimbun (2003.4.24).
４６
Analyzing the difference of “inbound and outbound of stocks”, which shows the account transfer
among companies in FY 2003.3, companies followed Matsui’s strategy and acquired from Matsui
more than they transferred to Matsui. However, the only company that did not follow Matsui’s
strategy, Monex, lost more accounts to Matsui than were transferred from Matsui (“Nihon ni okeru
online syoken torihiki no genjo” (The Reality of Online Security Trading in Japan), 2004.12, Kinzai
Institute) (in Japanese)
４７
Comparing the change in numbers of contracts and transaction amount per account (2001.9 –2003.3), Matsui decreased to about 70% in contracts and 60% in transaction amount. On the contrary,companies that decreased were Monex, which was late to follow, and the number of contracts of
Nikko Beans, except for closed information such as number of contracts of E-trade and transaction
amount of Monex. Monex showed an enormous increase in transaction amount (Takai, 2004a).
４８
See Matsui (2003), p. 130-131.
４９
See Yomiuri Shimbun (2004.3.15).
５０
Above, NIKKEI BP Real Interview (2002.5.31) (in Japanese).
５１
From interview with Mr. Namba, Chief Information Officer in Monex Security (2004.6.21).
４４

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