MMRCDISCUSSION PAPER SERIES
No. 278

Emerging Market Strategy of Japanese Firms:
Reshaping the Strategies in the Growing Markets
Junjiro Shintaku
Associate Professor, Graduate School of Economics, University of Tokyo
Tomofumi Amano
Associate Professor, Graduate School of Economics, University of Tokyo
October 2009

東京大学ものづくり経営研究センター
Manufacturing Management Research Center (MMRC)
Discussion papers are in draft form distributed for purposes of comment and discussion. Contact the author for
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http://merc.e.u-tokyo.ac.jp/mmrc/dp/index.html

The 8th Northeast Asia Management and Economics Joint Conference-Global Economic Crisis and the Northeast Asian Cooperation-

Emerging Market Strategy of Japanese Firms– Reshaping the Strategies in the Growing Markets –Junjiro Shintaku(Associate Professor, Graduate School of Economics, University of Tokyo)

Tomofumi Amano(Associate Professor, Graduate School of Economics, University of Tokyo)

Contact: amano@e.u-tokyo.ac.jp

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Emerging Market Strategy of Japanese Firms– Reshaping the Strategies in the Growing Markets –Junjiro Shintaku(Associate Professor, Graduate School of Economics, University of Tokyo)

Tomofumi Amano(Associate Professor, Graduate School of Economics, University of Tokyo)

Emerging markets are now growing markets which can become giant markets.
However, while Japanese firms are said to have high technology capabilities, there are few
cases of their success in these markets. Japanese firms’ products are “too high quality”,
and one cannot say that they always accurately understand the needs of the middle class inlocal markets. Their business resources are also overly concentrated in Japan, notallocated properly to develop the business in growing markets. This situation is similar toso called “innovator’s dilemma”. In response to the problem, one must correctly
understand the causes of the dilemma, reexamine the basic quality and functions
appropriate for emerging markets, and rebuild market strategy based on “reasonable
quality”. There is also necessity to reorganize their resource allocation and to develop
organizational capabilities to penetrate large middle class market. Based on cases and datacollected from original field surveys, this paper considers and prospects directions forrebuilding strategies of Japanese firms in emerging markets.
Key words: emerging market, appropriate quality, innovator’s dilemma, resource
reallocation

1. Issues in Tapping Emerging Markets(1) Handling the Middle Class in Emerging Markets
Amidst slowdowns in the U.S., Europe and other developed countries since autumn lastyear, there has been renewed interest in emerging markets in developing countries. Even
before the slowdown, the importance of efforts in BRICs and other emerging markets has
been stressed. But one might say that the Lehman shock accelerated the shift in focus
from developed markets more intensively. In recent literatures, there is also a debate on
strategies penetrating the base of pyramid (BOP) in developing countries. For example,
based on case studies of 24 European and U.S. firms in BOP markets, London and Hart
(2004) point out that it is important to review local partners and develop new relationshipwith new peripheral partners instead of reusing inherited ones.
Such research on BOP markets provides interesting ideas and viewpoints to our study(Dawar and Chattopadhyay, 2002; Delios and Henisz, 2000; Hart and Christensen, 2002;
Hart and Milstein, 2003; Hokisson et al., 2000; Khanna and Rivkin, 2001). However,2when we consider the main target segments of Japanese firms in developing countries, it isusually one upper class than BOP, which is called as middle of pyramid (MOP) (Amano,
2007; Oki and Shintaku, 2009; Shintaku and Amano, 2009; Shintaku, Amano andYoshimoto, 2008a; Shintaku, Amano and Yoshimoto, 2008b; Gao et al., 2008; Yokoi,
Yoshimoto and Amano, 2008). According to the “2009 Manufacturing White Paper” by
Japan’s Ministry of Economy Trade and Industry, middle class markets in BRICs grewfrom 250 million people in 2002 to 630 million people in 2007 (China 270 million, India
140 million, Russia 100 million, Brazil 120 million). When Japanese firms attempt toenter such rapidly growing middle class markets, what problems are they facing and how
are they solving? These are the central issues of this paper.
Figure 1 summarizes the relationship between markets and the development process ofJapanese firms. After World War II, Japanese manufacturing industries first grew based onJapan market. Then they began exporting to the U.S. and other developed country markets.
At that time, many Japanese firms faced the problems of low quality, which only enabled
them to compete at the low end of the markets. For example, Honda was forced to recall
the first large motorcycle it sold in the U.S. Auto makers also entered from the low end of
the markets such as targeting used car buyers. Photocopiers also first entered with small,slow machines. Thereafter, it is well known that Japanese firms strove to improve their
quality in ways that did not raise costs, steadily transitioning their products toward theupper end of developed country markets.
However, in tapping emerging markets, firms now face the issue that they must target alower end of markets than currently. This is the first time that Japanese firms have beenpressured into a full scale strategy targeting the lower end of markets. The following threeproblems have been frequently mentioned for these markets. First is the excess quality
with too high prices. Second, regardless of their product excellence, the product quality is
not understood by customers. Third, product specifications do not match local needs.
Overcoming these problems are relatively new hurdles to Japanese firms.

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Figure 1
Development Process of Japanese Companies

U.S. &
EuropemarketsJapan
marketEmerging
markets

Use higher quality
to build market.
Transition fromlower segment
to upper segment.

Transition
down fromupper
segment23(2) Manufacturing CompetitivenessLooking at Japanese firm products which repeatedly fail in emerging markets, there aremany cases where one cannot say that the product itself is bad. Japanese firms still havestrong technical and manufacturing competencies. It seems that their poor results lie in thelack of business models which utilize their technical and manufacturing competencies,
and their insufficient marketing activities to convert their manufacturing competencies
into customer values.
Figure 2 shows a framework which groups into three levels of factors determining the
profitabilityofmanufacturingindustries:“external

competitiveness”,“internal

competitiveness” and “manufacturing organizational capabilities” (Fujimoto et al., 2007).
High earnings are primarily due to price, performance, brand, etc. which the customer cansee. We call these things as sources of “external competitiveness”. However, external
competitiveness which customers can see is affected by internal competitiveness infactories or inside the firm, which customers cannot usually see. That is measured byproductivity, costs, lead time, etc. When customers evaluate the value of products,
measurements of internal competitiveness are not always relevant. However for the firm,internal competitiveness is very essential for boosting its external competitiveness. Low
costs enable pricing below competitors, short production lead time results in customer
satisfaction, and short development time enables timely delivery of products meetingcustomer needs. Behind internal competitiveness, there are the sources relating with4

“manufacturing organizational capabilities. For example, even in the same industry, why
is a specific firm (for example, Toyota) able to maintain higher productivity, reduce morecosts, adapt more rapidly to new environments than others? The answer lies in its
organizational capabilities.

