Krannert
Krannert Graduate School of Management
Winter 1982
Purdue University
Forget Theory Z. Forget Earnings. Think IVIARKET SHARE.
A report cited in a February 5 Wall Street Journal article states that U.S. corporate research in the steel industry lagged behind that of Japan mainly because of U.S. "pro¬ clivities" for short-term payoffs: "The financial pressures of public ownership always pull against the long-term orientation needed for successful scientific work."
The report's authors say these shortcomings are shared by other large U.S. companies. Furthermore, big companies fail to nurture small discoveries that may grow into major technological advances: "We found one case where an American steel company sold a fledgling invention to a Japanese firm, then later not only had to buy it back at a much higher cost but also had to pay the Japanese outfit to install and teach (the company) how to run it."
Such news comes as no surprise to Leighton Smith, partner-in- charge of Arthur Andersen & Co.'s Management Information Consult¬ ing Division and speaker in the Krannert Executive Forum. During his four-year tenure at the com¬ pany's Tokyo office. Smith isolated a few of the significant factors that brought Japan to world domination in many industries. And he doesn't believe the much-touted "Theory Z" is one of them.
Labor relations are not unimpor¬ tant, but the key to Japanese thinking—from the board room, to the stockholders, to the people in
the plants—is/77a/-/fe^ s/vare, not earnings per share (as it is in the U.S.).
Smith observes that this thinking is evidenced in the way Japanese management sets prices. "They determine the cost of what it would take to achieve dominance in the world market. Taking out target profit and marketing distribution costs, management computes the 'maximum allowable manufacturing cost.' Then they tell their engineers, 'This is the cost you must design to.' " A company will even run red ink if necessary to get the produc¬ tion volume up and capture the market share, says Smith. "It's this kind of thinking that has allowed the Japanese to dominate world markets."
"The biggest problem in the U.S.," Smith says, "is at the top—in the boards of directors." Directors need to stop worrying so much about earnings per share and begin to act
as a buffer, protecting top managers from the stock holders so that long- range planning can take place. "Then management must do the planning and make it work," so investors will be willing to provide the dollars and allow the profits to be plowed back into the company. "A good investment in the long run is what counts with Japanses inves¬ tors," he says. Until corporate boards act as buffers, freeing execu¬ tives so they can stop fighting fires—battling the problems of this quarter or this year—and can con¬ centrate on the markets down the road, American industry's markets will continue to be eroded by the Japanese.
A big part of capturing those markets boils down to engineering, in Smith's view. Not only do Japa¬ nese engineers design to cost, but they are very good at utilizing exist¬ ing resources—machines, people, time. For example, Japanese indus¬ try relies on general purpose, intel¬ ligent robots that can be easily reprogrammed for assembly changes, and it has also exploited group technology very successfully. In a country where over 90 percent of the raw materials and energy has to be imported, industry must con¬ vert these resources very efficiently: "To survive, their economy must be geared to better conversion to fin¬ ished products and get them out into the world market cheaper and with better quality than anyone else."
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