No-one knows Japanese business better than Ulrike Schaede from the University of California, San Diego.  Her recent interview on "Japan's Evolving Business Strategies" is most certainly worth a read. Here are some of the key points:

Japan is not a country with just large, sluggish, bureaucratic corporate conglomerates.  There is a strong new dynamic as its companies slowly throw off the old and embrace the new.  In fact, it is more similar than many imagine to the US with its old companies like Kodak, Chrysler, or Sears, and new ones such as Apple and Google, and ones like IBM which totally reinvented itself.  

From the 1950s to the 1980s, Japan was in economic catchup mode -- importing raw materials and new technologies, transforming them into high value-added items by exploiting a cost advantage, and exporting.  By the time that Japan had become advanced country in the 1990s, this approach no longer worked.  Japan has lost its cost advantage to other Asian countries, which also matched its quality in consumer end products.  Japan could no longer compete in blow dryers and toasters.

The first response of Japanese industry was to offshore large parts of manufacturing, beginning in the 1980s.  Today, some 20% of Japanese manufacturing is located outside Japan (for cars, it is 51%; for electronics it is over 30%).  So while Japanese companies export less from home, they still reach foreign markets and make profits which come back to head office -- like when Toyota produces a car in Kentucky, or when Bridgestone makes a tire in Thailand to sell it in India.  Japan has in fact been a leader in the globalization of production networks.

But at home the previous industrial architecture—with its emphasis on stability through business groups, main banks, cross-shareholdings, and exclusive subcontractor tie-ups— thwarted change.  In the old days, what it took to win was size.  This is how companies like Hitachi or Panasonic ended up with several hundred subsidiaries, many in unrelated businesses.

Today, what it takes to win is specialization and excellence in a few clearly defined core strengths, to build a competitive advantage over global competitors. And after decades of economic stagnation, many Japanese corporations are redefining their goals and core business strategies.  They are shifting from the "Old Japan," predicated on stability, even in the face of low performance, and the "New Japan," which pursues competitiveness based on flexibility and fast maneuvering.  

These companies have embarked on a journey to “choose and focus”, meaning to choose a limited number of businesses to operate in (and exit the others) and have a clear plan for how to compete globally in these businesses by focusing resources.  But choose and focus is a long slow process in Japan's strong-culture, change-resistant organizations.  It is also important to keep positive aspects of old Japan such as loyalty to the organization and attention to detail, which translate into an ability to produce very complicated products at consistently high quality.  

In addition to old companies changing and adapting, many new Japan companies occupy the sweet spot in the global supply chain, namely producers of upstream (input) materials, fine chemicals, and production equipment that feed into end products we value so much, namely electronic gadgets that are assembled in Taiwan, South Korea, and China.

What is mostly exported from Japan now are highly innovative, highly advanced parts and materials that feed into the making of electronics and cars. For example, Japanese companies combine to a 70% world market share in fine chemicals for electronics, and more than 60% of the machinery needed to make electronics parts such as LCDs. Japanese companies compete in the specialty steel markets, and they hold a 65%+ market share in carbon fiber (now used to make the Boeing Dreamliner, but soon probably also to be found in cars).

Surely the recent Olympus scandal is evidence that Old Japan is still alive and well?  Even here, corporate governance is changing.  As of 1989, some 70% of the shares listed on the Tokyo Stock Exchange were in the hands of domestic corporations, banks, and life insurers. The majority of these were “cross held,” meaning they were based on business ties and geared toward stability.

Corporate governance—monitoring managers—was done informally or through the main bank, and usually did not really happen unless a company got itself into deep trouble. There was very little pressure on companies that were inefficient but stable.

For a variety of reasons, these holdings have unwound. Now, foreigners hold about 27%, and a new category of “trust banks” hold 18%.  Both of these investor groups invest more in companies with higher return on investment, and managers now face strong pressures to show results. Better access to corporate information through more stringent disclosure rules, such as obligatory consolidated accounting, have also empowered individual investors. And there have been some reforms of the governance system itself, such as rules on outside directors.

So Japan is changing, according to Ulrike Schaede.  The question is how quickly and how much.


References:

"Japan's Evolving Business Strategies", Q&A with Ulrike Schaede,
University of California, San Diego
http://m.nbr.org/Kgb1p5