Fig.2 Understanding Manufacturing Industry
Profitability in Levels
もの造りの組織能力とパフォーマンス
Manufacturing
Organizational Capabilities & Performance

その他の環境要因
Otherenvironmental factors

Manufacturingorganizational
組織能力
capabilities
Level of ability to do things
組織ルーチンon site,which other companies
cannot easily copy
Arrange, order, clean,solve problems, improvejust-in-time,
flexible production

深層のInternal
competitiveness
パフォーマンス
Index measuring actual
生産性
on-site capabilities whichcustomers
do not see
生産リードタイム
Productivity, cost,
適合品質
production
lead time
Development
lead time,
開発リードタイムdevelopment productivity

表層のＥｘｔｅｒｎａｌ
Ｃｏｍｐｅｔｉｔｉｖｅｎｅｓｓ
パフォーマンス
Index measuring
価格 actual
product capabilities
納期
evaluatedby customers
Price, performance, delivery
製品内容の訴求力
Effects of brand & ads
Market
share
広告内容
の訴求力
Customer satisfaction

利益
Profitability
パフォーマンス

Company earnings
Stock price

能力構築競争の対象領域
Capability
building competition

Source: Takahiro Fujimoto et al. “Study of Manufacturing Management” Kobunsha Shinsho, Fig. 1-1-2, p.26

In straight way of thinking, strong organizational capabilities create excellent internal
competitiveness, which lead to external competitiveness, resulting in the satisfaction ofcustomers and high profitability. Figure 2 shows a path to build and maintaincompetitiveness in such a way. The auto industry and some other excellent Japaneseindustries might follow this path.
However, some firms have excellent technical and manufacturing competencies but do
not gain their external competitiveness in the market. For them, internal competitivenessis not directly linked to external competitiveness and profitability. Then, it might be betterto examine reasons of the mismatch of external and internal competitiveness.
Moreover many Japanese firms making efforts in emerging markets leave mostfunctions of development in Japan. If full action is to be taken for emerging country
middle class markets, they might require fundamental restructuring or reallocation of both
external and internal competencies in global manufacturing value chains.

(3) Innovator’s Dilemma
One can view the problems faced by Japanese firms in emerging markets currently as
similar to “innovator’s dilemma” pointed by Professor C. Christensen. His book strives toanswer the questions: Why do excellent leading firms fail in innovation? What are thecharacteristics of innovation in which leading firms fail? (Christensen, 1997) Previous

5innovation research said that technical novelty or difficulty was the cause of leading firm
failures. But Christensen explained such failures from a “market” perspective.
His argument is based on the research of the hard disk drive (HDD) industry.
Summarizing his conclusion, Christensen asserts that leading firms fail because theyefficiently work only to meet the needs of existing large customers, and overlook the
emergent needs of new customers. Better adapting to existing customers has been a
success factor in the past, but it cannot secure the better adaptability to discontinuous
customers in emerging markets.
For example, in the 1970s, HDDs were mainly used in mainframe computers.
Mainframe customers wanted HDDs with “large information capacity”, “processing
speed” and “reliability”. Thus leading HDD firms vigorously invested in basic
technologies, products to increase storage capacity, processing speed and reliability. But
then small HDDs appeared with small disk sizes. Small HDDs are firstly introduced in the
PC market, which was the low end of the market relative to mainframes. HDD
performance demanded by PC manufacturers differed from that for mainframes. Importantfactors were “small” and “low cost”, and in the case of notebook PCs, “energy efficient”.
Small HDD manufacturers which entered the market pushed forward with productdevelopment and innovation to satisfy these new demands. But mainframe manufacturers
were the main customers of the existing leading firms, which did not allocate resources
for those types of innovations. They did not see value in smaller size, nor in reducing
price far enough that durability suffered
Issues which Japanese firms face in Asian markets are quite similar to this problem (wewill call this “emerging market dilemma”). We hereby introduce the case of a printer firmin Asian markets. In the 1980s, Epson’s printer business in Japan invented excellent
technology of dot matrix printers (below, “SIDM printers”: Serial Impact Dot Matrix
Printers). However, because of the low speed and the small potentials of color printing,the industry and market slowly moved from SIDMs to inkjet printers in the 1990s and thebasic technologies of SIDM printers including head processing technology weretransferred to the development of inkjet printers（Fujiwara, 2008）. Engineering resourceof the firm also shifted from SIDMs to inkjet printers. However in the late 1990s, because
the price competition in the inkjet printer market became so severe in oligopolisticcompetition and product development cycles became so short, it became hard for most of
the firms to gain sufficient profit from hardware business. Thus they invented a new
business model called “supply business”, which creates profit via supply products like ink
cartridges, rather than hardware products.

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SIDM printers are the products before the supply business model became popular. Thus
the hardware price is relatively high, and their supply products are cheap. After SIDMs
had matured in developed countries, replaced by inkjet printers, they have mainly been
exported to developing countries like Indonesia and India. In Indonesia the products weresold via sales agents for business use in the country, printing on bankbooks, printing
receipts at shop registers, etc. SIDM printers had few head failures, and their ink ribbon
prices were cheap, so they became widely popular with heavy business users in the
countries like Indonesia, which enabled Epson to expand its brand in these regions. Sincebusiness use also required after sales service, Epson levered SIDMs to widen its service
network throughout the country. These accumulated sales resources became essential,
when Epson brought inkjet printers later.
In 2001, Epson established a sales firm in Indonesia, to introduce inkjet printers in the
country, where the first movers like Cannon and HP had already covered this productsegment. Since inkjet printers are the ones after the supply business model was introduced,
printers themselves were much cheaper than SIDMs. But they had higher priced cartridges,
etc. Epson also brought this model to Indonesia in the same way without making any
special changes, but higher cartridge price became a bottleneck for business users whocare about the running cost of printers. As a result, in Indonesia, many users prefer using
Chinese made copy cartridges to using genuine cartridges. Moreover new businesses
sprouted anywhere which modify products to enable easy use of such low priced
cartridges, which cannot be ignored by printer firms.
Leading firms in developed countries always challenge cutting-edge innovations inorder to differentiate themselves from other competitors in their home markets. But thesecreations do not necessarily match the functions and uses in emerging country markets. In
many cases, old products may match well instead. There is sometimes a “twisted
structure” between developed markets and lagging ones. But as the lagging market’s size
expands, the structure cannot become negligible even by the leading firms.

Japanese firms which have succeeded mainly in developed country markets havebuilt their paths through their competences of technology and innovation. They
have built up organizational capabilities and leading business models. As a result,they have succeeded in upgrading their brand values in these markets. These are
extremely important assets for them. However in emerging markets, they are underpressure to make a different type of strategic change to conquer the discontinuityof market conditions and customer needs.

7

2. Analytical Perspectives of Emerging Market Strategy
When developed country firms approach the middle class markets in emerging
countries, the more the firms have strengths in technology, the easier they have mismatchwith local market conditions. How can this be resolved? Here, we will introduce twoanalytical perspectives: (1) Analysis of market conditions and reasonable quality, and (2)Reallocation of resources and local capability development.

(1) Analysis of Market Conditions and Reasonable Quality
Products of Chinese firms are low priced but they still have many problems withquality. On the contrary, Japanese products in China market may be high quality but theirprices are too high. This is a common problem for Japanese products in emerging markets,with the problem of “excess quality”. Japanese products provide quality too much higher
than the level of quality sought in local markets, which causes high prices.
A typical example is the CD-R market for recording optical discs. The CD-R market
was created in the early 1990s. Sony advocated this disc standard, and Taiyo Yuden
developed the fundamental materials (dye) and established a manufacturing method.
Japanese firms held almost a 100% market share when the market was being created, but
this was limited to the niche markets such as creating masters for music CDs. That market
scale was limited, but they were able to maintain high prices. At that time, Japanese firms
alone dominated, with 20 firms having entered the market.
Then in 1997, CD-R drives began to be installed in PCs, and as the market grew, global
production volume increased rapidly, and now over 10 billion CD-R discs are made andsold each year. CD-R formed an overwhelmingly large market compared to the oldrecording media of magnetic tape and floppy discs. However, in that growth period,
production by Japanese firms grew very little, with that growth led by Taiwanese firms
instead. Production also grew in India, starting in 2001. Looking at price trends, since
Taiwanese firms entered the CD-R market in 1997, prices plummeted by 2/3 in one year.
With such a drastic price drop, many Japanese firms became unprofitable. Forced to
drastically review their operations, many Japanese firms halted production and someJapanese firms with strong brands (TDK, Hitachi Maxell, Mitsubishi Chemical Verbatim)
switched from production to OEM purchasing from Taiwan firms.
Taiwanese firms with growing production did not have very strong brands, and many
supplied OEM to developing country firms. Taiwanese firms supplied discs as OEM to
Japanese firms, but they did not have their own capabilities to develop basic materials for8

