STRATEGIES FOR U. S. FIRMS TO BETTER
PENETRATE JAPANESE MARKETS

Nobuaki Namiki
School of Business & Public Administration

California State University
Sacramento, California

There has been much heated debate over Japanese trade barriers mainly
because of huge and growing trade deficits with Japan. Until the late 1970's,
many U.S. government officials, businessmen and academics have blamed tariff
and non-tariff barriers imposed by the Japanese government. After intense
negotiation with Japan, the U.S. government has been successful in reducing or
eliminating legal barriers for many manufacturing goods and financial services.
Also, in addition to the trade liberalization programs, the Japanese government
has initiated capital liberalization programs so foreign companies can acquire
Japanese companies to gain ready access to Japanese markets.

In spite of these programs and recent drastic appreciation of Japanese cur-
rency against the U.S. dollar, except for a few specific products, U.S. trade
deficits with Japan have continued to increase. Quite simply, many Ameri-
can companies still have not succeeded in penetrating the Japanese markets.
Two explanations are offered for this phenomenon. First, some argue that
the Japanese government, through various forms of assistance to private busi-
ness and subtle legal restrictions, helps prevent foreign companies from entering
Japanese markets [10]. Additionally, the unique Japanese culture is itself consid-
ered a non-tariff barrier against foreign companies [15]. For example, Japanese
value long-term, personal, trusting business relationships, which are not eas-
ily established with American businessmen because of language barriers and
cultural differences.

However, another barrier, not so well known but much more formidable
than those mentioned above, also exists. This barrier is related to the unique
economic environment-or more specifically, the market structure-in Japan. A
distinctive feature of Japanese markets is the grouping of companies or interfirm
relationships. Unlike the competitive market structures of the United States and
other countries, powerful groups of companies in Japan, referred to as keiretsu
or industrial groups, control nearly half of the Japanese economy. American
companies without knowledge of such barriers and means to deal with them
have considerable difficulties in entering Japanese markets. This article will
explain why and how market-structure based barriers work against American
---------------

Journal of Business Strategies, Volume 5, Number 1 (Spring 1988)

1



companies attempting to penetrate the Japanese market, and suggest strategies
for U.S. companies in overcoming these barriers.

The Market~StructureBased Barriers

The essence of market-structured based barriers is related to the complex
relationships established between companies within industrial groups, and be-
tween groups of companies. The interfirm relationships raise trade barriers
by influencing Japanese companies' decision making processes, thereby binding
their behavior patterns. As a consequence, their behavior or action patterns
in conducting business or in competing in the markets are substantially dif-
ferent from those of American companies. There are basically three types of
relationships: (1) relationships between a parts supplier, a manufacturer, and
a distributor, with a single product line; (2) cooperative relationships between
companies within a group; and (3) competition between groups of companies, or
industrial groups. The following sections will describe the major characteristics
of industrial groups and explain each type of interfirm relationship.

Industrial Groups
Until the end of the World War II, the Japanese economy was virtually con-

trolled by the zaibatsu, ten family owned and controlled industrial and bank-
ing combines. They accounted for about one-third of incorporated business in
Japan [81. Mter the war, the Allied Occupation Force dissolved the zaibatsu in
order to reduce the concentration in the economic sector and to promote democ-
racy in Japan. However, these companies later regrouped, and the groups are
now called keiretsu or industrial groups, without family control. Today, there
are six industrial groups that were regrouped based on the old zaibatsu. They
are Mitsui, Mitsubishi, Sumitomo, FUji, Sanwa and Dai-Ichi Kangyo. The first
three keiretsu are the direct successors of old zaibatsu, and the latter three
are tied through their main banks and also successors of some former, smaller
zaibatsu brethren [7J .

An industrial group consists of many large firms plus numerous small-to
medium-sized companies. Selected large companies are represented by their
presidents in the group's president club, the overall policy making organ, and
are called "member companies." The member companies are usually oligopolists
in their respective markets. Their predecessor zaibatsu had tried to achieve an
oligopolistic position in a wide range of industrial activities. As a result, few
member companies in an industrial group are monopolists, and each industrial
group includes almost every industry in Japan. There are twenty-three member
companies participating in the president club in Mitsui Group, twenty-eight in
Mitsubishi, and twenty-one in Sumitomo [17J. Each member company with
its subsidiaries and related companies represents one broadly defined industry.
Each keiretsu has only one member company representing each industry in order
to ensure minimum competition and conflict within the industrial group.

