Courage to Change Japanese-style Business in Crisis (1992)
"A Different Price Setting System to Europe"
Product pricing is usually determined by the costs involved in manufacturing and promoting a product such as the cost of resources, labor, research and development, advertising and so on, with the profit margin determined by demand.
Accordingly, when you make a high quality product with quality resources and facilities, advanced technology, and the necessary skilled labor, the cost of production by necessity goes up. Moreover, maintaining high dividends to shareholders means guaranteeing fat profit margins and this necessitates high product prices.
In the case of regular products with low manufacturing costs, margins are smaller and the product is supplied and sold in large quantities for a low cost. This is how prices are set under a free economic system or market mechanism.
However, although Japan and Europe function under the same free economic system, the trend has been that Japanese companies have been able to generally set lower prices than their European counterparts. Why is that?
Competition between companies in Japan is extremely fierce. For example, in the home electronics market, this relative separation is clear, where competition in the European market is not as fierce, but in Japan large multi-nationals are clustered together and going head-to-head in a very narrow market.
In this kind of market, competition inevitably intensifies into a price war. Being able to produce a large quantity at a reduced cost is one key to winning out. In order for these powerful enterprises to secure markets for the products they are producing in large quantities they are prepared to sacrifice profits and reduce prices in order to focus on winning market share.
The Japanese pricing system, therefore, looks at what price it needs to sell its product at to win market share, and then shaves costs and profits in order to be able to sell it at that price. Because of this distinctive feature of the Japanese market, the pricing system for Japanese companies has become different from Europe. Many Japanese manufacturers, particularly the car and electronics industries, have a lot of international competitive strength, and they compete against each other even in foreign markets. In order to beat their Japanese rivals, even in foreign markets, they compete in the same way as they do in Japan.
From the viewpoint of European manufacturers, the Japanese system operating in their markets has been interpreted as an invasion aimed at strangling their businesses. That is the problem.
(Continued in Volume 7)
( Extract from"Nijuisseki e" (Towards the 21st Century), published by WAC)