disc production (dye, polycarbonate, etc.), manufacturing equipment (molding machines,etc.), nor manufacturing recipes. Thus Japanese firms sold dye and recipes to thecontracted Taiwanese firms, and supervised production including thorough quality control.
Taiwanese firms are making CD-Rs while receiving guidance from Japanese firms.
Those Taiwanese firms supplied CD-Rs to Japanese firms, and also supplied to
IMATION and other U.S. and European firms. However, few U.S. and European firms
invested in R&D on optical discs, so they did ODM purchasing from Taiwanese firms. In
short, instead of specifying materials and recipes like Japanese firms, they only evaluatedprototypes proposed by Taiwanese firms, negotiated prices and purchased. Thus there arethree business models for Taiwanese firms: supply to Japanese firms based on their strict
quality control, produce and sell under their own brand, and ODM supply to U.S. andEuropean firms.
According to an interview survey of engineers at Taiwan’s major disc firms, in OEM
for Japanese firms, they complied 100% with the materials, recipes and quality control
items specified by the Japanese firm, but the level of quality control fell in ODM for U.S.
and European firms. It is a rough feeling, but rating quality control items for Japan at 100,
the level is about 20 to 30 in their own brands and ODM products for the U.S. and Europe.
Specifically, it seems they restrict the volume of dye used, and increase the number oftimes stampers are used. They thereby reduce prices by sacrificing the level of quality.
According to them, products for Japan are too high quality. Quality and price are
generally in an upward sloping relationship, and products for Japan are good quality but
also high priced. According to them, the world’s customers generally do not seek suchhigh quality, and even if quality is sacrificed a little, they are happy with the lower prices.
On the other hand, small and medium Taiwanese firms and Chinese firms lacking
technical strength produce inferior products which are too low quality. Japanese productswith excess quality and Chinese products with too low quality both can only gain small
niche markets, while medium level quality and price products are “reasonable quality”
achieving the largest sales. This is the way Taiwanese firms think of quality.
This way of thinking seems a rational view of quality and price. However, there is not
only one level of reasonable quality. The level of quality and price supported depends onthe market. Even for CD-R, Japanese brand products (so-called excess quality products)
are still sold in Japan market. This means that high quality/ high price products arereasonable quality in Japan market. Samsung Electronics boasts a large market shareoverseas, but one reason that its products are not sold in Japan at all seems to be the effectof this characteristic of Japan market.

9

High
Market size

Too much
Quality

Price
Quality too
low

Reasonable
Quality

Low
Low

Quality & Function

High

Figure 3 Reasonable quality and Price
Even for the same product, strong sellers differ by market because of different
distributions of preferences in each market. Even for the same product, some consumers
emphasize price in their preference, and other consumers emphasize quality and function.
Consumers who emphasize price focus less on quality and function, so they choose thekinds of products by Taiwanese firms. In contrast, consumers who emphasize quality andfunction choose products by Japanese firms. The latter comprise a higher percentage ofJapan market, so Japanese products sell well. Such consumers comprise a small percent of
the China market, so Taiwanese products sell well. In the same way, even for the same
LCD panels, Japanese products sell well in the large TV market which emphasizes
functions, while Taiwanese products sell well in the PC market which emphasizes price.
In this way, even for the same type of product, the way products sell well differs
depending on the country and region or market segment. Here, we refer to thequality-price combination of best selling products as “reasonable quality”. Figure 3 shows
this way of thinking. Emerging market strategy first requires the perspective of how tochoose the combination of quality/function and price appropriate for the market, thenadapting product strategy accordingly.

(2) Reallocation of Resources and Local Capability Development
Another viewpoint is that a low market share of Japanese firms in emerging markets is
closely related to the distribution of firms’ business resources. Japanese firms tend tocreate products with excess quality, because the central activities of product planning anddevelopment design are overly focused in the home country of Japan. Market unsuitability

10comes from the characteristics of resource allocation, so the problem will not be solved
unless this is drastically revised.
Let’s look at this point in the same HDD industry as Christensen. In this industry, alongwith growth of small HDDs, U.S. specialized manufacturers which led in that field grew,
and manufacturers which developed drives for mainframes etc. declined. In this process,especially with small HDDs used in PCs, the market’s base broadened towards the lower
and mid-markets, and the HDD market size grew exponentially. As a result, firms in themarket were forced to produce huge volumes of drives, and their production rapidly
shifted to Asia to handle that mass production.
Mass production in Asia soon became a precondition for the industry’s existence. Many
firms which could not handle investments for mass production withdrew from the market.
Seagate and other U.S. specialized manufacturers reigned at the top of the industry over along period. These firms established mass production bases in Singapore even in the early
1980s, positioned them as their Asian hubs, and began strengthening them. They
cooperated with the local government and universities, working to cultivate engineers,managers and suppliers. They developed the Singapore factories as the centre of process
technology development and technology transfer to other Asian countries. They accept the
product designs from the U.S.A. and develop the prototyping and the production processes
in Singapore. Then they transfer the knowledge and recipes of the production processes
from Singapore to the other production sites including Thailand, Malaysia and China.
With these development efforts in Asia, since the year 2000, the U.S., on the other hand,put much effort into basic research, product development, development and manufacturingof core parts, etc. This international division arrangement built their overwhelming
competitive dominance in product development performance, manufacturing cost, mass
production market share, etc. (McKendrick et al., 2000; Amano, 2005; Shintaku, Amano,
Ogawa, Nakagawa, Oki, Fukuzawa, 2007).
On the other hand, Japanese firms are selling disk drives to existing customers in theupper end market of mainframes and the captive market of internal sales. Also, they did
not commit to the development of technology capabilities in Asia. Rather, most of theirdevelopment activities including process development remained in Japan. Their foreign
production ratios were still low even in the latter 1990s. Viewed from the perspective offormation of full scale industrial concentration in Asia, with human resource development
and formation of development resources and their utilization in production strategy, it
seems Japanese firms were behind the U.S. firms, even though Japanese firms hadsuperior technologies including head and media technologies (Amano, 2005; Shintaku,
Amano, Ogawa, Nakagawa, Oki, Fukuzawa, 2007).

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In “The Innovator’s Dilemma”, Christensen states that when “disruptive technology”
exists, the higher its level, the more important it is to form a project team separate fromthe mainstream in the organization (Christensen, 1997). Also in the “emerging market
dilemma”, the greater the gap in market and resource characteristics between existing
markets and emerging country and lower end markets, the more necessary it is to haveknowledge development sites near local markets and local mass production sites separate
from the existing mainstream, do work there to solve problems required for market
response and handling mass production, build up knowledge gained with experience, andenhance the technical level of local human resources.
The “emerging market dilemma” arises from the gap between resource allocation
which developed country firms had previously adopted, and ideal resource allocation
when assuming future growth markets. To overcome this dilemma, firms must review
methods of multinational management strategy and organizational structure, working toreallocate business resources towards the frontiers of sales activities in growing emerging
markets and production activities in low end and middle markets, to enable easier localorganizational learning and buildup of resources.
Also, among emerging markets, there may be regions where it is easy to make progressin such organizational capability building, and other regions where it is not easy. One
must ascertain the potential abilities of the region’s human resources, and decide where toinvest resources. A firm should have abilities in planning location selection and themethod of international division of work between locations in the network, from theperspective of “comparative advantage of organizational capabilities” (Fujimoto, Amano,
Shintaku, 2007). This is also suggested by the above example of the HDD industry.

