Book of the Week: The Mind of the Strategist – The Art of Japanese Business

In this weeks edition of the “Book of the Week” I would like to present you “The Mind of the Strategist – The Art of Japanese Business” by Kenichi Ohmae published in 1982 at McGraw-Hill, 304 pages

Take-Aways

  • The purpose of business strategy is to cause events to favor your strengths.
  • Identify your strengths and build on them.
  • Every industry has a key success factor — know yours.
  • Penetrate appearances.
  • Address the problem, not the symptoms.
  • Know what separates winners from losers in your industry and your market.
  • Analyze potential improvements in terms of cost, benefit and strategic advantage.
  • Keep track of customer and market trends — even though customers may not know what they want.
  • Know the difference between a “business” and a “product.”
  • Think like an entrepreneur, but think.

Relevance
What You Will Learn

  1. How Japanese business people think about strategy
  2. How you should conceptualize and execute your strategy.

Recommendation
This book, first published in Japan in 1975, is a somewhat dated classic, since the first edition appeared at the high water mark of Japanese competitiveness. Japan’s economic doldrums since 1990 probably ensure that few business people will emulate it now. In a way, the fact that the bloom is off Japan’s chrysanthemum makes this book more useful and relevant than it was a quarter-century ago. Now that people aren’t starry-eyed about Japan, it’s possible to sort through the recommendations, take them with a grain of salt and find their deeper usefulness. The author is a famous McKinsey consultant, so the book is packed with charts and jargon. Ignore the jargon, the obsolete observations about how U.S. companies organize themselves and the anachronisms about Soviet-style central planning, now a relic. Focus instead on the examples and asides. I also note that this is a must-read for anyone working in Japan or competing against Japanese companies, if only because so many Japanese managers give it to their new hires as part of their training programs.

Abstract
The Point of Beginning
Japanese companies have astounded the world with their competitive drive and success, so everyone wonders what their secret is. Surely such remarkable achievement must derive from some equally remarkable formula or insight. How paradoxical it is that these worldbeating firms have no formal processes of strategic planning, lean or nonexistent planning staffs and rudimentary technologies. With all these deficiencies, they still manage to penetrate new markets and establish dominance in a wide range of industries.

In fact, although Japanese companies don’t usually have an army of strategic planners, they do have some remarkable strategic insights. Usually those insights reside in one person, often the person who founded the company, perhaps a man with scant formal education. Instead of a thorough grounding in analytical methodologies, this man usually has an intuitive understanding of how the market works and where the company must position itself. These insights are creative, usually unorthodox and often radically new.

This kind of strategic visionary leader is becoming obsolete. In both the East and the West, the pressure of organization and institution overwhelms the individual, pushing aside the prophetic visionary, exalting the number-crunching rationalist. U.S. corporations, in fact, look like the Soviet economy. They’re full of central planners who attempt to control every detail of policy, procedure, resource allocation, risk and return. This sort of thing does not make for strategic success. Strategy is always and everywhere the product of an attitude and a way of thinking, not of an analysis or a set of facts. Great strategists are like great artists.

Recognize that strategy begins with analysis. The strategist analyzes a set of facts, in the sense of taking the set apart, and then reassembling it in an order that makes sound strategic sense. The purpose of strategy is to maximize one’s advantage. On a battlefield, this means picking the right place to fight, the right time to attack, the right time to retreat — weighing and re-assessing as circumstances change, but always with maximum advantage in mind. Strategy is intuitive, but it is also analytical; it is analytical, but also intuitive.

Main Issue
The first step in strategy is to identify the one issue that matters most — the critical issue. To do this, you must frame the question properly. Suppose a company is incurring high costs for overtime work. What is the correct question? Could it be, “How can we reduce overtime?” or maybe, “Do we have enough staff?” or perhaps, “Does our staff have the necessary skills to do the work in a timely manner?” Each question would elicit a different response. Clearly, though, it is necessary to answer the third question before moving to the second, and then the first.

Unfortunately, many business people would simply assume away the two most critical questions and focus on the first. It takes a certain disciplined creativity to question what everyone else takes for granted. Some people can intuit the critical issue, but they are scarce. Fortunately, a disciplined method can help anyone arrive at a workable definition of the critical issue. This methodology can apply to a broad spectrum of business issues:

  • Diagram the issue or question (e.g., Can we lower costs on this product?).
  • Identify the issue components (e.g., Fixed costs, variable costs, design specs).
  • Question each component (e.g., Can we change the design specs to use cheaper materials?). Look at the advantages and disadvantages of changing that component.
  • Offer a specific plan of action for each issue component.

Four Strategic Paths
Strategy is about achieving competitive advantage. If there were no competitors, there would be no strategy. No one would need it. This suggests that the most important strategic issue is competitiveness. A company can tolerate certain internal deficiencies, but firms cannot survive competitive inadequacy. Allowing the company to deteriorate vis a vis its competitors means putting the company’s fate in the hands of the competition. People think differently when they face competitive survival. This changes their focus. They recognize that the best is the enemy of the good, and possibly the friend of the competition. Good enough is good enough. There’s no point looking for the perfect strategy or the perfect competitive situation. The point is to gain an advantage over the competition at a reasonable cost. Do that often enough and you will win. This can be accomplished four ways:

  1. Re-allocate resources.
  2. Focus on one’s relative strength.
  3. Redefine the key issue of the business by a bold stroke.
  4. Be free.

