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Main Points Presented in 1997 White Paper on Small and Medium Enterprises

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Promoting the Essential Functions of Small and Medium Business
In this White Paper, we clarify the following as key issues concerning the small and medium-sized business sector to consider as the competition environment undergoes change. (1) Importance of preparing for change (2) Cultivation of top quality management resources (managerial and technical capabilities, human resources) to ensure preparation (3) Desirability of broadening operational development by creating new alliances with outside interests (strategic alliances) (4) Importance of creating a small and medium-sized business sector environment conducive to managerial reform for the promotion of essential small and medium business functions

Key Issue (1): "Preparing for Change"

Preparing for change incorporates the ability to make an accurate assessment of market changes, to make rapid decisions on how to respond to them and to translate final decisions into actual goods and services. Responding to the increasing use of information systems and the changing pattern of demand, large enterprises in Japan have been reforming their organizations and enhancing their decision-making and product development processes to enable them to react more swiftly to changes in the market. Unfortunately, Japan's small and medium enterprises, which have placed top priority on functionality, have not necessarily as readily improved their responsiveness to change in recent years.

Approximately 60% of large enterprises have reduced the time required for decision-making. In contrast, roughly 10% of small and medium enterprises take longer to make decisions.

Changes in the speed of decision making(compared with 10 years ago)

Managers must now demonstrate the ability to analyze business conditions, make decisions and formulate a vision of the future.


[Example of outsourcing used to accelerate product development (from the standpoint of a large enterprise)]
Company A (a large enterprise) is a manufacturer of precision instruments with an aggressive R&D program. The speed and timing of new product development hold the key to the future of a company like this. At the same time, however, there are limits to the amount that can be spent on retaining the necessary human resources and, as the company grows in size, the plethora of rules covering the activities of the company's development support departments (parts purchasing and test machining) become increasingly burdensome and the advantages of smallness are lost. For this reason, an effective way of accelerating the product development process is to identify precisely what needs to be done at the outset and then to breaking overall requirements down into individual tasks to be outsourced.
For the purpose of developing a low-end analytical device (atomic absorption device) for the southeast Asian market, for example, company A sent a development team to country B in southeast Asia to concentrate on research. Parts were procured locally and the software was commissioned from a US company. As a result, company A managed to bring the new product through to the merchandising point within the allotted product development time.

[Example of a company that succeeded in revitalizing itself and improving its business results while working to accelerate its decision-making process]
As part of its efforts to obtain recognition under an ISO standard, company E (in Nagano Prefecture employing 200 people), which specializes in the manufacture and sale of car parts, reviewed its internal organizational structures. As a result, the company found that (1) sales data tended to be held by only one employee, and that (2) information from the shop floor tended not to be acted on even when it reached the managing directors' committee, which consisted entirely of executive directors, through the company's traditional channels. This tendency for important information to get bogged down in the machinery and general slowness of the decision-making process were consequently slowing the company's ability to respond to its market. The company then abolished its old pyramid structure stretching from the president down through senior managing directors, managing directors, general managers, managers and others and to replace it with a structure consisting simply of the president and one other full-time executive director. The various corporate departments were represented by a junior board (JB), consisting of five junior managers selected from various concerned departments. The JB meets in the presence of the president, the managing director (the sole remaining executive director) and a consultant from the business planning office to discuss a wide range of company business and policy issues which surpass individual departments and to accelerate the decision-making process. This has had the effect of significantly accelerating responses to and treatment of problems the company faces, as well as highlighting internal corporate problems.

[Example of a small business committed to shortening product development lead times]
Company J (in Tokyo employing 97 people), which manufactures automotive parts, has been developing information systems for development and production departments and shortening the length of times required for development and production, improving its competitiveness with other companies.
(Changes in the development structure at Company J)

Key Issue (2): "Top Quality Management Resources"

A company's competitiveness lies in identifying where its own strengths lie and channeling the bulk of its management resources into those areas. It is impossible and inefficient for small and medium-sized companies, which tend to suffer from a shortage of management resources, to attempt to control all of their own such resources. It is more important from the point of view of enhancing its ability to compete that they identify their best management resources and apply them selectively.

Creative small companies, identified as such by the Creativity Law, indicated that their greatest strengths lay primarily in the originality of their product and R&D and planning capabilities.