3. Product Strategies with Reasonable Quality
We discussed the two perspectives of emerging market strategy: (1) Analysis of market
conditions and reasonable quality, (2) Reallocation of business resources and developmentof local capabilities. Below, we explain specific points of strategy based on these two
perspectives. We first explain the former perspective: How should a firm analyze market
conditions and reasonable quality, and take decisions accordingly?

(1) Low Price Products with Reducing Excess Quality[1] A Top-Down Decision about the Quality – ASEAN Market Strategy of Honda
Motorcycles

12Let us first look at the example of Vietnam’s motorcycle market. In Vietnam,
motorcycles have become the popular transport for common people. If one goes to Hanoi
or Ho Chi Minh, the roads are full of motorcycles. The market was about 500,000
motorcycles in the late 1990s, but in the year 2000 the market’s size leapt to the 2 million
level, and in 2003 it fell again to the 1 million level (See Fig. 4). The cause of thesemarket’s sudden changes lies in Chinese made motorcycles.
In China’s motorcycle market, Chinese firms started from models which were copies of
Hondas, then developed to conquer the market, leaving Honda resigned to less than a 5%
market share. However, Chinese firms also suffered from domestic price competition, andlooked towards the ASEAN market as an exit. The first target of Chinese firms was theVietnam market. Low price (low quality) Chinese made motorcycles entered Vietnam in
the year 2000, with Vietnam made Chinese models also flooding the Vietnam market. For
Honda which had lost the vast China market, the entry of Chinese made motorcycles into
Vietnam was a huge threat that it may lose even their ASEAN market shares.
Before then, Honda had a dominant position in the ASEAN market, and in the Vietnam
market it boasted a 20% to 30% market share. Honda’s main product in the ASEAN
market was the Super Cub. Soichiro Honda designed it about 50 years ago. This long lived
product was priced at about 200,000 yen in Japan, and it was also sold in Vietnam at thehigh price of about $2,000. It was a very high priced product for Vietnamese people.
Into this Vietnam market came Chinese motorcycles priced at $500 to $700. At 1/3 to
1/4 the price, families which could only buy one motorcycle previously were now able tobuy 3 to 4 motorcycles. Even though Vietnamese incomes did not grow so quickly, themarket size leapt, by 200% to 300%, to 2 million motorcycles.
In response, Honda made a plan to cut prices in half. To do so, they worked on large
cost reductions. It planned a $1,000 motorcycle. To achieve this, they investigated using
low cost parts made in China and ASEAN, and dramatically revised its design. However,there were many troubles in using local parts, and at first there were many parts they
could not use. Similar to other manufacturing industries, design-standards are determinedby Honda headquarter in Japan, and it cannot use parts which do not meet those standards.
They were far from reaching $1,000 by only using parts which meet Honda standards. It
would be good if the quality level of Chinese made parts improved, but they could not be
improved easily, and waiting for that would make market entry too late. If so, Chinese
products would conquer the market.
Then Honda took an action viewed as taboo, revising its design standards. Even thoughdesign standards could usually be raised, they were very rarely lowered. Lower standards
reduce safety and durability, with the risk of damaging the firm’s brand value. On site13

engineers want to design things which are better in some way, and do not usually lower
design standards in ways which run a risk of reducing safety or durability. This influences
the entire firm’s brand value, and such decisions are taken by the headquarter president,
not a local subsidiary president. Slowly raising design standards can be achieved in abottom-up process, by ideas of engineers. However, lowering design standards is a highlevel business issue, even though it is not so difficult for engineering, which can only beachieved in a top-down process.

Thus in January 2002, Honda started selling its $1,090 “Wave α”. Launching thisproduct suddenly shrunk the price gap with Chinese made motorcycles. Also, Chinese
made motorcycles which had already flooded the market broke down often, so Vietnam’s
consumers also began to worry about their quality. The Vietnam government also began toregulate them. As a result, Wave α was a hit product when it entered the market, andChinese made motorcycle sales plummeted in 2003.
Figure 5 shows this example in the previous section’s framework. Usually, when
Japanese firms cut costs, they reduce costs without reducing quality. However, that alone
cannot shrink a huge price difference. In such a situation, they may follow a procedure of“Review design standards → Use low cost parts → Reduce quality with large price cut”.
This way makes the large cost reduction possible and makes the products competitive
even to Chinese products.

14

High

Price

Review quality design
standards, and cost/pricefalls while reducing quality.

Simple cost cutting does
not cut costs in half.

Low
Low

Quality & Function

High

Figure 5 Lower Price Products with Reducing Excess Quality[2] Customers Determine the Quality – Quality Concept of Samsung Electronics
Samsung Electronics has a perspective on quality which reflects the above discussion.
First of all, a basic assumption is their concept “Quality is determined by customers, notdetermined by the manufacturer alone”. It also understands that even for the same product,
customers seek different qualities depending on the purchase price. In short, even for thesame product, the level of quality sought depends on the income level. It applies thisstrategy to countries and regions.
Specifically, even for products with the same basic design, it changes the parts used
depending on the market where sold. That is, it ranks parts, using high rank parts formarkets accepting high prices, and low rank parts for markets which like low prices, witha different cost structure even for products with the same appearance. Thus in emerging
markets like India, this system can launch products which look the same as products fordeveloped countries, but are low cost structure products at low prices.
Samsung Electronics utilizes “Market Failure Rate” as a quality control index. The rateis the number of complaints (not product failures) divided by the total number of units
sold. In other words, even if there is a failure, if it does not result in a customer complaint,
the market failure rate does not rise. If customers think that “This product is cheap, so
nothing can be done about this kind of failure”, then the market failure rate does not rise,
judging that this is allowed by the market. In markets which prefer low prices, even if thereal product failure rate is 10%, the market failure rate can be 5%. This is to avoid excess
quality by looking at the market failure rate. Japanese firms have aimed at zero failures,
but this example suggests that they cannot thereby handle quality differences dependingon the market.

15[3] Developing Low Price Models in China – Nokia’s Conquest in China’s Mobile
PhonesNokia’s success in China’s mobile phone market in recent years is also largely a resultof its development and launch of special models which cut quality for emerging markets.
In the growth process of China’s mobile phone market, foreign firms like Nokia andMotorola held an overwhelming market share at first. But since around the year 2000, themarket shares of Chinese firms grew rapidly, and they achieved over a 50% market sharein 2003.
Then instead of shifting to the high priced segment, Nokia took the strategy ofthoroughly confronting Chinese firms in the low priced segment. Until then, it wascommon knowledge that mobile phone handsets were a global product, and products weredeveloped for global markets. Models which were one generation old in developed
country markets were often launched in the low priced segment of China and otheremerging markets. Nokia turned around this common knowledge, by developing low pricemodels which from the start target China, India and other emerging markets. It developed
products economizing both functions and costs, with black & white LCD, no camera, andfew frequencies, in candy bar shapes with no independent keyboard.
With these products, Nokia regained market share from Chinese firms, unusual among
foreign firms. Looking at Nokia’s share of the China market by price segment, it gained
the highest market share (40%) in the low priced segment of up to 1000 yuan. Currently,
the Nokia 1200 model is sold as the lowest price model of all products in China’s highvolume stores, at 280 yuan in Shanghai in August 2008. This is cheaper than products by
China’s large firms. China’s consumers seem to be choosing products with low price alongwith Nokia’s reliability and brand.

