In Part 2, we analyze recent changes in the business environment affecting the small business sector. In Chapter 1, we consider the changes in Japan's economic structure. In the first section, an overview is given of trends in imports and exports and foreign direct investments by SMEs, and the relationship between Japan's small business sector and the growth in cross-border specialization in Japan and Asia accompanying the growth in Japanese firms' overseas investments is examined. The recent currency crisis in Asia is also touched upon. The following section then provides an overview of trends in consumer and corporate demand. In the third section, the increasing fluidity of subcontracting relations is considered, with particular reference to manufacturing industries, and the causal relationship between the changing pattern of subcontracting relations and the overseas development of Japan's large firms in particular is examined from the perspective of both large firms and small and medium subcontractors. The fourth section looks at the growth of the service economy and the factors underlying it, and describes the current state of the small service sector and its future prospects. In the fifth section, we look at the introduction of information systems in firms of different sizes, and in the following section we consider how Japan's distribution structure is changing. Although the Japanese economy has been known for its over-abundance of micro firms and multi-layered wholesale structure, the business environment of the distribution industry is changing radically and the features of the industry itself are changing; changes in consumer behavior, the rapid strides made by new types of retailers and growing deregulation have combined to intensify competition, and changes will have to be made to improve the functions and efficiency of the distribution system.
In Chapter 2, the changes in regional economies are analyzed. The first section considers the major changes wrought by the growth in motorization, which has on the one hand led to the problem of the hollowing-out of city centers, and on the other has made it more advantageous for retailers to locate in the suburbs, which are now more accessible. An overview is given of the current state and changing business environment of the shopping areas commonly found in city centers and the small and medium retailers which form their backbone. The next section focuses on the industrial agglomerations found throughout Japan where manufacturing is concentrated. The features and recent transformation of these industrial agglomerations are examined due to their fundamental importance to the production of goods in the Japanese economy.
In Chapter 3, the changes in the institutional environment are examined. In the first section, it is argued that the changes in the financial environment resulting from the reform of the financial system (the Japanese "Big Bang") will have an enormous impact on SMEs, which are heavily dependent on loans from financial institutions for financing. After analyzing the impact on the small business sector of the cheap money policy adopted after the collapse of the bubble economy, the effects on small businesses of the Big Bang and the response to the Big Bang of financial institutions are examined. The following section analyzes the effects on the small construction sector of the recent changes in the institutional environment thought most likely to significantly affect SMEs, i.e. reform of the taxation system, reform of the labor and employment systems, and fiscal structural reform. The third section looks at the need for sustainable development and the creation of a resource-recycling society which places minimal strain on the natural environment, and shows how SMEs will be expected to play their own part and take radical steps over the long-term to conserve resources and prevent global warming by, for example, recycling more resources, conserving energy, and using new forms of energy.
Chapter 1.Economic structural change
Section 1.Overseas expansion of SMEs and growing cross-border specialization
1.Trends in imports and exports of typical small business products
Exports of typical small business products have basically been on an upward trend since the yen began to weaken from the latter half of 1995. The rate of growth in imports, on the other hand, has slowed down since the second quarter of 1996 (Fig. 2-1).
2.Establishment and closure of overseas operations of SMEs
Although the number of foreign direct investments made by Japanese SMEs has declined for the past two years, a large proportion of all investments continues to be made by SMEs (Fig. 2-2). However, 16% of those firms that have expanded overseas have closed down overseas operations in the past, and another 3% are currently considering the possibility of doing so (Fig. 2-3).
3.Growing cross-border specialization in Asia
The active steps taken in Asian countries since the 1980s to liberalize trade and investment have made it possible for Japanese firms to expand their operations in the region, and a process of cross-border specialization within Asia has taken place in industries such as the auto and textile industries (Figs. 2-4, 2-5). It appears likely that the small and medium-sized Japanese firms involved in this system of cross-border specialization will supply parts not only to large Japanese firms with overseas operations but also to foreign firms. It is expected that production will increasingly be located in the optimum locations for making each type of product, and Japan's small business sector too will be involved in the new international division of labor.
4.The impact of the Asian currency crisis
The collapse of currencies and worsening in economic conditions in the countries of Southeast Asia has had a major impact on the Japanese small business sector. Although the export competitiveness of SMEs that have expanded into Southeast Asia is expected to increase, these firms are also having to review their plans for sale and production of products bound for local markets. There is also a possibility that firms which import raw materials will find that their production costs go up, and firms with debts in foreign currencies may find that the cost of repayments increases (Fig. 2-6). SMEs in Japan which export a large proportion of their output to Asia could be adversely affected, while those which import from the region may find that problems arise concerning quality and delivery. The small business sector may also find that competition intensifies as the prices of rival imports fall (Fig. 2-7).
