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Industrial Structural Reform and the Rejuvenation of Japanese Companies: 

Industrial Structural Reform and the Rejuvenation of Japanese Companies 　March 1999 Ministry of International Trade and Industry International Trade and Industry

Approaches: 

Conventional approach of IT projects New approach Approaches Analysis Recommendations Practice - Use of existing classification of industries - Technology and commodity oriented (i.e. what can be done with IT?) - Qualitative - Technological and business orientation - Aimed at corporate IT officers and those planning new business projects - Educative - Aimed at emerging industries and businesses - Introduction of technology - Drive toward overall standardization of technologies - Inter-industry crossover - Management oriented (i.e. How can IT be used?) - Quantitative - Grounded in management theory - Directed at CEOs, CIOs and other top executives - Designed to assist implementation - Directed at key industries and leading firms (studies focus on automotive, electrical equipment, healthcare, finance, logistics and retail sectors) - Commercial test bedding - Early successes

Main gist of recommendations: 

Japanese corporate and economic recovery 1. Essentials of IT Main gist of recommendations 2. Industrial structural reform (IPR) 3. Growth opportunities created through evolution 4. Approach to realizing growth

Slide4: 

1. Essentials of IT Japanese corporate and economic recovery 2. Industrial structural reform (IPR) 3. Growth opportunities created through evolution 4. Approach to realizing growth

Breakdown of labor costs by type of work (%) : 

Source: MITI, Global Forces. Direct hands-on work 51 46 36 12 9 30 42 55 19 US Germany India Analytic work Interpersonal negotiating work - Data retrieval - Coordination - Supervision of progress Breakdown of labor costs by type of work (%)

IT workers by industry in the US (%): 

Source: MITI, Global Forces. Agriculture, forestry and fishery Catering Construction Food Other manufacturing industries Transport Industry goods Transport equipment Printing Business services Mining Healthcare Other services Wholesale General retail Government Education Finance Department stores Auto dealers Telecoms and utilities Engineering and general business ＜ 30% 30～40% 40～50% ＞ 50% IT workers by industry in the US (%)

Time required for communication (minutes): 

Source: MITI, Global Forces. Data retrieval (e.g. accessing information externally) 25 10 1 Phone Web sites Web site agents Coordination (e.g. taking and placing orders) 3.7 1.6 0.3 E-mail EDI Supervision of progress (e.g. investment portfolio management) Newspapers Web sites Web sites for specific individuals 1/25 1/12 1/10 Time required for communication (minutes) Letters

Changes resulting from increased communication: 

Source: MITI, Global Forces. Specialization Communication costs Segmentation Communication costs Selectivity Communication costs Optimum balance Industries & companies Organizations Clients Changes resulting from increased communication

Slide9: 

- Industrial structural reform (IPR) is achieved through a three-step process of division/expansion, recompilation and reconstruction. - In this process, a new type of business based on “value packagers” and “customer agents” emerges. 1. Essentials of IT Japanese corporate and economic recovery 2. Industrial structural reform (IPR) 3. Growth opportunities created through evolution 4. Approach to realizing growth

Industrial structure as industry process: the auto industry: 

Flow of activities creating added value for client Raw materials Sub-components Toyota Supply of automobiles Ancillary goods and services Resale Servicing and maintenance Insurance Auto loans Spread of keiretsu … … … Industrial structure as industry process: the auto industry Spread of value added for client

Value-adding structure of industry processes*: 

(\10,000, per user) Source: Financial statements of automakers and MITI’s analysis. 5.6 1.0 42.5 77.8 39.1 37.0 6.7 25.9 10% 0 32.9 11.3 196.0 21.0 11.0 20% 25% 8% 37% Materials Total Trading company Tertiary parts maker Trading company Secondary parts maker Primary parts maker Assembly maker Dealer Price of new car paid by consumer Auto insurance Auto loan Servicing & maintenance Car supplies Used car After-sales service providers Dealers Assembly makers Parts makers Materials makers Value added in “provision” of car Value added in “ancillary goods and services” Premises - Average price: \1.96 million - Figures for auto insurance and loans based on gross interest. - Figures for insurance and maintenance calculated assuming that a car’s lifecycle is 5 years. 1.2 2.5 3.5 3.6 6.8 12.9 19.5 21 3.6 1.7 6.5 3.1 5.4 311.0 Value-adding structure of industry processes*