(2) Making Quality Difference Visible – Value-oriented Strategy in Emerging
Market Countries
Up to now, we described low price product strategy, but it is also necessary to look at ahigh quality/ high price product strategy. Looking at an example of watches, Japan’s watch
manufacturers led the wave shifting to quartz in the 1970s, grabbing the global watch
market from Switzerland. Japanese firms also started the business of selling movements,
the core watch part, also holding about 70% of the global market in this field. Instead ofIntel Inside, they achieved “Japan Inside” for watches.
But looking at Japan’s watch market under their nose, only 46 million Swiss watchessold for 540 billion yen in 2004. This was only 4% on a quantity basis, but reaches 67%
on a price basis. Swiss watches have grabbed most of the added value in Japan’s market.

16Setting each of their prices to 100 in 1993, Japanese watches only reached 135 in 2004,
while Swiss watches reached 316, a clear gap.
The same phenomena are seen in Japan’s motorcycle market. Japan’s motorcycle
industry dominates the world, but in Japan’s market for large motorcycles (750cc and up),Harley-Davidson has boasted the top market share since the year 2000. As Japan’s
motorcycle market peaked in 1982 and has steadily shrunk, Harley-Davidson has steadilygrown in revenues and profits since 1985. It has the top market share of 33.2% in 750cc
and up (ranked second at 18% in 250cc and up), with its prices double those of Japanese
products, at 2 million yen and up. Harley-Davidson Japan has the concept of selling “lifetime services”, instead of just selling motorcycles, planning various events and shows sothat customers can enjoy their lives with Harley-Davidson motorcycles.
This does not necessarily show the effectiveness of a dual strategy with high value
added strategy in developed countries, and low price strategy in emerging countries. Evenin emerging markets, Japanese firms may succeed with a high value added strategy.
Regardless of whether it is a developed or emerging market, to adopt and succeed with ahigh value added strategy, the key is effort to convince customers of the value of products
and services provided. Decide which customer class to target, make products and services
for them backed by the firm’s unique technology and know-how, and advertise their value
through marketing activities. That is the basic pattern of differentiation strategy.
The previous section showed that even if the quality of a product is 3 times better, theproduct cannot be sold if the price is 3 times as high. However, are the phenomena inemerging markets always excess quality? Looking closely, we see it is not actually thecase. In many cases, local consumers cannot recognize a “3 times” quality difference.
Even if there is an actual 3 times quality difference, sometimes consumers do not think
there is such a big difference, but only see the price difference and choose low priceproducts. Only the visible price difference is obvious, and the invisible quality difference
ends up downplayed.
Actually, this aspect is also seen in CD-R and DVD-R, which were described in theprevious section. If one measures disc durability (disc life: time until the disc becomes
unreadable), Japan brand media (including made in Taiwan) has a life of 10 years or more.
But overseas brands including Taiwan manufacturers, even though they are advocating
reasonable quality, had dramatic errors and it was not possible to measure them. However,many consumers think that CD-R and DVD-R are standardized products, so all of them
are basically the same. But they are not the same at all in reality.
However, in a sense, it is natural that consumers think that way. A problem on the sideof Japanese firms is that they have not very actively delivered information to consumers

17

on disc life and other quality indicators. Therefore people in Japanese industry started toact. They formalized the measurement methods to estimate disc life an international
standard of ISO (ISO/IEC 10995). Such standardization is an effective means to makevisible unseen quality differences.
This is similar in the energy saving technology in electronics products, where it isimportant to appeal to consumers via international standards and home electronics
standards. In China, these types of standards have been established recently (1 to 5 stars),and electronics firms became required to display the energy saving level of each productin shops. There are also subsidies accordingly. As a result, the market share of foreign
products has grown since around 2008. In air conditioners, Japanese products use inverter
technology, and tried to appeal with their energy conservation, but had been losing theirshares against low price non-inverter Chinese products in past. But after the energy saving
display policies, this situation is slowly changing. For example, Daikin, which has built alarge market share in the commercial air conditioner market, are also building theircompetitive market position in home-use inverter air conditioners in China market.

High

Price

Mistaken understanding:“Small quality
difference, big pricedifference. High price isonly brand premium.”

Make quality visible

Low
Low

Quality & Function

High

Figure 6 Make Quality Differences Visible
The case of LCD TVs in China also fits the case. When thin screen TVs first became
common in 2005, Chinese firms immediately conquered the market, but since around 2007,
Japanese and Korean made TVs started a comeback. One cause was the larger screen sizes.
With larger screen size, one notices quality differences which are not noticeable inrelatively small screens. The move to larger screens is an example of quality differences
becoming visible.

18(3) Priority-driven Localized Products – Shift in Differentiation Axis
The third strategy is development of so-called localized products. One can also call thisa shift in the differentiation axis. Japan, China, and India each emphasize quality andfunction differently. Improve the quality/ function axis emphasized in the local market,
and relax the quality/ function axis which is not so important to it. Just because it is an
emerging market that does not mean that demand for all functions is lower than in Japan.
For example, there are many car thefts in India, so higher cost is acceptable if it is forstronger an anti-theft mechanism (Park, 2009). On the other hand, Indians do not care as
much about the detailed specifications demanded by Japan’s customers.
Shifting the differentiation axis is reducing the quality level and cutting costs for axes
unimportant to the local market, while improving for axes prior to it even if it requires
higher costs. Such a strategy is needed in order to launch differentiated products in a local
market without raising costs much. Developing localized products requires suchpriority-driven product development.
High
Quality & function matching Local
marketCombinelowering &raising of quality

Low
Low

Quality & functions matching Japan market

High

Figure 7 Localized Product Development by Shifting Differentiation Axis
The phenomena in which this is required when products for developed country markets
are converted to products for emerging markets is similar to the “Innovator’s Dilemma”
which Christensen asserts. The innovator’s dilemma is that it must slacken a value axis
previously emphasized, while emphasizing a value axis previously neglected. When thecustomer segment dramatically changes, the value sought by customers changes. He
asserts that leading firms which had their greatest success via the value network withexisting customers fail due to inability to respond to such changing values. For example,
in Christensen’s book, he plots a graph with the value of shrinking drive size on the19horizontal axis, and increased storage volume on the vertical axis, showing that for thesame hard disk drive, the value emphasized in the notebook PC market is very different
from the mainframe market. Minimizing the size is added value in the notebook PC
market, but sometimes negative value in the mainframe market.
Recently, Japanese firms are also trying to develop differentiated products for
emerging markets, and we can see various efforts. As one example, Panasonic established
the China Lifestyle Research Center in Shanghai in 2005. Its activities include performing
thorough field studies of China’s consumers, and proposing product plans based on suchinformation. In China, there are many survey firms which provide modified informationfrom the internet etc. But few survey firms perform reliable field surveys. High quality
information is not obtained from internet surveys, etc. Thus the goal is to properly
perform field surveys by its own organization, and provide feedback to productdevelopment departments Japan.
The China Lifestyle Research Center was only recently established, so there are still
not many of their proposals implemented in actual products. One successful case is a slim
form refrigerator. In Chinese households, the refrigerator is often placed in the livingroom instead of in the kitchen. It was remarked that “Chinese put a new refrigerator in
their living room so guests can see it.” But a thorough survey showed that the kitchendoor is narrow in standard Chinese homes, and a 60cm wide refrigerator cannot fit
through. Sales leapt 10 times just by changing its size.
Actually, it may be obvious for Chinese that kitchen doors are small and refrigerators
cannot fit through. But changing the size requires costs such as metal shape changes. Also,
in Japan there is no value in creating a halfway product like 55cm width. Thorough fieldsurvey data may be needed in order to convince the development team in Japan of its
value.
One key to success in localized product development lies in methods to shorten thespatial distance and psychological distance between the local market and Japan’s
development team. Panasonic’s Lifestyle Research Center is one method to solve thiswithout moving the development organization. Another approach to this problem may belocalization of the development organization. Hitachi is one successful example of this in
India’s air conditioner market.
Hitachi formed a joint venture with an Indian air conditioner firm, then developed its
business, and that firm is now transformed into a subsidiary. It was originally an Indian
firm, so this immediately achieved localization of development. Thus Indian engineers aredeveloping products for the India market while absorbing Hitachi’s technology. One
successful product is a blower/ air conditioner with an automatic detection function.