[Example of small business that secured a large share of the global market on its technical capability]
With its high technical capability regarding specialized hinges for OA equipment (high-performance hinges), Company B (in Kanagawa Prefecture employing 93 people), a manufacturer of electrical machinery and equipment, has secured an 80% share of the domestic market. This company has obtained a patent for its unique technology which allows hinges to be secured in any location, and this technology is used particularly widely for the liquid crystal screens on lap-top computers. Originally a parts producer audio equipment and other areas, the company resolved to focus on development in the face of increasingly intense price wars due to the appreciation of the yen and the off-shore shift of audio manufacturers. It therefore sold its factories and focused on becoming a development-oriented company. Through consistent efforts to develop its core hinge technology, the strength in which the company had the greatest confidence, Company B has obtained success and has shown strong sales even under recent conditions. The company is currently pursuing active development in overseas markets and expects to secure a 50% or higher share of the US market.

[Example of a fabless company which retains only product planning and development functions (with no production facilities)]
Company N (in Kanagawa Prefecture with 525 million in capital and employing 68 people), which specializes in the manufacture of health equipment and environmental conservation equipment, operates on a fabless basis (without production facilities), confining itself to product planning and development only and outsourcing the remainder of the merchandising and manufacturing process, including the design and manufacture of trial products. The company president, who used to work as a researcher with a major manufacturer, established the company around the concept of "children's health and environment" and, aided by growth in society's needs in this area, the company has continued to grow steadily. Taking his lead from the growth seen in fabless venture companies in the US and feeling that the establishment of in-company production facilities would be costly while also leaving the company exposed to the risk of line changes and other similar issues associated with product sales and market trends, the president opted for the fabless model. The company takes its role as matching the need for a product with a concept, distinguishing the originality in the principle itself (determining what can be patented) and determining, amongst other things, the overall structure of the product, its image and its basic design features. This is the extent that a product is pursued in-company and remaining processes from detailed design work through merchandising plans, trail manufacturing and mass production is outsourced. In this way, the company is able to secure all patents associated with each new product it handles and has already acquired more than 100 patents.

[Example of a company which discovered new corporate features during discussions with a company from a different sector]
In discussions with a company from another industrial sector, Company C (in Miyazaki Prefecture employing 43 people), which specializes in printing labels, sheets and boards for electronic parts, was made aware by a participant from the other company of the special nature of the technologies they were using and which they had not considered unique. The possibility of combining Company C's seal printing technology with another company's radio wave-based identification technology. This led to the establishment of a joint research effort and the eventual commercialization of an automatic settlement system for use in restaurants. Further, the techniques developed in this joint research has been adapted in an entirely new field, namely the development by the company of a system to provide help for blind and partially sighted persons.

Key Issue (3): "Strategic Alliances"

The term "strategic alliance" refers to a type of situation in which a company combines superior in-company and external management resources with a view to achieving a particular objective (expanding its business, improving efficiency, diversifying its activities, developing new products, etc.) without giving up its independent corporate existence. It is important that small and medium-sized businesses focus on their own superior management resources, as well as aggressively and flexibly apply external management resources with regard to the resources which they lack.

The objective of strategic alliances are shifting from increasing sales in existing areas of operation and improving production efficiency to the development of new products and the diversification of business.


[Example of a company which succeeded in improving its agility through a tie-up with small and medium enterprises possessing processing technology]
Company S (in Tokyo Prefecture employing 85 people), which manufactures portable telecommunications-related equipment and optical machinery-related equipment, has succeeded in improving its agility with regard to the development of its products by creating a network with several dozen small and medium enterprises possessing core processing technology. This company's products are extremely compact, and due to the constant increases in the required level of precision, it struggles to meet required delivery deadlines when all development and manufacturing processes are conducted in-company. For this reason, the network of small and medium enterprises possessing core technology has enabled this company to accelerate its responses to deliveries.

[Example of the pursuit of agility as seen in a virtual organization in the United States]
With operations in the east and northeast of the state of Pennsylvania, Company Q consists of 18 small and medium manufacturers. The member of this company, which is known as the Web, were selected in autumn 1993 by the Ben Franklin Technology Center in the northeast of the state and the company was launched in June 1995. The companies participating in the Web are all specialist manufacturers in such areas as metals, forging, electronics and chemicals, and they operate under a system in which various members are selected in accordance with the type of order received to form a "virtual organization" for the purpose of carrying out the joint development and manufacturing work required to complete the order. The idea is to differentiate Company Q from other companies by virtue of its agility. The president simultaneously selects the orders and companies that will handle the order. The 18 member companies participate in Company Q's activities in accordance with its ethical precepts and operating rules. The company brings the technologies of the member companies together in order to provide a comprehensive response to customer requirements. The principal advantage enjoyed by members of the Web is the opportunity to respond to a wider range of requests and, in doing so, to enter new markets and acquire new customers. Company Q's performance is improving yearly.