Process of industrial structural reform (IPR): 

Process of industrial structural reform (IPR) Division and expansion Recompilation Reconstruction - Division: Emergence of specialized firms and value slicers. - Expansion: Provision of support ranging from customer’s purchase of goods and services to end of use (consumer industries) and permeation of customer services (infrastructure industries) - Emergence of services combining existing “raw” goods and services. * Value packagers: Providers of services combining various goods and services. * Customer agents: Customer service agents offering specialist skills and knowledge. - Reconstruction of number of activities creating added value based around value packagers and customer agents. Parts Assembly Distribution Use Value packagers Customer agents Division Process repeated Specialized firms Value slicer Expansion Customer service user support

Division and expansion: liberalization of the architecture of goods: 

Division and expansion: liberalization of the architecture of goods Future developments Closed Open Most industries are becoming more open due to the pursuit of economies of scale and the division of labor. High level of interdependence between fields and processes. Value created through optimization. Parts and processes highly independent of one another. Value created through the combination of modules with standardized interfaces. Easy for product assembly makers to continue to control the flow of activities creating added value. Value slicers emerge at each step of the flow of activities creating added value, reducing the domination of assembly makers. Traditional financial services Jumbo jet Large-scale machine tools (elevators) Automobiles (sedan) Color TVs PCs Software Advanced financial services Autos

Potential for unbundling in the auto industry: 

Potential for unbundling in the auto industry Present to short/medium term Future (long-term) - Autos are a prime example of “closed” goods. Degree of openness of industrial structure L M - Openness is growing due to increasing use of electronics and modular construction. - Considerable attention is lavished on cars, and final fine tuning by assembly makers plays an important role. - Varies depending on customer segment. Perception of cars as everyday items L~H M~H - Growth in commodification of automobiles - Increased focus on functionality The degree of opening up remains limited. Increased openness in the future is unavoidable.

Division of industry processes: the auto industry: 

Division of industry processes: the auto industry Flow of activities creating added value for client Raw materials Sub-components Toyota Supply of automobiles Ancillary goods and services Resale Servicing and maintenance Insurance Auto loans Spread of keiretsu … … … Spread of value added for client

Expansion of industrial processes: From supplying products to offering lifecycle support : 

20 16 57 21 Provision of autos Auto insurance Auto loans Servicing and maintenance Resale Gas stations Parking Car navigation systems Auto supplies Entertainment Information Travel Leisure Provision of ancillary services Driving support Car life support Spread of value added Of which value added by OEM makers is 5 α α Expansion of industrial processes: From supplying products to offering lifecycle support α (\ trillion)

Recompilation: the emergence of new types of business in the auto industry: 

Recompilation: the emergence of new types of business in the auto industry Cars Driving support Car life support Parts & materials Particular goods OEM Flow of activities creating added value for customer Parts Auto insurance Card loans Servicing teams Traffic information Parking Gasoline Entertainment information Travel information Dealers Service stations Point terminals ・ ・ ・ ・ ・ ・ Wireless communication (car navigation systems) Gasoline Point terminals Stations ・ ・ ・ ・ ・ ・ Customer Distribution Cars Loans Insurance Servicing Resale Spread of value added for client Provision of auto-related services Ancillary services Total car life support Total driving support Customer agents Combined goods (packaging) Purchase of goods and services (support) Purchase of goods and services

Reconstruction: the emergence of new industry processes in the auto industry: 