2



Unlike prewar zaibatsu whose companies were privately owned and controlled
by the family owned holding company, ownership control is absent within an
industrial group. However, there is a considerable coordination among com-
panies within a group, through financial control, interlocking directorates and
personal relations, in addition to the regular meetings of member companies'
presidents at the group's presidents' club. Every industrial group includes the
main bank and its related financial institutions which are usually considered
the group's leaders and provide financing mainly to the companies within the
group, and the trading company which conducts import and export transactions
mainly for the group's companies. Though financing institutions are prohibited
by law from owning more than ten percent of any company, the group's main
bank, through provision of huge financial as well as management resources, has
considerable influence over the member companies [4J. The companies usually
accept the bank's management personnel who oversee them as the companies'
top executives, thereby lo;>ing their management autonomy to, and allowing
substantial control by, the main bank. It should be noted, however, that the
influence of main banks over member companies has recently been somewhat
reduced because of financial successes by many large Japanese companies.

Coordination within an industrial group is also enhanced by cross stock-
holdings and interlocking directorates. Companies within industrial groups hold
their shares mutually, usually much less than ten percent each. However, a con-
siderable portion of a company's stock is held by companies belonging to the
industrial group. Nearly seventy percent of Japanese corporate shares are held
by institutions ([111, 112]).

Large Japanese firms belong to industrial groups because of the benefits from
the association and of the high costs of not belonging to a group, in addition
to the Japanese desire to belong to groups-often called "groupism," a cultural
norm in Japan. The benefits are substantial, and include access to financial and
capital markets through the main bank, access to export market and distribution
channels, and improved corporate image/status. An industrial group also helps
its member companies compete with those in different groups. Moreover, a
group provides protection to those member companies with financial problems.
Though bankruptcy rates for smaller firms are high in Japan, those for large
firms Me extremely low because of protection by industrial groups. There are
only a few large companies, including such notables as Sony and Honda, which
do not belong to industrial groups.

The six industrial groups explained above are sometimes called "financially
linked" keiretsu or industrial groups. In addition, there are ten or so manufac-
turers' groups or enterprise keiretsu, each composed of one huge manufacturer
and numerous parts suppliers, without the main bank. The examples are Toy-
ota, Matsushita, Nissan, Tokyo Shibaura (Toshiba), and Hitachi Groups. Most
of them participate in presidents' dub of one financially linked keiretsu because
of the benefits from the association mentioned above. Some of them participate

3



in presidents' clubs of two financially linked groups, such as Nissan and Hitachi
[13].

Manufacturer-Distributor Relationships
Japanese distribution channels are usually perceived as extremely complex,

having many layers of wholesalers in the distribution structure. However, the na-
ture of relationships between manufacturers and distribution channels in Japan
differs greatly from that in the United States. In Japan, each distributor is
a loyal and exclusive wholesaler for one manufacturer in each product cate-
gory ([15], [18}). This is one of the reasons that many foreign companies have
difficulty in obtaining distribution channels in Japan.

Large manufacturing companies (member companies) have for a long time
expended tremendous effort and energy in developing and maintaining the ex-
clusive distribution networks. Japanese manufacturers often own substantial
stocks of their key distributors. Most manufacturers extend generous financing
(or credit) to the wholesalers, and the wholesalers are also expected to pro-
vide their retailers with generous financing. Manufacturers are also expected to
be responsible for unsold items; retailers can return unsold items and get full
credit. In return, manufacturers expect their distributors to aggressively push
their products and often to maintain retail prices at the same level in all classes
of trade.