Now, let’s look at each path separately:

Re-allocate Resources
As noted earlier, every industry has one or two factors that determine success. No matter how complicated the industry may seem, at its heart it is simple. Banking, for example, is about collecting money at a low cost and lending it at a higher return. The critical factors in an industry can be identified several ways. One is to analyze the industry, looking at each segment, defining how competitors in each area behave and drawing some overall conclusions about the success factors. Another is to examine the conduct of winners and losers to define the behavior, advantages or resources that made the difference. Once you have identified the key factor for success (KFS) in your industry, re-deploy your resources to focus on building strength in that key factor. If it is service, focus your resources on developing outstanding service. If product design is a key factor, focus on that.

Relative Strength
Examine your product and identify areas where you can focus on achieving a relative advantage. This may mean literally taking your product apart, taking your competitor’s product apart and comparing the two. For ex ample, Fuji and Sakura competed in the market for photographic film. Their quality was comparable, but Fuji had an advantage in its name, which suggested the sharp colors and contrasts of Japan’s scenic, holy mountain. Sakura means “cherry blossom,” and connotes a vague, hazy sort of beauty. Sakura analyzed the market to find out whether it could reverse its loss of market share to Fuji, and found that consumers were becoming more concerned about cost and often tried to squeeze an extra shot or two onto a roll of 20 exposure film. Sakura decided to introduce a 24 exposure film at the same price as Fuji’s 20 exposure film. Strategically, this made sense. Sakura could not win the image contest — Fuji had relative strength there. But Sakura could develop relative strength on the basis of cost. The corporate strategist who relies on relative strength should think through competitors’ likely reactions to each move, and prepare to defend against those reactions.

The Bold Stroke
Simply put, this is about asking “Why” to test every assumption that is ordinarily taken for orthodox wisdom in your industry. One of the best practitioners of this method is Taiichi Ohno of Toyota. He asked why car companies had to keep costly-tofinance inventory on hand, and wound up inventing “just-in-time” material management practices. Keep asking why. Great breakthroughs come from answering this question.

Be Free
Specifically, take advantage of “strategic degrees of freedom.” Having identified the key factors for success, precisely identify what courses of action may be open. In the case of an auto company, perhaps safety is a KFS. An automaker can do many things to improve safety, but can’t do all of them at once. Meanwhile, there are some things that might improve safety but that the company simply cannot do. Strategic planning and strategic action should proceed in the areas where the company is indeed free to move.

Strategic Triangle
Using the methodology above, you will avoid some of the great errors of strategy, including:

  1. Tunnel vision — You must keep alternatives in view at all times.
  2. All or nothing — In fact, half a loaf, even a quarter, is preferable to none.

Think of strategy as a triangle with three sides: company, customer and competition. Movement by any of these elements affects the market and may make it necessary to change the strategy. However, strategic change can be vexingly difficult. Here are some examples:

Company-based strategy
One Japanese air conditioner company with an outstanding reputation for engineering decided to cope with a competitive threat by developing a line of high-quality, high-priced home air conditioners. The product went to market and flopped. It was well-engineered, but so heavy that distributors were not willing to carry and install it. There’s an old saying to the effect that when the only tool you have is a hammer, every problem looks like a nail. Beware. Strategic planning must be broad and comprehensive; it must address not only immediate possibilities but “what if” consequences. Companies that opt to outsource some operations make a clear decision, a commitment, usually based on costs, to change what their company does and to focus their resources on what they do best.

Customer-based strategy
Generally, a company should identify one subset or segment of customers and focus on them, instead of trying to satisfy the entire market. This means knowing your customer segment very well and understanding why you might have a relative strength with this group. Japanese car companies adopted this type of strategy in the 1970s, when they introduced fuel-efficient compact cars to the segment of the U.S. market that was the most receptive to them.

Competitor-based strategy
Seek areas where the competitive situation allows you to develop a clear edge. Sony had a great reputation for quality in the U.S., but its reputation in Japan was comparable to its competitors’ reputations. Sony invested heavily in advertising, PR and marketing, and soon commanded a price premium over its Japanese competitors because it had built relative superiority on the image front.

Business strategy concerns how best to operate in a given economic environment; it would be foolish to ignore the implications of the overall economy. Low growth, for example, can exacerbate competitive pressures. Meanwhile, advances in technology or changes in industry structure may well derail strategies based on the assumptions of the past. Be aware, use foresight and never stop asking “why?” Remember that your purpose in developing a strategy is to gain competitive advantage. Many small steps can add up to one very long lead over the competition.

About the Author
Kenichi Ohmae, a director at McKinsey & Company and co-leader of its strategy practice, has written several best-selling books on strategy and several scientific papers on nuclear engineering.


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