(1) The business recovery of small and medium enterprises lags behind that seen in large enterprises.



(2) Although production at small and medium enterprises has tended to increase, the pace of these increases is slower than that seen at large enterprises. A significant gap is evident in the production levels at smaller and larger enterprises.


(3) The recovery of capital investments by small and medium enterprises lacks force.



(1) Earnings at small and medium enterprises are sluggish. Stagnate sales prices is one factor to which this can be attributed.


(2) One reason for the gap in production activities is the relatively small ripple effect on production at small and medium enterprises from the high growth in industrial production particular to the large enterprises. The ripple effect of large enterprises on small and medium companies is sluggish.


3.Structural Change

1. Changes are evident in the pattern of specialization among subcontractors.

(1) Main contractors are tending toward in-company production and overseas procurement.



(2) Subcontractors are working to improve quality and precision in contrast to demands by main contractors for thorough cost reductions.


(3) Subcontractors seeking to strengthen ability to make proposals, demerge main contractors, develop new products and develop new business interests are also evident.


2. Although such advantages as ready procurement of parts and materials, ready access to market information and access to established sales channels offer benefits in establishing as part of a group, the ready availability of workers such as skilled laborers, which was previously considered an advantage, has begun recently to diminish.



[Group company which has changed handled products by applying technical ability and specialized labor network]
Company E (in eastern Osaka, Osaka Prefecture employing 40 people), which manufacturers wire materials, began by manufacturing rivets, growing to obtain a significant share of the specialized irregular wire sector as it changed the primary products it manufactured. The company was established soon after World War II as a rivet manufacturer, but shifted to the wire drawing industry during the recession which followed the end of the special Korean procurement. Company E subsequently began producing irregular wire (wire drawing rather than wires with circular diameters) from the mid-1960s. The manufacture of irregular wire was the foundation of the company's success. When its irregular wire manufacturing technology received acclaim from about the mid-1980s, the company began receiving orders for pressure-resistant layer parts for underwater telecommunications cable and grew into a company which currently holds a significant share of this market. The company's policy of accepting all orders from commercial firms and other companies, when its technical ability and the capability at the companies to which it outsources processes allowed for it, accounts for the considerable shifts in the products the company has handled. The commitment to naturally withdrawing from sectors which have lost their marketability has also contributed to these shifts. During the 50 years of operations in this region, the company has been able to grasp the technical abilities and manufacturing capacities of outsourcing companies which exist within the group and has been able to find the company which fulfills the relevant requirements for outsourcing. As a result, the existence of a specialized labor network is extremely important. Although the company considered a move to another region several years ago, it is impossible to replace the advantage of using outsourcing which is currently available, and the decision to stay in the same region was made. As the products this company handles are extremely specialized, business activities which are not conducted through commercial firms and iron and steel retailers are presently inconceivable. The company intends to pursue growth by continuing to apply the information possessed by its clients.

3. Competition among distribution systems has become increasingly severe, and small and medium retailers and wholesalers face extremely difficult conditions.



4. Small and Medium Businesses Key to Japanese Industrial Growth

(1) Importance of Maintaining and Developing the Dynamism of the Small Business Sector

Although employment is being reduced at existing business establishments due to restructuring at large enterprises, the birth of new establishments is contributing to increased employment.


(2) Features of Recently Active Small and Medium Enterprises

Creative companies identified as such by the Creativity Law are developing new products and bearing the weight of new markets.




Managerial ReformZíZí

--> Refer to the three key issues for managerial reform.
Key Issue: "Preparing for Change"
Key Issue: "Top Quality Management Resources"
Key Issue: "Strategic Alliances"


(1) Strengthening technical development is also effective for strengthening the top quality management resources of small and medium enterprises. In this respect, both the accumulation of technology and the strengthening of marketing are important.


(2) The insurance and training of the skilled technical capabilities necessary to future technological development.



(3) The development of an environment conducive to the development of information systems is also important to allow small and medium enterprises to increase their preparedness for change through operational reform and to effectively implement strategic alliances.


6. Environmental Improvements
(Easing of regulation impact on small and medium corporate activity)

(1) The effect of high cost structures and institutional restrictions on small and medium enterprises is increasingly significant. The Japanese government has committed to full-scale economic structural reforms such as deregulation and various systematic reform.



(2) Approximately 10% of Japanese small and medium enterprises have forged tie-ups with academic institutions. In addition to issues concerning human resources, technology and funding, many companies which have yet formed these alliances, however, have not thought them practically viable.


(3) Such regional efforts as information sharing and intermediary functions are also important in terms of promoting management reform through strategic alliances by small and medium-sized businesses and other means.


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