Manufacturer-Parts Supplier Relationship
Many American businessmen have claimed that large Japanese manufac-

turing companies tend to procure parts from other Japanese companies rather
than from foreign companies. This tendency stems mainly from the large-sized
manufacturers' substantial control over small-sized parts suppliers, and the re-
sulting benefits for the manufacturers .. They have established key large-sized
suppliers as their own subsidiaries, often with substantial ownership and finan-
cial control. In turn, these key subsidiaries have developed their own network
of smaller-sized parts suppliers and subcontractors. And these smaller-sized
parts suppliers and subcontractors have developed their own network of even
smaller-sized parts suppliers and subcontractors. In other words, they have
developed a pyramid-type subcontracting structure which has a hierarchy of
parts suppliers. The relationship of a company with lower-level hierarchy to
that with higher-level hierarchy is exclusive, i.e., captive of the hjgher-Ievel
hierarchy company.

This industrial structure, of course, tremendously benefits big business. Be-
cause of the structure, most large manufacturing firms do not have incentives to
be integrated into labor-intensive, low-productivity parts manufacturing, and
instead, procure parts at minimal cost from substantial numbers of subcontrac-
tors who usually pay low wages. The Japanese economy is characterized as
~~dual structure" because large-sized companies co-exist with numerous small

4



companies and there are wide gaps in productivity and wages. Employees at
smaller companies receive around 35% to 45% lower wages than workers at
big companies, get considerably fewer fringe benefits, and enjoy no lifetime em-
ployment privilege [2]. In 1971, almost sixty percent of small and medium-sized
manufacturing companies in Japan were classified as subcontractors [14J. More-
-over, because of the dependency of subcontractors on their manufacturer, the
manufacturing companies can depend on the subcontractors for quick delivery
of these low-cost, high quality parts. An example of the close working relation-
ship can be found in the kanban or "Just-In-Time" inventory system employed
by Toyota Motor Company.

Across-Industry Cooperation Within An Industrial Group
Member companies within an industrial group conduct substantial economic

transactions among themselves, often through their group's trading company.
It should be noted that this is an across-industry cooperation within an in-
dustrial group, while the previous section deals with a member company re-
lationship with' its suppliers and subcontractors within its respective industry.
The intra-group buying and selling originated in the prewar zaibatsu, when the
family-owned holding company encouraged business between the subsidiaries
mainly through the trading company [7J. Though the business conducted be-
tween member companies within a group has been much less than in the prewar
zaibatsu, member companies have still preferred to do business with their group's
members and their related companies.

However, the degree of cohesiveness among member companies within a
group differs considerably from one group to others. Nearly three-fourths of
the managers in Mitsui, Mitsubishi and Sumitomo Groups, the three direct
successors of the prewar zaibatsu, expressed their pride in belonging to their
respective groups. On the other hand, only half of managers in Sanwa Group,
a smaller industrial group tied through the main bank-Sanwa Bank-expressed
this pride. Also, about two-thirds to three-fourths of managers in the three
groups expressed their wish primarily to buy commodities produced by their
member companies of the same group, compared to only about one-third of
those in Sanwa Group [13].

Competition Between Industrial Groups
While there is strong cooperation within an industrial group, competition

exists between industrial groups. It should be noted that "competition" in the
Japanese context is different from that in American or Western context. 111 the
United States, competition exists between individual companies with the same
or similar product lines or in the same industry. In Japan, competition exists
not only between individual companies with the same product line, but also
between companies (with different product lines) belonging to different indus-
trial groups. The major driving force for competition in markets is the desire to

5



improve status and prestige of the industrial group. In Japan, where a coopera-
tive rather than individualistic business philosophy prevails, competition means
intergroup rivalry for status and prestige [8J. A larger, stronger member com-
pany helps improve the industrial group's prestige and image.. Also, a group's
status of image is considered higher if it includes a larger number of big, grow-
ing companies, and represents larger numbers of industries, compared to other
industrial groups. An industrial group's member companies have strong needs
to expand internally, add new product divisions, or establish new subsidiaries.

Therefore, competition among Japanese companies in Japanese and overseas
markets tends to center on capturing market share or increasing sales volume,
sometimes even at the sacrifice of short-term profits. Since substantial blocks
of shares are held by companies in the industrial group, a company can forego
short-term profits when it needs to aggressively compete with companies with
the same product line in different industrial groups. Also, the main bank in the
group can help the company with financing, the trading company with market-
ing, and other companies in the group with capital infusion and other assistance,
when needed. A challenge by a company against those in different groups can
lead to competition between industrial groups, and can escalate to "excessive
competition" whereby rival groups lower and continue to maintain prices below
production costs [8J.