Reconstruction: the emergence of new industry processes in the auto industry Cars Parts Auto insurance Card loans Servicing teams Traffic information Parking Gasoline Entertainment information Travel information Dealers Service stations Point terminals ・ ・ ・ ・ ・ ・ Wireless communication (car navigation systems) Gasoline Point terminals Stations ・ ・ ・ ・ ・ ・ Customer Total car life support Total driving support Customer agents Driving support Car life support Cars Servicing Resale Spread of value added for client Provision of auto-related services Ancillary services Parts & materials Particular goods OEM Flow of activities creating added value for customer Distribution Purchase of goods and services Combined goods (packaging) Purchase of goods and services (support) Distribution Loans Insurance

Reconstruction of the physical distribution industry: 

Distribution Provision of services comprising logistic functions Incorporation of services to suit customer segment Service delivery Evaluation of package and components suitable for individual customers. (4) Non-logistical information management (5) Services themselves (1) Basic logistics services (asset base) (2) Logistics-related ancillary services (activity base) (3) Logistics-related information management (information base) Home delivery service offered through convenience stores - Business planning - Business risk-taking - Shipment volume forecasts - Collection of payment - Insurance, trade finance - Selection of suppliers of products, etc. - Call center business Corporate client - Tracking - Logistics EDI - Customs business - Inventory control - Inspections - Assembly and repairs - Product testing - Packaging and labeling - Issuing of slips Personal client - Car transport - Rail transport - Air transport - Marine transport - Warehouse and logistics center Forwarders - Service - Marketing - Agents Corporate agents Personal agents Diagnosis Rating Service Procurement - Receipt and placing of orders - Credit account management Examples: Car inbound logistics Global apparel logistics Reconstruction of the physical distribution industry Spread of value added for customer Customer services Physical distribution business

New types of business and growth opportunities created by IPR: 

Source of growth Economies of scale Incorporation of added value of related goods and services Creation of new added value through combination of goods and services Creation of higher value added and greater advantages of scale through optimum combination of new types of firms Growth-oriented business types Specialized firms Value slicers Solution providers Value packagers Customer agents Leaders of corporate networks Infrastructure providers (rating and information services, etc.) New types of business and growth opportunities created by IPR

Outline of new types of business: 

Definition Value provided KFS Value packager Customer agent Corporate network leader Infrastructure provider Value slicer Businesses concentrating on functions at a particular step of the industry process Offer more advanced skills due to specialization Total concentration on specialist field Greater investment than rivals in specialist field Businesses providing functions on a large scale at a particular stage of the industry process unrestricted by conventional keiretsu ties Low prices due to advantages of scale High skill level due to specialization Determine industry standards All-out pursuit of advantages of scale in a particular field Businesses that create new value by combining goods and services offered by various players to meet needs of specific customer segments Increase attractiveness to customer by creating optimum combination Provide feedback to providers of individual goods and services that enable improvements to be made Discernment of customer needs Proposal capability Businesses that procure the optimum goods and services on the market to meet the needs of individual customers More able than customers to select goods and services Make purchases on behalf of customers Good judgement Broad information network Sound understanding of needs of individual customers Businesses providing functions common to businesses that directly make up the industry process (rating, market administration and information services, etc.) Stable provision of common functions at low cost Scale Neutrality and reliability Cost competitiveness Technical capability Competitiveness in terms of speed, cost and quality based on comprehensive coverage of the industry process Overwhelming domination of particular steps of the industry process (particularly the customer interface) Exert centripetal force on companies at other steps of the industry process Leaders of a coalition of companies providing a comprehensive range of functions throughout the industry process by organizing players such as packagers and customer agents Specialized companies Outline of new types of business

Slide22: 

Japanese corporate and economic recovery 1. Essentials of IT 2. Industrial structural reform (IPR) 3. Growth opportunities created through evolution 4. Approach to realizing growth

Growth opportunities created by reform of the auto industry: 