Section 2.Changes in demand trends 1. Trends in consumer demand
At the height of the bubble economy, consumers sought high-quality products regardless of price, and then when the bubble collapsed, interest shifted to cheap products even if of inferior quality. What consumers are now looking for is a suitable balance between price and quality.
2.Trends in producer (large firm) demand
Large firms have recently begun to place greater emphasis on criteria such as "soundness of management", "ability to cut delivery times", "ability to offer quality assurance", "ability to develop technology" and "planning and proposal capability" when selecting subcontractors (Fig. 2-8). It can be seen, therefore, that it has become increasingly important and necessary for subcontractors to not only produce high-quality products cheaply in a given period of time, but also to suggest what and how to produce in an even shorter period and to provide quality assurance.
Section 3.Overseas expansion of Japanese manufacturers and changes in inter-firm relations
1.Overseas expansion of Japanese manufacturers
Japanese firms produce not only in Japan but also overseas, and their overseas production ratio has grown consistently (Fig. 2-9).
2.Fluidity of subcontracting relations
Comparing the number of subcontractors of large firms now and three years ago shows that the higher a firm's overseas production ratio, the greater the fall in the number of its subcontractors (Fig. 2-10). An examination of the proportion of small and medium subcontractors also shows that the proportion of SMEs relying mainly on subcontracting business has fallen (Fig. 2-11).
3.Response of small and medium subcontractors
Small and medium subcontractors have attempted to maintain and develop their subcontracting business in various ways, but large firms have generally been critical of their efforts, with almost 70% indicating that they were dissatisfied with small and medium subcontractors' "planning and proposal capability", "prices" and "ability to offer quality assurance" (Fig. 2-12). On the other hand, a majority of large firms were satisfied with small and medium subcontractors' "quality", "reliability of delivery" and "soundness of management".
4.Subcontracting in the future
Faced by an increasingly hostile business environment, 65% of small and medium subcontractors are attempting to improve their business strategies by, for example, "reducing dependence on specific parent companies", "strengthening relations with a specific small number of parent companies", and "leaving the subcontracting business by developing directly marketable products" (Fig. 2-13). It can be seen, therefore, that there is a degree of awareness on the part of small and medium subcontractors that they must reappraise their subcontracting policies and approach subcontracting work with clear objectives. 
Section 4. Growth of the service economy
1.Growth of the service economy
The service sector's share of the Japanese economy is growing. An examination of trends in employment by industry shows that the rate of growth in employment in the service sector is higher than in other industries, and that the service sector has accounted for the largest share of employment since 1994 (Fig. 2-14).
The growth of the service sector is built on demand for services to make life more comfortable and industry more advanced as Japan becomes more economically and socially advanced and diversified.
A comparison of the opinions of service providers and users regarding the effectiveness of services shows that compared with service providers, a significantly smaller proportion of service users felt that using services improved the quality of a firm's business activities. It thus appears that service providers will have to make users more aware of the benefits of using services, and it is important that users too recognize their benefits and make effective use of services (Fig. 2-15).
2.Current state and features of the the service sector
An examination of changes in activity indexes in the service sector shows that although there has been growth across the board in the service sector, growth in corporate services has been particularly strong, while personal services have enjoyed steadier growth (Fig. 2-16).
Regarding entry into the market, just under 50% of firms felt that there was a high level of new entries in the personal service sector and just over 50% felt that there was a high level of new entries in the corporate service sector. This suggests that companies see the service sector as an attractive new area of growth to enter (Fig. 2-17).
3.Challenges and outlook for the small service sector
When questioned on the subject of corporate strategy, a large proportion of SMEs in the service sector said that their main concern was "displaying originality", whereas more large firms in the service sector responded that their strategy was to "improve employee training" and "lower costs". This suggests that SMEs are attempting to differentiate themselves from their competitors while at the same time avoiding price competition (Fig. 2-18).
When asked about what sorts of problems they thought lay ahead, a high proportion of large firms mentioned "fierce price competition" and "difficulty of differentiating from competitors", which suggests that they are attempting to differentiate themselves like SMEs and are finding it difficult specializing in niche markets. SMEs, on the other hand, were more likely to mention "difficulty raising funds" and "insufficient variety of services" as the difficulties they faced (Fig. 2-19), suggesting that due to their small size, their business resources (including human and financial resources) were less fully developed than those of large firms.
4.Standardization and assessment of services
Unlike other goods, it is unclear what services comprise and whether they are suitably priced until one actually uses them. Small and medium service businesses are currently lagging behind large firms in providing customers with information about their services. In comparison with large firms, a smaller proportion of SMEs thinks a system or criteria for objectively evaluating the price and quality of their services would be desirable, and a larger proportion thinks it would be undesirable, reflecting a clear difference of opinion between companies of different sizes (Fig. 2-20). However, as the service sector continues to grow and demand increases, the small service sector will increasingly find that it has to provide more information on services and adopt standards and systems of assessment if it is to meet the diverse demands of consumers and expand.