Strategies to Penetrate the Japanese
Market-Structure Based Barriers

The structure of Japanese markets is substantially different from that of
markets in the United States and other Western countries. It is essential for
American businesspeople to understand the Japanese market structure and,
based on that knowledge, to position themselves in the market. The following
strategies and approaches are recommended to American executives preparing
to enter the Japanese market.

Assessing Competitors' Responses in the Japanese Market
When considering entry into the Japanese market, it is important to assess

accurately the likely responses of established Japanese competitors. Intensity of
resistance or response depends largely on the number of participants in the mar-
ket, their sizes and stakes in the market, and more important, the commitment
or policy of the involved industrial groups to the market.

When a foreign company enters a market that is represented by many
large-sized member companies of industrial groups, it can expect formidable
resistance. Member companies of an industrial group are the "flagships" of
the group; the group's status and prestige depend largely on these companies'
growth and performance. Therefore, other member companies and the related

6



companies in the group directly and indirectly support a member company fac-
ing substantial threats from a foreign company. This competition, then, is not
only with the member companies in the industry but also with the other com-
panies in the industrial groups. Member companies threatened with substantial
market penetration by foreign companies can raise the entry barriers through
many means, such as financial and other assistance from the main bank and
other member companies, cooperation from the distribution channels and the
parts suppliers, and even assistance from the Japanese government. One of the
major reasons why some American and other foreign companies have failed in
the Japanese market is that they have underestimated Japanese responses in
the market.

Another indicator of the intensity of the resistance is the Japanese govern-
ment's industrial policy. The Japanese government, notably the Ministry of
International Trade and Industry (MITI), has promoted development of cer-
tain industries through "administrative guidance," subsidies, and tax incentives
[9]. Industrial groups tend to make their resource allocation decisions based
on governmental policy or guidance. In the industries targeted for develop-
ment by the government, competition is fierce even for Japanese companies.
For example, under governmental guidance, all the industrial groups have been
supporting development of computer and semiconductor companies within their
groups. In many industrial groups, some member companies have formed joint
ventures in order to combine their technical and other resources to develop
and compete with other companies in different industrial groups. The result in
the semiconductor industry is overcapacity (and overproduction) and "excessive
competition" by Japanese companies in the Japanese as well as world markets.
Competition in the computer industry is similar; all industrial groups have been
developing their own computer companies, some of which have been challenging,
and gradually gaining ground against, the market leader, I.B.M. Two of LB.M.'s
responses to the increased competition are to closely monitor government policy
on the market and to have a voice in the policymaking process by joining indus-
try associations and government advisory groups [3]. Therefore, it is essential
for American companies to monitor policies of the Japanese government and
industrial groups on the industry.

Many large-sized American and other foreign companies have been suc-
cessfully exporting to or operating in Japan. Examples are 1.B.M., Esso, and
Nestle. The companies tend to possess superior technologies, new products, or
brand identification to highly differentiate themselves from Japanese companies,
thereby avoiding head-on competition in the markets. Also, these companies
tend to possess considerable capital, technology, and managerial resources [16].
Moreover, in some cases, industrial groups have "accepted" the foreign com-
panies because the group's member companies have no capability to produce
the foreign companies' products or similar products, yet need their products.
However, foreign companies without such capital, technology, and managerial

7



resources would have considerable difficulties in penetrating and succeeding in
the Japanese market. These companies seek a niche in the market. The strat-
egy to carving a niche in the Japanese market, however, is considerably different
from that in the U. S. market.

Seeking a "Niche" or "Void" in Industrial Groups
The approach is to seek a "niche" in an industrial group. Though all indus-

trial groups attempt to be the leaders or oligopolists in each industry or market,
some groups have weaker positions than others. In some cases, an industrial
group supports a marginal company to maintain presence in the industry in
order to sustain the group's image and prestige. Moreover, not every group is
represented in each industry. The largest three, Mitsui, Mitsubishi, and Sum-
itomo Groups, represent a broader range of industries than the others. Some
industries are dominated by a few groups because of group history. The prewar
zaibatsu had emphasized certain industries during their development stages. For
example, the Mitsui zaibatsu controlled paper, coal, synthetic dyes and much of
the foreign trade; the Mitsubishi zaibatsu controlled heavy industry, shipbuild-
ing, marine transportation, and plate glass [lJ.

