助成Institute forInternational Policy Studies
・Tokyo・IIPS International Conference“Reidentifying Japan for the 21st Century”
Tokyo, October 27-28, 2004

“Japan’s Manufacturing Strategy for the 21st Century”
ByProf. Takahiro Fujimoto
Professor
Faculty of Economic
University of Tokyo

Japan’s Manufacturing Strategy for the 21st Century
Professor Takahiro Fujimoto
So far as the assessment of the manufacturing industry is concerned, analyses about the Japanese
economy in the past decades took a weaving course through a repetition of overreactions.
Overconfidence during the bubble economy period and absence of self-confidence in the 1990s
derive from the same root. Assessment tended to be confused due to lack of consistent framework of
their “field-based strategy” founded on real situations in the manufacturing field (GENBA). It goes
without saying that excessive pessimism does not bring forth a constructive prescription. In short,macro- and micro- analyses of the Japanese economy tended to be totally divided throughout the1990s.
As a result, economic and industrial diagnoses have become tangled with regard to at least threepoints. The first point is the intermixing of “competition-driven industry” (in particular,manufacturers who continued to build operational capability) with “competition deficient industry”(many in regulated industry/bid-rigging industries which became targets of the structural reform, orKOZO KAIKAKU). Biased media coverage and professional analyses on the former in good times
and on the latter in bad times resulted in exaggeration of actual ups and downs of Japan’s industrial
competitiveness. The fact that the former remained generally stable in terms of competitiveness inthe field has been discounted.
The second point is the “obsolete industrial classification” disregarding differences in productfeatures. The real competence of Japanese manufacturers tended to be divided between thosemanufacturing “integral” products and those manufacturing “modular” products in terms ofarchitecture (design concept). However, such minute analysis of product features was generally
insufficient; discussions were mostly bound by the established industrial classification. We need toreconsider the established industrial classification, and re-establish an industrial theory by looking
directly at the reality of product-process architecture in the manufacturing sites (GENBA) without
institutional prejudice. In this context I put forward the “architecture-based industrial analysis”
which tries to integrate theories of engineering, economics and business studies.
The third point is the frequently observed “intermixing of financial and competitiveperformance” The Japanese manufacturing industry in the 1990s was characterized by the wide gap
between profitability and productive performance. The manufacturing field in many sectors
continued to build operational capability assiduously, still leading the world in terms of productivity,
defect rates, development lead time, and so on. However, companies’ profitability was, in manycases, stagnant due to the strong yen, the recession, and strategic blunders of corporate headquarters.
Many short-circuit arguments not based on data were spotted by overlooking this fact, concludingthat they must have lost competitiveness simply because their profitability is bad.

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The basic strategic prescription of all time is the “dual strategy” – objectively understanding
one’s own strengths and weaknesses, exploiting and improving the strengths aimed at bringing out
results (e.g., profit), and either reinforcing or avoiding the weakness. There were surprisingly many
Japanese companies that did not have a clear idea of these basics, however. In order to develop a
clear-cut “dual strategy,” you must directly look at the history of the company, identify thecompany’s unique “organizational capability” generated therefrom, and, for the time being, select“strong products” which “fit” this organizational capability. As a criterion for such product selection,
I consider that inclusion of “architecture” which can be obtained through observation of the field(GENBA) or a viewpoint of design concept is effective. In the longer term, company efforts may berequired to convert even ill-fitting products into its sphere of strengths either by acquiring neworganizational capability or changing the architecture of the product.
If we continue to adhere to the existing industrial classification which is institutionally framed
by industry associations and regulatory authorities, we may have difficulty devising an effective
management strategy or industry policy. Going back to the actual field of manufacturing once, andre-looking at the actual product architecture and manufacturing capability without institutional
prejudice would be the first step towards approaching more effective strategies and industrialpolicies. This process can be considered an attempt to infuse an engineering concept of architecture
into social science fields of economics and business administration. My fundamental belief is thatany learning concerned with manufacturing should be based on a “fusion of natural and socialscience.” In this direction, I have been conducting classes at the University of Tokyo in Technologyand Operations Management, offering a graduate course focused on field-based researches, andfurthermore, trying out “The University of Tokyo Manufacturing Management Research Center” asan opportunity of industry-academy-government partnership.
I consider field-based strategy to be an appropriate framework for Japanese manufacturers whocontinued to compete by using tactics from school athletic meets, which start from reinforcing theoperational capability. A firm’s strategy shoulders the history of each company. It is certainly
important to learn the American way of “profit-first,” objective-driven, and rational strategic theory.
However, as it is a strategic theory based on the history of American companies, simply shadowing it
may not help Japanese firms catch up with strategic capability of seasoned US blue-chip firms evenafter many years of efforts. We need to take into consideration a strategic theory based on the“school athletic meets” history which Japanese companies had shouldered in the last half of the 20thcentury. And that is what the field-based strategy is about.
The basics of this framework are to focus on the field concept of “design information,” out of
which “organizational capability of manufacturing” and the concept of “product-processarchitecture” are derived. To begin with, I believe that we should ascertain the invisible flow of“design information” rather than the flow of materials when we analyze the mechanism of2