Growth opportunities created by reform of the auto industry Main points Examples Impact on profits Realization of advantages of scale Elimination of duplicated work and functions Skipping of unnecessary functions and companies Value slicers Denso (parts) Auto By Tel (dealer) Reduction of role of parts and OEM makers Reduction of involvement of dealers in internet marketing Expansion of scope of services provided Packaging of service content to meet individual customer needs More rapid introduction of new goods Driving support, car life support Driving packages for new drivers Concurrent engineering integrating parts/OEM makers and dealers Formation of open market linking numerous sellers and buyers (consumers) Recruit’s internet market 6,900 1,900 3,900 (\100 million; annual operating profits) 1,100 Total

Reduction of costs (elimination of duplicated and unnecessary work)Denso’s joint development promotion system (DECCS): 

OEM (assembly makers) Denso Suppliers Aims: Reduction of design and development period Halving of design and pilot manufacturing assessment process Pilot manufacturing carried out only once Conversion of differently formatted CAD/CAM data*** * Denso Engineering Comb Computing System. ** Each OEM makers’ data formatted differently *** Precision not yet increased sufficiently. DECCS* Design division with 85 centers overseas Design business Denso’s suppliers O E M 3D CAD/CAM data** Under consideration Reduction of costs (elimination of duplicated and unnecessary work) Denso’s joint development promotion system (DECCS)

Ford’s virtual corporate net (VCN): Successful cost reduction and revenue growth: 

Ford’s virtual corporate net (VCN): Successful cost reduction and revenue growth Marketing Assembly Production and procurement of parts Development Team Web Site Period until start of production of new model Before: 36 months Now: 24 months Internet Europe/Asia Ford extranet Parts database Analysis of competition Parts ranking “Delivery of blue seats at 10:52am, May 15” Dealer Customer Ford Partners Parts makers can instantly determine what parts are required when. More than 50% of vehicles will be made “on demand” by the end of 1999. Period from order to delivery (in the case of a Mustang): 1996: 50 days Early 1998: 15 days Parts makers Parts makers Dealer’s PC Team Web Site 4 Blue 4 Mustang Results Sale of total car ownership service Loans Insurance Servicing contracts Planning stage

Increase of revenues (provision of car life support)Overview of integrated customer management in the auto industry: 

Sale and after-sale services * Installed at convenience stores and video rental stores as well as dealers’. Marketing Development and procurement of products Core goods Finance Auto goods and services Other related goods and services Provision of wide range of goods and services Integration of car life information on individual customers Marketing support Control customer interface in the interests of customer convenience New cars Used cars Auto supplies Servicing and safety inspections Camping goods Car rental Sheet metal Customer database Web Call center Car navigation information center Telephone, fax PC MM terminal* Merchandising database Auto insurance Loan, leasing and cards PC Telephone, fax Car navigation For dealer For customer Increase of revenues (provision of car life support) Overview of integrated customer management in the auto industry

Growth opportunities created by industrial structural reform: 

* As only quantifiable effects are included, the actual figures would be considerably larger. ** This provides the scope for service commission for customer agents, etc. (\ trillion) Main content Examples Evolutionary process Total earnings growth in 6 industries Realization of advantages of scale Elimination of duplicated work and functions Skipping of unnecessary functions and companies Back-office work in finance Elimination of overlapping inventories of makers, wholesalers and retailers Skipping of wholesaler or retailer Expansion of scope of services provided Packaging of service content to meet individual customer needs More rapid introduction of new goods Move from providing cars to offering “driving” support Money management programs for middle-aged and elderly consumers Concurrent engineering encompassing auto parts and assembly makers and dealers Formation of open market linking numerous sellers and buyers (consumers) Marketing via the internet of numerous makers’ new and used cars 4 4 4 4 4 4 4 4 4 4 4 * Growth opportunities created by industrial structural reform Division/ expansion Recompilation Reconstruction

Breakdown by industry and growth opportunity of scale of earnings growth: 

