Horizontal specialization model through Western management

The business model of US computer and semiconductor industries is a horizontally specialised type
where each company concentrates core competences in specialist fields. The vertical integration that
yielded benefits in the early days of the computer industry (including PCs) has shifted to disintegration
as a result of changes in the market and technology business environment (including faster
ICT tools and technology changes such as standardisation of the technology interface and modularisation).
As a result, from the 1980s onward, the business activities of vertical integration were
divided into individual modularised processes, and vertical disintegration and disaggregation in
the digital industry accelerated. Then the horizontally specialised value chains of the PC and semiconductor
industries arose. The changing environment drastically reduced transaction costs among
companies and markets. DELL and other finished product manufacturers were able to efficiently
procure products from outside the company, and the finished product manufacturers achieved
the transformation of optimal vertical boundaries. Features of this horizontally specialised model
are that the interfaces between each horizontally specialised business layer (conditions of
Long Range Planning, vol 42 2009 487
contractual agreement, such as product development specifications and manufacture) are made explicit,
and each company acts as a modular organisation holding specific core competences in each
business layer.41
In recent years an increasing number of cases have occurred where large, branded corporations,
such as Nokia and Apple’s iPod in the mobile phones field, have specialised in product R&D and
sales and marketing while outsourcing production to large EMS (electronic manufacturing service)
companies, such as the US Flextronics and Solectron and the Taiwanese Arima Communications,
which have factories throughout the world.
Appendix 3. Digital consumer electronics, communications device,
semiconductor and mobile phone sectors
Digital consumer electronics and communications device sectors
Strategies and aims grounded in the knowledge integration model are used to develop digital and
network technologies, realise core black box technologies and ‘only one’ products, develop products
supporting multiple product types, produce cells as manufacturing innovations, develop and apply
ICT, and develop sales systems and new solutions to dominate world markets.
Core technology developments such as Matsushita’s Black Box and Sharp’s ‘Only One’ products
are implemented in-house and contribute to the accumulation of expertise. They also promote dynamic
collaboration with other companies by implementing joint development with outstanding
external partners and positively adopting external partners’ outstanding technology. Integrating
heterogeneous technologies is especially important to realising multimedia services through advanced
broadband services and mobile phones, and collaborating with external partners possessing
leading technologies is an urgent task.
The knowledge integration models of these Japanese manufacturers of consumer electronics and
communications devices also create new competences by acquiring new knowledge (including pathbreaking
resources) across technology and industry boundaries through dynamic collaboration.
This involves implementation thorough ‘selection and concentration.’ The manufacture of core
products that can be differentiated from those of other companies, such as Sharp’s and Matsushita’s
flat-screen TVs and Canon’s digital cameras, takes place mainly in-house (mostly within Japan itself).
Meanwhile, non-core products (products that cannot be differentiated from those of competitors)
are driven by dynamically outsourcing to EMS companies.
A common feature of Japanese manufacturers’ basic structure, the vertical integration business
model, is the unification of development and production processes. In Japanese manufactures,
the development of digital consumer electronics incorporating cutting-edge technology elements
has been structured by the high integrity of the vertically integrated organisational system crossing
work function and specialist fields.
The lessons learned from Canon, Matsushita, and Sharp’s need to share and transfer advanced
tacit knowledge relating to pioneering digital consumer electronics are to unify (vertically integrate)
the entire value chain and promote and collaborate on individual R&D, production technologies,
manufacturing, sales and marketing functions simultaneously, thereby synthesizing creativity and
efficiency. Vertical integration has the effect of promoting the transfer and sharing of tacit knowledge
(mentioned in section 3.1) and inspiring employee creativity. The concurrent business and
collaboration of each function also enhances the efficiency (speedy delivery of solutions when problems
occur) and the optimisation of product functions and cost by unifying design and production.
Semiconductor sector
Japan’s Matsushita Electric, Toshiba, Fujitsu and other companies are vertical integration-type
semiconductor manufacturers (called IDMs, or Integrated Device Manufacturers) that possess
the interactive functions of providing semiconductors oriented to the company’s original system
(set products) and also selling semiconductors to other companies. IDMs also include specialist
488 Boundaries Innovation and Knowledge Integration
semiconductor manufacturers with no in-house set divisions (in Japan these include, for example,
NEC Electronics and Renesas, a joint venture of Hitachi and Mitsubishi).