20

India and ASEAN countries differ from Japan in that if people do not directly feel air
blown from the conditioner, they do not feel they are being cooled by the air conditioner.
Thus Indian engineers proposed adding a sensor to detect people’s movement, and blow
air focused in the direction of people. This was popular when launched in the market.
Other home appliances also have such needs which cannot be seen in Japan. For example
there are still many power blackouts in India, so washing machines are often stopped in
the middle of a cycle. When a normal washing machine stops in a blackout, the user does
not know how far it was in the wash cycle. Thus they added memory in the washingmachine to remember the washing machine’s status the moment power was cut, and when
the blackout ends and the wash is restarted, it automatically continues from the same
point.

4.

Resource Reallocation and Local Capability Development
When considering strategy for emerging markets, resource strategy has anotherimportant aspect. The resource conditions sought for business activities in developed
country markets and emerging markets are fundamentally different. Firms entering
emerging markets usually have an initial condition of insufficient resources necessary for
penetrating into the middle class market in developing countries. Local organizational
capabilities must be newly developed through learning-by-doing activities in local
markets. This aspect is less emphasized in traditional literatures which think thetechnological and managerial resources of a firm are mainly developed in its mothercountries and transferred to the host countries.

(1) Resource Reallocation and Capability Building under the Low Price
Strategy
Almost all firms which accomplish a transition to the strategy of low price andreasonable quality have also implemented dramatic changes in resource allocation. This
was true for the ASEAN strategy of Honda motorcycles, foreign markets strategy of
Samsung Electronics, and Nokia’s recovery in the China mobile phone market. Change inmarket strategy also requires a “leap” in resource conditions.
Let’s examine the case of Honda. In 2002, Honda launched the Wave α, reacting to thequick growth of Chinese motorcycles in Vietnam markets. This product launch enabledHonda to recover from the worst situation in this market and to change the company to becompetitive in low-price market. For them, this product became the trigger of changing

21

the development and production system in ASEAN
Like automobiles, motorcycles are products which need fashion aspects different by
country. Even within ASEAN market, Thailand, Indonesia and Vietnam each preferdifferent characteristics in exterior design. Thus the design of these parts requires
different specifications by country. Based on the market research in each country,
gathered market data is transferred to Honda motorcycle R&D center in Thailand andengineers at the center plan and design motorcycles in major countries in ASEAN. Afterthe specifications of models are decided, the design information moves to the production
sites in countries like Vietnam and Indonesia, where die making, mass production andprocurement of parts, and the assembly of these parts are implemented accordingly.
Figure 8 Division of Labor for Development in ASEAN Motorcycle Platform
Thailand(1) ASEAN Platform & mechanicalparts development(2) Development of models for Thai
market(3) Product design/development forIndonesia, Vietnam, etc.

Information feedback
for mechanicaldevelopment
matching market

Provide mechanical &product design
information
Provide mechanical &product design
information

Information feedback
for mechanicaldevelopment
matching market

Vietnam(1) Product planning matching
Vietnam market, (2) Metal shapedevelopment from design/development of exterior aspects, (3)Production of mechanical parts

Indonesia(1) Product planning matching
Indonesia market, (2) Metal shapedevelopment from design/development of exterior aspects, (3)Production of mechanical parts

On the other hand, in order to guarantee the “reasonable quality” in the drive system ofmotorcycles, Honda tried to standardize their engines and other core parts among different
models and different countries in ASEAN, which we call “platform” strategy. Honda also
located the design/ development base of these internally standardized parts in Thailand.

1

Data on motorcycle driving use in each country is gathered in Thailand, and the core driveparts of common platforms for ASEAN are designed centrally in Thailand. The design
data is transferred to production sites in each country, where metal shaping and mass
production of parts are implemented.
1

Motorcycle design and development was already being done in Thailand since around 1988, but
in 1997, Honda R&D Southeast Asia Co. Ltd. was established in Thailand, and its was made into a designand development base. Then it invested 800,000 baht in this center in 2003, strengthening its motorcycle
design activities for the ASEAN market. It performs various full scale R&D activities, including market

22

Figure 8 shows the above division and network of development. In the system,
Thailand performs (1) development of standard mechanical parts used in ASEAN Cub
platform, (2) development of models for the Thai market, (3) development of products forIndonesia, Vietnam, etc. Whereas Vietnam and Indonesia performs (1) market researchand data reporting for product planning in each country’s market, (2) die-making and parts
mass production, and (3) assembly of motorcycles in each country.
This production strategy enables mass production of products which can assure
reasonable quality in the drive system. There is also great progress in R&D capabilities inThailand, as well as production and procurement capabilities in Vietnam and Indonesia.
The local procurement ratio for parts in Vietnam was 53% in 2001, rising to 76% in 2003.
In Indonesia, in addition to final assembly, upstream processes are being developed infactories: aluminum casting, machining, engine assembly, pressing, welding, painting, etc.
Local factories have approximately a 10% internal production ratio for parts formonitoring and assistance to local suppliers. The number of suppliers has broadened toabout 130 suppliers, with Honda’s assistance.
(2) Gathering Market Knowledge by Continuous Experiments and New Business
Creation in Local Context
As described above, emerging markets have unique market characteristics not found indeveloped markets, and if product development is not done which benefits from
adaptation, hit products are unlikely to result. Simply selecting low end items from theexisting product line, removing features and bringing to market is not a true solution tomismatches between market and product.
Many developed country firms have product development bases in the home country,
and their products naturally have a “developed country market bias”. To get away fromthis bias and develop differentiated products in emerging markets, it is ideal to have thefunctions and a base for information collection, planning and development in growing
local markets, collect high quality information from the market, and plan products andbusiness systems based on such information. The differentiation axis in a local market is
not understood in advance, but comes into view later as a result of deep local market
surveys and interactions with users. An important issue is how to design a place for suchinteraction with the market and building up resources, and how to utilize knowledge andresources. In that sense, Panasonic’s China Lifestyle Research Center mentioned above isan important example.
In the sense of creating contacts with the market and designing sites for planning andsurveys, product planning, design, mock-ups, prototyping and inspection.