Section 5. Adoption of information systems in manufacturing
1.Growth in use of information systems by firm size
The information systems found in firms are changing from simply being more rational, laborsaving means of processing office work to being advanced systems based on information networks which have the potential to revolutionize business management as a whole. However, the degree of information orientation differs between firms of different sizes, and there are concerns that this difference could become increasingly pronounced in the years to come.
The first step in increasing information orientation is to introduce computers, and the Small and Medium Enterprise Agency's survey of manufacturing industries shows that computers have been introduced by nearly all medium-sized firms (defined in this section as firms with 20 or more employees) and large firms (Fig. 2-21). A large proportion of small firms (defined in this section as firms with fewer than 20 employees) have not introduced computers, however, and the proportion is greater the smaller the firm. There was also a correlation between the introduction of computers and the age of managers, and the proportion of firms responding that they have already introduced computers or have no need to introduce computers differed greatly depending on whether managers were aged under 50 or 50 and over (Fig. 2-22).
An analysis of the placing and taking of orders using information networks shows that a significantly smaller proportion of small and medium-sized firms use a computer communication network than do large firms (Fig. 2-23). However, some firms are using information networks to expand their businesses, and the likelihood is that use of information networks will permeate the small business sector. (See Example.)
2.Strategic computerization
Below we focus on the internet and CAD, CAM and CAE. Use of the internet eliminates the differential between different sized companies and the concepts of time and physical distance, and opens up new opportunities for small firms. However, less than 10% of small firms and around 30% of medium-siezed firms have used the internet, which compares unfavorably with over 80% of large firms which have used it (Fig. 2-24).
An internet home page can provide a firm with wide publicity, boosting its market presence and increasing its appeal to consumers. However, there is a huge difference between the proportion of large firms and SMEs using the internet to make information on themselves more widely available (Fig. 2-25). If a home page is to be successfully used to expand business opportunities, it is essential that the contents be periodically updated and the existence of the home page itself publicized so as to reach as large an audience as possible.
Computer aided design (CAD) and computer aided manufacturing (CAM) using CAD data have become widely used in industry. In the metal product and machinery manufacturing industries, in which CAD and CAM have a particularly major contribution to make, over a quarter of small firms and more than half of all medium-sized firms have introduced CAD and CAM (Fig. 2-26). There are also some cases of SMEs expanding business opportunities by, for example, introducing computer aided engineering (CAE) to perform various computer-aided simulations. (See Example.)
Section 6.Changes in the distribution structure
1.The small retail sector and the problems it faces
(1)The harsh small retail environment
According to the Ministry of International Trade and Industry's "1997 Census of Commerce", there were some 1.4 million retail stores in Japan with total sales of JPY148 trillion and around 7.35 million employees. The number of stores has been on a consistent downward trend since the 1982 survey. One reason for this is the reversal of the entry and exit ratios in the small retail sector, and the level of newly established stores has slumped in comparison with the level of closures due to existing stores going out of business or changing business (Fig. 2-27).
An examination of the changes in the number of retail stores by size shows that the number of stores has fallen since 1982 primarily due to the drop in the number of small retail stores with 1~4 employees. Over the same period, the number of medium-sized and large stores has increased (Fig. 2-28).
An examination of changes in the number of stores by type shows that the stores which have grown most in number have been "supermarkets other than general supermarkets" and "convenience stores" (which, due to franchising, are commonly small and medium retailers), followed by "general supermarkets" (Fig. 2-29). On the other hand, the number of "specialty stores" and "other general stores", which are typically small and medium retailers, has been falling.
(2)Declining desire to remain in business
The Small and Medium Enterprise Agency's 1997 survey of management in the distribution industry showed that while an extremely high proportion of large firms (97%) intend to continue and expand their operations, this proportion falls with firm size. There are in addition signs in the small retail sector of a declining desire to remain in business, with 23% of firms indicating that they will close down when the current generation retires, and 3% indicating that they will leave the retail trade shortly (Fig. 2-30). This decline appears to be due to an intermingling of micro-level factors (the circumstances of store managers themselves and their response to problems such as the aging of management) and macro-level factors (the changes in the distribution structure and the wider business environment).
(3)Changes in the distribution structure affecting small and medium retailers
As has been shown, small and medium retailers are facing an increasingly harsh business environment. When asked what changes in the business environment most affected the management of small and medium retailers, the commonest response was "intensification of price competition" (63%) and "changes in consumer needs and behavior" (56%), followed by a smaller proportion of firms citing the "appearance of new types of retailers" (29%) and "movement of large stores into the neighborhood" (28%) (Fig. 2-31).