The differences in representation or strengths of industrial groups in markets
present opportunities for the entry of foreign companies to Japanese markets.
An industrial group with weak or no market position in an industry may even
encourage foreign companies to "associate" with the group in order to compete
with other companies in different industrial groups. The opportunity is pre-
sented due to intense intergroup rivalry for status and prestige. The association
benefits both the industrial group and the foreign company.

In selling an industrial product to Japanese companies, search for an indus-
trial group without a company producing the product. Because the industrial
group needs to "import" the industrial goods from other industrial group's com-
panies, companies in that group may be much more inclined to buy from foreign
companies than those in groups which have their own producers, given supe-
rior services, technologies, and other available amenities. Also, companies in
an industrial group which includes a company that is producing the industrial
product but is only marginally competitive in the market due to obsolete tech-
nologies, poor services, or other controllable reasons, may be willing to buy from
outsiders.

For consumer products, the wholesalers or distributors which belong to an
industrial group without companies manufacturing the products may be more
likely to carry foreign goods. Also, an industrial group usually has large-sized
department store chains that mainly distribute its group member companies'
products. Therefore, in order to identify an established distribution channel
that is willing to carry foreign products, search for a niche or void in one of
Japan's industrial groups.

8



Since the larger industrial groups, Mitsui, Mitsubishi, and Sumitomo, repre-
sent a wider range of industries, there would be a higher chance of associating
with the other smaller industrial groups, such as FUji, Sanwa, and Dai-Ichi
Kangyo. However, as mentioned previously, there are more cohesive, coopera-
tive relationships among companies in the larger industrial groups than among
those in the smaller industrial groups.

Investigating the Interfirm Relationships
So far, the above recommendations are made mainly based on "generic" be-

havior patterns by Japanese companies that are influenced by the presence of
industrial groups and the cooperative nature of interfirm relationships in Japan.
However, the degree of cooperation or the nature of the relationship between
companies may differ greatly depending on specific ties between companies,
industry conditions, and industrial groups. Investigation of the nature of inter-
firm relationships in the specific industry or market is important because the
knowledge can help:

1. identify Japanese companies which are more likely to buy foreign products
or carry the products in their distribution channels, within the specific
industry;

2. identify with what objective Japanese companies conduct business or com-
pete in the market;

3. develop and nurture relationships with Japanese parts suppliers or distri-
bution channels, when a foreign company decides to make direct invest-
ment in Japan; and

4. develop and nurture business relationships with Japanese companies in
the market or in related industries.

The basic web of relationships can be based on familial ties, marital ties,
personal friendships, long-term business relationships, or other factors, between
top managers of companies. These relationships can be reinforced by interlock-
ing directorates, cross stockholdings, and exchange of management personnel
between companies. In some cases, relationships among related companies are
so strong that it is virtually impossible for a foreign company to supply parts
or to conduct business with the Japanese target company. For example, the
Toyota Motor Company procures most parts from firms whose presidents are
from the Toyoda family, the founding family of the company [6J. In other cases,
the relationships are weak. Firms have business, but less cooperative, relation-
ships due to a short history of business transactions between the companies.
Newer companies such as Honda, tend to have loose ties with other companies.
The relationship may also be weak in a changing, volatile business. In these

9



cases, a Japanese company may be much more receptive to dealing with foreign
compames.