Breakdown by industry and growth opportunity of scale of earnings growth (\100 million; annual profits; 2001~2003) Source: MITI’s analysis. Autos Finance　　 Physical distribution　　　 Healthcare　　　 Electrical equipment　　　 Retail (convenience stores)　　　

Breakdown by industry of scale of earnings growth over time: 

(\100 million; annual profits) * Operating profits (ordinary profits in the case of financial institutions). ** Figures for 1995 for physical distribution and retail, 1996 for autos and electrical equipment, 1997 for finance and healthcare. Source: MITI’s analysis. Autos 19% 54% N.A. N.A. 370% 800% 102% 288% 32% 82% Finance Physical distribution Healthcare Electrical equipment Retail (convenience stores) 160% 270% At present** 2001～2003 2003～2008 Breakdown by industry of scale of earnings growth over time

Slide30: 

Impediments to IPR exist in industries, corporations and the business environment. It is necessary to quantify the impact of motivating top executives, provide illustrations of best practice, and improve the business structure for individual companies. A dramatic reduction of communication costs and development of the telecommunications infrastructure are needed to eliminate environmental obstacles to IPR. Japanese corporate and economic recovery 1. Essentials of IT 2. Industrial structural reform (IPR) 3. Growth opportunities created through evolution 4. Approach to realizing growth

Obstacles to IPR: 

Obstacles to IPR Lack of problem awareness (Why?) Divergence of opinion regarding ways of solving problems (What?) Absence of motivation and methodology to implement IPR (How?) Telecom costs too high Underdeveloped state of telecom infrastructure at the industrial level

Obstacles in individual firms and industries: 

Obstacles in individual firms and industries Why? (Why necessary?) What? (What needs to be done?) How? (How can IPR be implemented?) Cannot understand the need for IT (and the effects of investment particularly) from a management perspective … Missing link between IT and management know-how. Individual departments left to investigate the issue themselves. No sign of a comprehensive solution emerging. Concerns about numerous bottlenecks impeding implementation prevent actual steps being taken. Concerns of top executives

Approaches for overcoming obstacles to IPR: 

Approaches for overcoming obstacles to IPR Give examples of best practice (including practice in other industries) and emphasize benefits. Offer comprehensive solutions combining best practices. Describe actual steps toward implementation taken by successful companies. Propose pilot projects which enable risks to be easily controlled. “Oh, that’s why!” “I see, then we’ll have to do that!” “Right, we’ll have start off by doing that!” Why? (Why necessary?) What? (What needs to be done?) How? (How can IPR be implemented?) Cannot understand the need for IT (and the effects of investment particularly) from a management perspective … Missing link between IT and management know-how. Individual departments left to investigate the issue themselves. No sign of a comprehensive solution emerging. Concerns about numerous bottlenecks impeding implementation prevent actual steps being taken. Raise problem awareness Lead way to a solution Provide motivation to implement Concerns of top executives Solution - Propose unique IT approaches from a management perspective… Propose as a means of improving management and business performance rather than simply proposing the introduction of information systems. - Quantification of effects on costs… IT and KPI* improvement mechanism.

Top-down IPR at firms overseas: Ford: 

* Key Performance Index Mr. トロットマン, CEO Mr. ナッサー, COO IT division Vehicle center(3) Top executives led IT-based reform of business (Ford 2000): - In 1994 when profits were at their height, the decision was taken to introduce a global earnings control system encompassing technology, production and sales operations. - The swift decision taken on the basis of KPI* enabled Ford to halt the decline in profits, and record profits were again posted in 1997. - Concentration and specialization of internal and external resources through outsourcing (e.g. all parts logistics outsourced to ライダー and I2 technologies outsourced to IBM) and spinoffs (e.g. ビステオン). Global consolidation at business level achieved through IT: - Formation of VC structure accelerated by introduction of system connecting technology, production and sales operations in each VC. - Fragmentation of functions prevented by introduction of integrated inter-VC database. - Introduction of open, cutting-edge technology through use of standard systems and external experts. Top-down IPR at firms overseas: Ford