LSI technology innovation is extremely quick: rapid progress is occurring with miniaturisation,
weight reduction and reduced electricity consumption, in response to the needs of high functionality
and compactness in set (system) products (such as consumer electronic products and mobile
phones), and the development design and manufacturing rules have evolved many times over. Japan’s
semiconductor manufacturers have built up path-dependent knowledge relating to development
design and manufacturing over many years, developed new technology through coordination
and collaboration with development design and manufacturing divisions, and positively trained engineers.
Rather than emulate the Western management style of selling low-profit businesses and restructuring
personnel while innovating in digital technologies, a large number of Japanese
semiconductor manufacturers would rather accumulate intangible assets, such as technological
prowess and training personnel, from a tacit knowledge focus.
From the second half of the 1990s onward, moreover, Japan’s semiconductor manufacturers
kept up traditional IDM while promoting collaboration with external partners possessing specific
specialist technologies, and shifting toward the knowledge integration model, dubbed the ‘new
IDM’.
Mobile phone sector
The production structure of Japan’s mobile phone businesses is globally distinctive. First, they
possess a vertically integrated business structure that transcends mobile phone handset makers,
communications device makers and content providers. Second, they possess a new value chain
structure, exploiting mobile phones through the expansion of horizontal boundaries aimed at creating
new business.
NTT DoCoMo’s i-mode is characteristic of the first point, of forming vertical integration among
vertical boundaries. Data communication through mobile phones enhances the possibilities of mobile
computing and greatly promotes its user-friendliness. Led by DoCoMo’s i-mode, today’s mobile
phones have evolved from portable handsets to information terminals through internet access
technology.
The expansion of horizontal boundaries aimed at new business is another aspect. DoCoMo has
driven hardware and software platform development designed to realise mobile e-commerce services
while promoting strategic alliances through the formation of SCs with Sony, which possesses
e-money card technology, as well as with leading communication device manufacturers, computer
manufacturers and software vendors. In order to expand e-settlement services aimed at developing
usage structure applications, moreover, DoCoMo has dynamically driven collaboration with each
industry type, group and corporation, including distribution companies in other industries, such
as AEON and Seven Eleven; JR (Japan’s largest railroad company with expertise in private card services);
and Mitsui Sumitomo Visa Card (Japan’s leading financial organisation group company).
DoCoMo has initiated globally cutting-edge services through the knowledge integration models
of networked SC formation for horizontal boundaries, mobile e-cash service from October 2004,
and mobile e-credit services from April 2006.
The pioneering DoCoMo’s coordination and collaboration with heterogeneous industries has
cultivated new e-settlement service markets, influenced the business models of competitors
KDDI, SoftBank, and DoCoMo, and created new e-commerce markets through diverse usage structures
crossing industry boundaries, which in Japan includes ICT, finance, distribution, railroads
and education. As a result, a win-win ecosystem, or co-evolution function, has developed among
industries.
Meanwhile, the models of non-Japanese mobile phone carriers differ from the Japanese vertical
integration business models centred on the mobile phone carriers mentioned above. In Japan’s
tightly coupled relationships, information and knowledge is closely shared among mobile phone
carriers and handset makers, and mobile phone carriers implement handset marketing and product
planning (equivalent to the development business of mobile handsets in DoCoMo’s case). Mobile
Long Range Planning, vol 42 2009 489
phone handset makers outside Japan, however (including Nokia, Motorola, and Samsung), have
a loosely-coupled relationship with mobile phone carriers. The handset makers control the entire
value chain from upstream to downstream, from product planning to development and sales,
and possess branding power in the market. Furthermore, the tightly coupled relationship between
CPs and mobile phone carriers seen in Japan does not exist. (The relationships among mobile carriers
realising mobile internet services through i-mode licenses, however [nine countries globally],
are similar to those in Japan.)
Appendix 4. Basic differences between Japanese and Western management42
The fundamental difference between Japanese and Western firms is the difference in thinking relating
to business activities that determine the vertical value chain (integration or unbundling).
In recent years, the unbundling of function (R&D, production, and sales) against a background
of ICT development has boosted the efficiency of transaction costs among a large number of firms.
As transaction and interaction costs fall, the simultaneous pursuit of the three different economies
(speed, scope and scale) becomes difficult, and firms learn to strengthen business domain specialisations
through concentration and selection. This is the correct argument for implementing strategy
under fixed conditions. A large number of Western and Taiwanese firms, especially in ICT and
electronics industries, have exploited the merits of this unbundling and developed core competences
through concentrating and selecting resources (see Appendix 2). Japanese firms have a tendency
to form organisations that vertically integrate the different business activities and specialist
fields (see Appendix 3), while Western businesses, especially in IT and digital industries, have a tendency
to form specialised modular organisations in horizontally specialised business domains. Thus
the more a firm pursues the efficiency view, the more it promotes concentration and selection from
the unbundling of business models.
