Impact of Digitization and Human Capital

Part 2: Japanese Companies Falling Behind in Multi-level Competition

CHUMA Hiroyuki
Faculty Fellow, RIETI

With the advent of digitization, the competitiveness of Japan's leading industries began to decline in a salient pattern. Specifically, we can observe the following pattern: 1) the complexity of products, services, and various systems that contain both of them as components increases in a nonlinear fashion; 2) multi-level competition, i.e., competition in a new, enhanced level of systems that contain older systems as components, becomes a frequent occurrence due to a tremendous increase in the speed at which to transmit and respond to information; and 3) the exponential increase in complexity expands the number of sequences of thoughts to determine a business strategy to the point where Japanese companies are unable to cope with, thus, causing them to fall behind their overseas rivals in competition.

Multi-level competition is a concept essential to understanding the impact of digitization. Let me explain this by using easy-to-understand examples.

In the case of a simple product, the entire process from design to manufacturing can be undertaken in-house, without using external facilities or human resources. However, advancement in micro-technology, particularly in the area of semiconductor production, will make it possible to integrate a far greater variety of functions into components per unit of size more cheaply. This means that even when products become more complex, their prices may be lower. Furthermore, as software takes over more functions from hardware, products will become more flexible, and, in due time, a market will emerge for application software products designed to add specific functions to products in accordance with the needs of individual users. When this becomes reality, conventional products will not be able to compete in terms of performance, price, and functions.

As such, a new, higher level of competition is occurring on top of conventional inter-product competition, and "multi-level competition" refers to the repetition of this pattern. One example of this phenomenon is the quick transition from simple mobile phones to smartphones that are just as multifunctional as personal computers in the 2000s. Japanese companies failed to catch the wave into this multi-level competition and quickly lost ground on all fronts, i.e., products, chips, software, and applications.

Why are many Japanese companies falling behind in competition in the pattern mentioned at the outset? It is probably because they are still adhering to their old ways, trying to put up competition by wielding their polished conventional analog technology (bamboo spears) while avoiding reliance on digital technology (machine guns).

We can get a glimpse of how such sentiment is prevalent among Japanese corporate managers in PwC's Global CEO Survey conducted in 2016. While topping the world in the degree to which chief executive officers (CEOs) prioritizing "human capital" and "innovation," Japan was by far the lowest in the percentage of CEOs citing "digital and technology capabilities" as the area that should be strengthened most.

>> Original text in Japanese

* Translated by RIETI.

May 18, 2017 Nihon Keizai Shimbun

February 28, 2018

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