23

development, we find cases a step ahead in retail, which is closer to consumers thanmanufacturing industries. From that aspect, Seven-Eleven’s expansion in the China
market is an interesting example.
Retail is an industry with stronger local characteristics than manufacturing. When it
enters a foreign market, how to localize overall merchandising policy (below, “MDpolicy”) including product development has great impact on local business results. In thecase of Seven-Eleven, brand and basic operating policy, installation of the information
system, etc. are determined by the license consignee in Japan via contracts. But the local
subsidiary is relied on for almost all marketing decision making such as store location
strategy, interior design, product development, product procurement & delivery, andpricing strategy.
Seven-Eleven Beijing is a local subsidiary established in 2002, in response to the
deregulation of China’s retail sector. It currently has 75 stores directly managed under the
local subsidiary. When they first entered China, there were dry goods stores everywhereon street corners, where daily goods and dry goods were sold at very low prices. It seemed
difficult for a foreign firm like Seven-Eleven selling the same things to earn profits. Thus
since the time it entered China, an issue was whether it could create added value in ways
not in local dry goods stores and be competitive.
Thus they firstly built a “semi-open” store system comprised of 75 directly managed
stores with Seven-Eleven Beijing as headquarters. Among those, they began many
“market experiments”. Rather than generate large profits, Beijing’s directly managed
network aimed to learn local market characteristics from sales sites, and in combination
with trial experiments for product development, to develop products and systems which
can create original value and generate profits with strong possibilities for differentiation
vs. competitors. They try to standardize once developed products and systems in
preparation for franchising strategy in near future.
Let us look at an example. Seven-Eleven’s store locations in Beijing are concentrated
in the east side Chaoyang District with mixed office and residential areas, and in thenorthwest side with many universities and research institutes. It targets the customer
segment with household income of 5000 to 6000 yuan or more. As a result of detailed
analysis of customer need information received from its stores, they found that daily
goods and dry goods have slow product turnover and are difficult to differentiate, but riceballs, side dishes, full meals, etc. have fast turnover and are easy to differentiate.
The daytime Beijing office district is filled with people who cannot take lunch.
Chinese food is usually shared by 5 to 6 people if at a local restaurant, and a person does
not go to a restaurant alone. But Beijing has many dual income families and single people,

24and many people eat lunch and dinner alone, and they saw that demand certainly exists if
hot Chinese food could be provided separately in single portions. Then they planned theidea of a “Chinese Food Set Meal”. The local Seven-Eleven developed the business of
remodeling sections of the stores, cooking hot Chinese food there, and selling set meals insmall portions at reasonable prices. In order to use the benefits of a retail chain, they
prepared ingredients in a central kitchen, packaged them in a kit with seasonings, anddelivered them twice daily to stores. The menu changed weekly, and they also built eating
spaces in stores. In a country where steamed rice is expected, they contracted with a
special factory in order to introduce boiled rice, and thoroughly implemented hygiene
controls. China originally had no custom of eating raw vegetables at neighborhood stands
selling side dishes, but when Seven-Eleven displayed raw vegetables with hygiene
controls, they were flooded with buyers.
As a result of efforts in trial and error and commercialization over about seven years,
items like side dishes and set meals now comprise over 50% of the local subsidiary’s sales,making large contributions to store differentiation and profitability. Today, based on
products and know-how developed and standardized in its system of directly managed
stores, as its next stage they have begun investigating franchising which is a more “open”
system than now.

(3) Managing High Volume Production in Emerging Market– Establishing theSecond Mother Factory in Asia
“Market experiments” in growth markets avoid the risk of “home country bias” ingrowth markets with market conditions which are totally different from the home country,
and are an attempt at obtaining on-site information for the development of local business.
The same logic applies to production. The home country’s production conditions arefundamentally different from production conditions in an emerging market country, sowhen doing full scale mass production in emerging market countries, one must take into
consideration uncertainties and risks which are unimaginable in home country production.
For example, there are problems of (1) Vast production scale and fluctuations, (2) Large
scale labor and organizational management as prerequisite for labor intensive production
activities, (3) Failure to achieve conditions such as quality, cost and delivery due toinsufficient local organizational capabilities. These risks are interrelated each other, andrisks tend to increase with larger production scale. When a firm takes low cost strategy,
one must especially consider these points.
There is also the way of thinking of the home country’s mother factory trying tosupervise and control the local mass production. However, there are many cases that this25

mother factory system cannot control like following cases; (1) Design for products
manufactured in local factories is complex, and advanced adjustment and local problem
solving is required, (2) As local production becomes very large scale, the production risks
mentioned above become much larger, (3) Rapid launch of local production is needed,
related to the time allowed in the product life cycle, (4) There is a limit to the engineeringresources which can be allocated to foreign support from organizational capabilities of themother factory in the home country.
In such cases, it becomes useful to have a problem solving unit near the developing
country production site for supporting production process development, production launchand daily operations for high volume production (this can be considered a “production
experiments” site for volume production, corresponding to the “market experiments” inmiddle class market). Seagate’s Singapore base and Honda Motorcycles’ Thailand baseare truly bases which provide such functions.
These bases can be thought of as playing the role of “the second mother factory”. Thatis, based on product plans and design drawings created in the home countries, firms
develop optimal production processes considering unique local production conditions. It
launches mass production lines locally, standardizes production know-how, transfers
technology to other developing country bases, and also supports launches of mass
production there. It builds local know-how and experience for high volume production,
standardizes, and expands. Building such organizational capabilities locally is an effective
production strategy for skillfully adapting to production conditions in emerging markets
and middle and low end markets, reducing the risks of ultra mass production. Above all, in
product areas for which mass production cannot easily be outsourced, the firm must work
to scale up mass production and assure quality, and development of such an organizational
structure becomes essential. The above examples of Seagate and Honda are such cases.
On the other hand, there is also the way of thinking that outsourcing in Asia reducessome of the risks of high volume production. In such a case, the firm develops production
processes and launches production in its own production bases in its home country and in
Asia, builds up know-how on moving to mass production, standardizes, and transfers it tothe outsourcing firm as a turnkey system. In cases where an Asia base is used as asecondary main base, local engineers can be used to establish production process
know-how and create English language documentation. They can also communicate
directly between local sites, developing local technical staff and contributing to thedevelopment process of the home country.
Mitsubishi Chemical’s optical media business is a good example. Japanese firms once
had a large share of the optical media market of CD-ROM, CD-R, etc., but as the26technology matured, Taiwan firms and other lagging countries boosted their market shares.
Around the year 2000, new products such as DVD-R and DVD-RW were launched in themarket. But catch up by lagging country firms was also forecast in these fields, so
Mitsubishi Kagaku Media (the top firm at that time) took decisive action in advance.
Until then, Mitsubishi Chemical developed products and production processes in Japan,
and moved these into mass production in Japan and Singapore, selling under its own brand.
However, its production bases in Japan and Singapore had limited production capacities,
making it difficult to boost its market share based on these alone. On the other hand, there
were large risks in the firm alone making capital investments for large scale mass
production.
Then along with the introduction of DVD-R and DVD-RW, it changed from theprevious model for international division of labor. In the new model, Japan developed
products, cooperated with the Singapore base to establish production methods andknow-how, and once mass production was launched in Singapore and know-how
standardized, that was outsourced as intellectual property to manufacturing firms in India,
Taiwan, etc.
The India and Taiwan outsourcing firms are EMS type firms with vast production
scales. Their capital investments are made under each firm’s management decision.
Mitsubishi Chemical built a system to gain profit from multiple sources such as provisionof its intellectual property, sales of optical media products, and supply of raw materials
and equipment for outsourcer mass production, while it used outsourcing to reduce a largepart of the financial risks of high volume production. As the second mother factory, one
can say that its Singapore base is playing a vital role in this turnkey type business model.