Moreover, the investigation of these relationships can lead to better under-
standing of a Japanese company's behavior patterns, as well as its motivations
and expectations in conducting business. Unlike a U. S. company, where more
business decisions are made in "rational" fashion, Japanese companies may be-
have irrationally (in an American or Western sense) mainly because of their
intricate web of relationships with other companies. For example, it may be
judged "prudent" by Japanese parts suppliers to help their customers compete
in the growing market by reducing their prices for their parts below market
prices, based on the close relationships, such as marital ties, and the expecta-
tions that they will benefit in the long-run. It would be understandable that,
without knowing the nature of interfirm relationships, misunderstandings and
resulting mistrust would develop between Japanese and American companies
conducting business together. This is one of the major reasons why many joint
ventures between Japanese and American companies have failed in the past.
Therefore, it is essential for U. S. companies conducting business with Japanese
companies or operating in Japan to understand what kinds of behavior are
expected and required. Also, for American companies making direct foreign in-
vestment in Japan, it is important to know the expected behavior in developing
parts suppliers' networks and distribution channels, as well as developing and
nurturing relationships with other entities, such as banks and trading compa-
nies, in order to facilitate smoother business transactions in Japan.

Conclusion

The Japanese market is substantially different from that in the United States
or other Western countries in many aspects, of which the major differences stem
not only from culture and government policy, but also unique market structure.
The market-structure based barrier is a formidable obstacle against American
companies entering Japanese markets mainly due to lack of experience with this
type of trade barrier. Better understanding of the Japanese market structure
can greatly help U. S. firms overcome the barrier and, moreover, formulate
and implement viable strategies to enter Japanese markets. Armed with this
knowledge, they must make renewed efforts to enter the large and potentially
very profitable markets of Japan.

References

1. Bieda, K. The Structure and Operation of the Japanese Economy. New
York, NY: John Wiley and Sons Australasia Pty., Ltd. (1970).

2. Broadbridge, S. Industrial Dualism in Japan: A Problem of Economic
Growth and Structural Change. Chicago, IL: Aldine Publishing Company
(1966).

10



3. Browning, E. S. "Lobbying in Japan So Daunts U. S. Firms That Few
Even Try." Wall Street Journal. April 1, 1986, pp. 1, 19.

4. Caves, R. E. and Uekusa, M. "Industrial Organization." In H. Patrick
and H. Rosovsky (eds.), Asia's New Giant: How the Japanese Economy
Works. Washington, DC: The Brookings Institution (1976), pp. 461-523.

5. Czinkta, M. R. "Distribution in Japan: Problems and Changes." Columbia
Journal of World Business, Vol. 20, No.3 (Fall 1985), pp. 65-71.

6. "Frugal, Reclusive Commanders Of An Industrial Army." Business Week,
November 4, 1985, pp. 45-46.

7. Hadley, E. M. Antitru.9t in Japan. Princeton, NJ: Princeton University
Press (1970).

8. Haitani, K. The Japanese Economic System. Lexington, MA: Lexington
Books (1976).

9. Johnson, C. M.l. T.!. and the Japaneae Miracle: The Growth of Industrial
Policy, 1925-1975. Stanford, CA: Stanford University Press (1982).

10. Johnson, C. "The 'Internationalization' of the Japanese Economy." Cali~
fornia Management Review, Vol. 15, No.3 (Spring 1983), pp. 5-26.

11. Nishiyama, T. "The Structure of Managerial Control: Who Owns and
Controls Japanese Business?" In K. Sato and Y. Hoshino (eds.), The
Anatomy of Japanese Business., Armonk, NY: M. E. Sharpe, Inc. (1984),
pp. 123-163.

12. Ohmae, K. The Mind of the Strategist: The Art of Japanese Business.
New York, NY: McGraw-Hill (1982).

13. Sasaki, N. Management and Industrial Structure in Japan. New York,
NY: Pergamon Press (1981).

14. Small and Medium Enterprises Agency. Chusho Kigyo Hakusho, Showa
50-nen ban (White Paper on Small and Medium Enterprises, 1975).
Tokyo, Japan: Ministry of Finance, Printing Bureau (1975).

15. Woronoff', J. World '!rade War. New York, NY: Praeger (1984).

16. Wright, R. W. "Joint Venture Problems in Japan." Columbia Journal of
World Business, Vol. 14, No.1 (Spring 1979), pp. 25-31.

17. Yoshihara, K. Sogo Sosha: The Vanguard of the Japanese Economy. Ox-
ford, UK: Oxford University Press (1982).

18. Zimmerman, M. How to Do Business With the Japanese. New York, NY:
Random House (1985).

11


	Strategies for U.S. Firms to Better Penetrate Japanese Markets