(4)Changes in consumer behavior
A comparison of the criteria upon which consumers based their purchases now and five years ago shows that in over 70% of cases, the criteria for buying shopping goods and convenience goods have changed, with the commonest change being to place greater emphasis on a balance between quality and price (Fig. 2-32). This shows that consumers are becoming increasingly perceptive and are making their purchases based on stricter selection criteria.
(5)Attempts by retailers to improve business efficiency
With the recent developments in information technology and the initiative in distribution shifting to the side of the consumer, retailers have led the way in forming vertical tie- ups centered around large retailers in order to market their own private brands and shorten distribution channels.
Forming producer-retailer alliances to market private brands is one means available to retailers of improving their business efficiency. 37% of large retailers and 18% of small and medium retailers are already involved in such tie-ups (or 54% and 31% respectively if those retailers with plans to form tie-ups are included), and this differential between firms of different sizes can be expected to grow. (Fig. 2-33).
(6)Use of information systems
An examination of the use of point-of-sales (POS) systems by firm size shows that whereas an extremely high proportion of large retailer chains and new types of retailers have already introduced such systems, only a small proportion of general stores and specialty stores (typical small and medium retailers) have introduced them, and almost half have no plans to introduce them (Fig. 2-34).
2.Problems faced by small and medium wholesalers
(1)Decline in number of small and medium wholesalers
An examination of the number of stores from 1991 to 1997 shows that although the number of stores of all sizes has gone into decline, the decline in the number of large wholesalers is not as large as that of small and medium wholesalers (Fig. 2-35). More specifically, the number of small wholesalers has fallen markedly by 21% and the number of medium-sized wholesalers has fallen by 15%, whilst the decline in the case of large wholesalers has been only 9%.
Although the background to this decline is considered in more detail below, there has in short been a sharp drop in the business vitality of small and medium wholesalers (particularly small wholesalers), and a large gap has now opened up between firms of different sizes.
(2)Changes in the multi-layered wholesale system
One of the changes to the distribution structure which has affected wholesalers has been the change in Japan's well-known multi-layered wholesale system. An examination of the W/R (wholesale/retail) ratio (an index of the length and stratification of distribution channels) shows that the ratio peaked in 1982 and declined thereafter, showing that distribution channels have been shortening (Fig. 2-36). There has been particularly noticeable shrinkage in the length of distribution channels for foodstuffs, which had until now been amongst the complex.
(3)Changes in the business environmental affecting small and medium wholesalers
When questioned on what recent environmental changes have most affected management in the small and medium wholesale sector, the largest proportion of firms cited the "extended slump in consumer demand" (72%), followed by "collapse in prices" (62%) and "change in distribution system due to growth and development of large retailers" (56%) (Fig. 2-37).
(4)Improvement in efficiency of logistics
There is a growing propensity to view "logistics" as an area in which customer service can be improved and costs cut in order to improve marketing competitiveness. An examination of customers ' demands of wholesalers vis-a-vis logistics shows that the largest proportion seek "delivery at designated locations" (70%), followed by "better delivery rates" (59%) and "emergency delivery" (46%). Recent growth has been seen in demand for "delivery at designated times" (28%), followed by "better delivery rates" (25%) and "emergency delivery" (25%) (Fig. 2-38). The figures show that the retail sector expects greater speed and reliability in logistics.
(5)Small and medium wholesalers lagging in computerization
An examination of the introduction of EDI (electronic data interchange) by firms by firm size reveals that the larger the wholesaler, the greater the likelihood that it has introduced EDI, with 61% of large wholesalers having already introduced EDI. On the other hand, the smaller the wholesaler, the greater the likelihood that it has no plans to adopt EDI, and 67% of small wholesalers have no intention of introducing EDI (Fig. 2-39). These figures indicate that a large gap has now emerged between firms of different sizes.
(6)Sales force automation
Only a minority of firms have implemented sales force automation (SFA), and amongst small and medium wholesalers only 2% have done so. Moreover, whereas 64% of large wholesalers indicated they would like to implement SFA in the future, a particularly large proportion of small and medium wholesalers expressed no intention of doing so (56%) (Fig. 2-40). It would appear therefore that large wholesalers are more aware of how they can boost sales efficiency and competitiveness through SFA.
(7)Selection of wholesalers by retailers
An examination of the sorting of wholesalers by retailers by firm size shows that over 50% of firms of all sizes are increasing or planning to increase their selectivity, and only 33% of large retailers have no intention of being more selective (Fig. 2-41). It can be seen therefore that with a gap emerging between wholesalers of different sizes and the small wholesale sector becoming multipolarized, retailers are becoming increasingly selective in their choice of wholesalers.