production and development of a company. A company with effective “organizational capability ofmanufacturing” – for instance, Toyota – is after all a company who has outperformed its competitors
in terms of smooth transfer of design information from the stage of development, production,purchasing, distribution, and to the customers.
Each operational unit making adjustments closely and thereby achieving this goal througheffective teamwork – I call it “integrated manufacturing.” The Toyota method is a typical example ofit. It does not apply only to Toyota as many more companies equipped with such organizational
capability exist in post-war Japan compared with other countries. Behind the scene lies a postwar
history of the Japanese manufacturing industry, which continued over a long period of time to growby valuing, securing and reinforcing labor, production equipment, and subcontractors which werechronically in short supply. Broadly speaking, history nurtures “organizational capability” in eachcountry.
Products that are compatible with “integrated manufacturing” are, in most cases, productsdesigned and manufactured based on “integral” architecture. They are the products whose function
and performance cannot be properly realized unless parts and production processes are specificallydesigned, mutually adjusted, and optimized for each product design. Typical examples of productswith integral architecture include passenger cars, luxury motorbikes, light and compact homeelectronics products, gastric camera, precision machines, certain specialty steel, functional chemicalproducts, game software, and animation films, which exist in many categories beyond the current
industrial classification. Many of the Japanese products with strong international competitivenessseem to fall into these categories.
As explained above, my concept of the “architecture-based comparative advantage” is to attach
appropriate importance on history and foresee products whose production locations are likely toremain in Japan by focusing, as a major clue, on the fit between organizational capability andproduct-process architecture. I expect that an integrated framework of engineering and social science
will make the conventional comparative advantage theory of international trade more convincing. Asa matter of fact, the above-mentioned Manufacturing Management Research Center is now preparing
for actual measurement of architecture of various products in cooperation with the Ministry ofEconomy, Trade and Industry and other institutions.
The “field-based strategy” as I explained above has at least two pointers. One is that we need tomaintain the “school athletic meet” strength of Japanese companies which is focused on reinforcing
the operational competence of their manufacturing sites through capability-building competition thatbuilds ability. In this regard Toyota heads the list as is expected; we have so much to learn from thatcompany. However, there seems to be numerous failure examples due to superficial introduction ofToyota Production System, which is eventually followed by fadeaway after discovering that results
are not forthcoming. Learning from this company does not mean literally and superficially3introducing the Toyota method itself. The organizational capability of Toyota as a company
encompasses not only the above mentioned “organizational capability of day-to-day manufacturing,”
but also “capability of continuous improvement” to change daily and “evolutionary learningcapability” to make more fundamental progress in the mechanism as a whole. All such capabilities
are multilayered and unless the overall mechanism, including the evolutionary capability, is learnt
comprehensively, it will not be rooted in its entirety. The final deciding factor will be whether or not
the corporate culture of tenacious follow-ups and company-wide diffusion of new organizationalroutines will take root. In addition, the Toyota method as we see it is materialization in a particular
product called the automobile, and the methods will naturally vary in different products. Superficialtransplant of the whole mechanism will lead to a failure in this context as well. In brief, companies
need to learn from this company with broader and deeper perspectives.
The second pointer is that even if the field has an integrated manufacturing capability, producing
integral products which are highly competitive, the company may not necessarily be profitable. On
the contrary, we must recognize the fact that in Japan many manufacturers have had strong
production and development sites but they were not proportionately profitable as a company. We
should be careful not to mix up the competitiveness of the manufacturing sites and profitability ofthe company. Hence, an additional organizational capability of strategy formulation that bridges thehigh level of manufacturing performance and profitability needs to be strengthened.
For instance, although Nissan had suffered from low profitability until recent years, thecompany was among the top group internationally in terms of productivity of plant and development.
It was a typical example of “strong factory, weak headquarters.” The company’s so-called “V-shapedrecovery” is a result of having acquired a good balance as a “strong plant, strong headquarters” inpartnership with Renault and under the direction of President Carlos Ghosn who should be called“Mr. Headquarters Management.”
To the best of my knowledge, Toyota Motor Corporation has achieved an approximate 1
trillion-yen cost reduction in the space of 10 years after having initiated a full-scale rationalization ofproduct design since 1993. However, tremendous efforts of the “backroom manufacturing staff” got
the least attention in those days due to a delay in reflection of such efforts on profit due to the strong
yen and other factors. Yet again, here is an example of the intermixing of profitability withcompetitiveness. Such critical oversight occurs if you judge a firm’s actual capability andcompetitiveness solely based on its profitability. At the same time, a reverse overvaluation may occur.
For instance, if the above situation is true, a simple question should arise at the time that aone-trillion yen profit was recorded: “why is the company making only one trillion yen profit when
it has succeeded in achieving one trillion yen cost reduction solely through improvement in design?”
However, such voice was not heard among the mass media. Even Toyota was not making a level ofprofit in proportion to its extraordinary productive performance.