(4) Bottom-up Style Organizational Capability Building
From the beginning, managerial resources are scarce in emerging markets, and theseresources must be developed newly under the guidance of the firm entering the country. In
cases where market share is expanded via a low price strategy and high volume production,
it is necessary to build large scale production infrastructure, and it becomes essential tobuild organizational capabilities covering a wide scope. More than just letting thisnaturally come about, the firm quite intentionally pushes this forward.
Even if a product includes cutting edge technology, if they require too much to local
people and suppliers, then it will be difficult to induce bottom-up organization’s learningand broaden the business and market base. Products, projects and management techniquesmust be chosen which encourage participation by many related local parties, and whichraise the overall level in a short time by the organization’s learning.

27

Park (2009) surveyed the Korean firm LG Electronics, which entered India. In the
India market, compared to the difficulty of Japanese firms, Korean manufacturers like
Samsung and LG built competitive market positions. Their efforts in the India market
began in the late 1990s. LG Electronics India was established in 1997 as a fully owned
subsidiary, and is engaged in production of home electronics in New Delhi and Pune. It
established a software research center in Bangalore in 1998. It is now a top class homeelectronics firm in India, enjoying large market shares in color TVs, electric ranges,
washing machines, air conditioners, mobile phones, etc. We will now describe its
background from the perspective of local sales organizational capability development.
First, they put efforts into developing their distribution and service network in India’s
market. Their slogan is “Number one to the customer”, and since they entered India they
have set 18 branches, 1800 dealers, and 85 service centers in the market. Half of branchstaff work in service (currently 2000 dealers, 150 branches, 1100 service centers). Whenthey launched the production bases, even when there were quality issues in the beginning,they compensated for “lack of quality” by providing quick after service, striving to build
relationships with the final consumer. They focused on India’s non-working women,
actively recruiting wives as saleswomen, and working to have their products penetrate
rural homes, while thoroughly surveying which kinds of products and services are neededin the home. Products which penetrate widely in the local market were created throughthese local efforts.
Second, they decisively localized planning and marketing work for products soldlocally. LG selected specialists with strong knowledge of local consumers, and giving
them authority for almost all marketing activities. They also recruited 350 engineers forthe local R&D department. This also resulted in a growing number of successful cases.
For example, the voltage situation in India is unstable, and there were repeated accidents
in which the TV condenser’s capacity was exceeded and it exploded. In response, LG
Korea developed condensers for India and installed them in TVs. Also, since water isprecious in India, they imported core part from Korea and produce and sale drum typelaundry washing machines and food washing machines. They became very popular with
consumers. Such cases are increasingly common.
Third, in order advance aggressive localization of sales and production, the personnel
department played a main role in staff development and localization. Today, there are only
27 Koreans among the 3500 employees in LG Electronics India. Functions and positions
directly contacting with the India market in the subsidiary organizations are especiallylocalized. When it was initially established, few managers wanted to be transferred from
Korea to India, which also forced LG to work on raising the level of all local staff. Thus it28

ensured the transparency and fairness of personnel evaluations, and established a thoroughmeritocracy, with ongoing development of local staff and promotion to management. It
trusts its appointed managers, and delegates authority. Korean top management stressdirect talks with local sites, and department manager level staff also directly enter
production sites and talk with employees to seek paths to enhanced productivity. LG
Electronics’ success in India is largely due to this localization policy and boosting its
overall organizational capabilities.
The participatory type organizational capabilities development is a basic technique ofJapanese firms, but a problem is how to implement that overseas. Some Japanese firms
have succeeded in this. For example, a factor in the market share growth of Honda
automobiles in China is the quality improvement activities with participation by all
employees and suppliers, using the QC cycle. There is also Toyota’s success in Thailand,with its policy of localization of staff and the organization called “Thainization”
implemented since the end of the 1980s, encouraging independence and delegation of
authority to mid-level managers since its IMV project in 2002, and training and guidance
to develop the attitudes of Thai and other emerging country managers and suppliers’
managers. An important point is how to expand the scope and deepen the level of theseorganizational buildings to meet the business scope required by market penetration
strategies. If targeting the larger volume zones of middle and low end markets, not only
qualitative but also quantitative targets are needed in building organizational capabilities.
To that end, systematic human resource development and drastic localization policies may
be required when it becomes ready.

(5) IT System as Strategic Infrastructure
Finally, even though this is a bit supplementary, I want to touch on the importance ofIT systems for implementing the above four operations. In contrast to undertaking
business in a solely domestic organization, for entering emerging markets, business islikely to have a broad scope and large scale. Also, staff and firms of various countries will
participate, so it becomes very important to use the IT system to disclose and share
information with people involved, communicate to remote areas, control security, etc.
To boost the organizational capabilities of local managers and staff in a large scale
factory, it is important to disclose timely and accurate information to all the organization’s
members, cutting across the organization’s departments and levels, and have eachdepartment take autonomous decisions. Also for communication of skills, one muststandardize as much as possible where standardization is feasible, and broaden the scope
covered by communications. Developing this information infrastructure facilitates

29delegation of decisions to local staff, promotes communication, builds the consciousnessof managers, supports training, etc.
Firms have also appeared which strategically utilize their IT system to develop
emerging markets. In order to sell construction machinery in the large China market,
Komatsu installs GPS in construction machinery to understand the location and operating
status of construction machinery after the sale, prevent theft of machinery, sense problems,and facilitate parts supply and other after service. The distribution status of construction
machinery also helps it understand the regions where much construction is being done,enabling very detailed demand forecasts. Sales teams can utilize this “live data”, enabling
very effective and efficient development of sales activities. Also in Japan, it may benecessary to consider various requirements hypothesized for emerging markets, anddevelop IT systems which facilitate market development and organizational capability
development there. There are many uncertainties in emerging market strategy and sales &production operations in middle & low end markets, so IT infrastructure and systems
should be developed which enable local autonomous problem solving to handle those
uncertainties. These system building may require an initiative role of mother factories in
the home country.

Conclusions
This paper discussed issues in emerging market strategy both from the aspect ofmarketing strategy and resources strategy. In the midst of the economic crisis, somescholars believe that radical innovation will break the stagnation of industries andeconomies. But there is a danger in the concept of aiming at dramatic turnaround by
revolutionary innovation to break out of a stagnant situation. This is also connected to theway of thinking that it is sufficient to compete with technology and innovation in
emerging markets. But when developing new markets, one certainly does not succeed bytechnology strength alone.
Another point is the danger of thinking that income levels are low in emerging markets,
so in any case it is good to cut prices. Price reduction is important as one step todeveloping the market, but price reduction itself is not important. The important point iswhat approximate price that country’s consumers can accept for buying what things. Of
course, aiming to reduce prices without trying to understand the market is obviously
unlikely to lead to long term success.
On resource side, difference from the situation in developed countries, firms

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approaching middle class of emerging markets, will face very discontinuous situation andvery limited condition of local resources. Since the target markets have certain scale andneed newly developed external and internal resources, building up market relatedresources and organizational capabilities in local context is very critical for the success ofthe emerging market strategies. If resource strategy is not systematically considered, thestrategy will falter in the implementation process. Rather it is important to have a view toaccumulate local contextual resources in the implementation process of the strategies.
While Japanese firms have their manufacturing competences as their foundation, it isthat time when they rebuild these competences from the above mentioned two
perspectives of emerging market strategy, if they recognize these new markets will be thenext battleground of global competition and the next potential pools of business gains.

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