From a knowledge management point of view, however, even if unbundling is suited to economies
of speed, the firms that exploit unbundling are not necessarily capable of building competences
to create high-quality products and services and value-added, such as total solutions
exploiting the synergies of each R&D, production and sales function. This is because the principle
of self-sufficiency (internal production) is fundamental to building the intellectual capital needed to
sustain a competitive edge.
Matsushita Electric, Sharp and Canon, which profit from and acquire market share in the digital
consumer electronics field, are pursuing economies of scale through the revolutionary innovations
of cell production, economies of scope through simultaneous vertical start-up on a global scale, and
economies of speed through rapid development of new products resulting from black-boxed core
technology. Meanwhile DoCoMo is building industry-crossing vertical and horizontal value chain
models, and pursuing the three economies of the mobile phone business. Thus the building and
accumulation of precious intellectual capital exploiting the features of business activity bundling
within and among firms, and the ‘synthesizing capability’ that simultaneously pursues the three
economies, are both features of the Japanese firms.
Creative and productive friction and interaction among bundled business activities transcends existing
core competences to acquire new competences, and has the potential to create new innovations.
Many outstanding firms in Japan’s high-tech business fields consider the source of innovative creation
when determining costs, rather than deriving them simply from interaction within and among firms.
This is a feature that differentiates Japanese from Western firms. In Japan, the pursuit of the creative
and dialectic non-efficiency views enhances interaction through collaboration within and among
firms, and becomes the driver building new value-chain and co-evolution models.
Considering the above points, the root of the difference between the business models of Japanese
and Western firms is the difference in prioritising strategic behaviour based on the ‘non-efficiency
conceptions’ of the creativity and dialectic views. Western firms prioritising short-term profit and
shareholding can be seen as having a strong tendency to build horizontally specialised business
models (especially in IT and digital industries) based on the efficiency view.
490 Boundaries Innovation and Knowledge Integration
References

  1. G. Ouchi, Theory Z: How American Business Can Meet the Japanese Challenge, Addison-Wesley, Reading,
    MA (1981); I. Nonaka and H. Takeuchi, The Knowledge Creating Company, Oxford University Press, New
    York (1995).
  2. J. Lampel and A. Bhalla, Let’s get natural: the discourse of community and the problem of transferring
    practices in knowledge management, Management Decision 45, 1069e1082 (2007).
  3. For example, the global market share of digital cameras (2006 figures) ranked Canon top with 18.7 percent
    and Sony second with 15.8 percent. Four of the top six manufacturers were Japanese (results of survey by
    US company IDC: see http://www.idc.com/home.jhtml;jsessionid ¼ PP3GQD4RFWYYACQJAFICFGAKBEAUMIWD).
    Moreover, in Q4 2007, Sony was ranked first (19.5%) and Sharp fourth (10.1%) for global
    market share of LCD TVs, and Matsushita (Panasonic) was ranked first (39.6%) for plasma TVs. (Survey
    results from US DisplaySearch company: See http://www.displaysearch.com/cps/rde/xchg/SID-
    0A424DE8-1FE0F932/displaysearch/hs.xsl/6138.asp.) Meanwhile Matsushita and Sony are rank high in
    the global market share for DVD recorders. Thus the technological prowess and sales power of Japanese
    companies put them at the apex of the digital consumer electronics field. Meanwhile, NTT DoCoMo,
    which was created in 1992 and went on to develop the i-mode Internet services by pioneering mobile
    phones, has been featured in major business magazines. Examples include Business Week (2000), Amazing
    DoCoMo; The company’s wireless Net phone service is all the rage in Japan – and just might conquer the
    world, US edition; Case studies have also been taken up in leading academic journals, such as J. Ratliff,
    NTT DoCoMo and its i-mode success: origins and implications, California Management Review 44(3),
    55e71 (2002); M. Kodama, Transforming an old economy company through strategic communities,
    Long Range Planning 35(4), 349e365 (2002).
  4. M. Porter, Competitive Strategy, The Free Press, New York (1980).
  5. The boundary conceptions of efficiency, power, competence, and identification become important elements
    for all firms making boundary decisions. See M. Santos and K. Eisenhardt, Organisational boundaries
    and theories of organisation, Organisation Science 16(5), 491e508 (2005).

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