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As seen above, a company’s overall strength should be evaluated in a balanced manner based on
measurements of profitability as determined by the capital market, market performance (such asprice) as evaluated directly by customers, and productive performance (productivity, etc.) thatreflects actual capability of the plant and development team.
From the standpoint of field-based strategic theory focused on design information, part of thereason for falling into the “strong factory, weak headquarters” situation is quite often poor
positioning strategy regarding product-process architecture. The company is highly competitive as it
trains its field and makes integral products, but its customers are also implementing integral
architecture businesses, and therefore demand customized (product-specific) design, which
frequently results in limited production volume, limited negotiation power, and an unprofitablebusiness on the former side. The positioning in which a company practices integral architecture andits customers also practice integral architecture epitomizes “Japan as the major power of integralarchitecture.” Ironically, as too many companies are good at implementing integral architecture,
Japan as a whole is excessively integral architecture-oriented. Their manufacturing operations areshaped up and strong, but they are not as profitable as they deserve.
If we look at companies currently making exceptionally high profits in Japan, many are
positioned in the borderline intercrossing area of the “integral architecture” and “modulararchitecture.” Integral architecture-based products are sold to companies manufacturing modulararchitecture-based products, or vise versa. Companies including Shimano, Inc., Mabuchi Motors Co.,
Ltd., KEYENCE Corporation, Rohm Co., Ltd., for example, are considered to have tactfully
positioned themselves in such borderline area, thereby raising profitability.
This may sound rather paradoxical, but in short, based on the historic premise that there aremany companies that have established “integrated” organizational capability in Japan, each one of
the Japanese companies tends to have strong “integral” products. However, if all companies start
introducing integral architecture, they become more demanding to each other. Although theorganizational capability may be reinforced, costs in designing complex integral products and costfor dealing with complex customer interface will restrain profitability. Hence, they tend to become a“competitive but unprofitable company.”
Under such circumstances, what is now required of Japan is a “modular business architect” whocuts a grid lock of highly intertwined integral businesses into manageable modules, patches themup again, and builds a more profitable business model as a whole. If I may call such architect ofmodular business a “producer,” and coordinator of integral artifacts a “director,” we can say that
although Japan has a great number of efficient directors, it has relatively fewer efficient producers.
Paradoxical as this may sound, I would like to say in encouragement: “Come out all producers inJapan and improve profitability of the integral businesses of Japan.”As you can see from the above, manufacturing companies in Japan on the whole need a sturdy

5strategy which can link its operational competitiveness with profitability. I believe, however, that it
does not mean dependence solely on the strategic theories of Western origins. A strategy carries
history on its shoulders. If Japanese companies have actually come thus far by reinforcing theorganizational capability of their manufacturing operations, we should not swim against the tide,but value the “strategy for architectural positioning” which tries to capture the reality of theirmanufacturing sites. And it means infusing the engineering idea of design and architecture into thefield of social science which encompasses strategic theory and economics.
These are the reasons for my belief that manufacturing education based on the integration ofsocial and natural science is needed in college education, corporate education and communityeducation. We also are shifting our emphasis in education towards that direction. It is after engineers
with understanding of strategic approaches and non-engineers who are able to have substantial
discussion with engineers start working in close partnership like two wheels of a car throughout theentire hierarchy of the corporate organization that many of the Japanese companies will realize“strong plant, strong headquarters” in the 21st century.

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