MARKETING CHANNEL ADMINISTRATION BY JAPANESE MANUFACTURERS: AN EXPLORATORY INVESTIGATION Dissertation for the Degree of Ph. D. MICHIGAN STATE UNIVERSITY MITSUAKI SHIMAGUCHI 1977 I II III IIIIIIIIIII III III IIIIII IIII III IIIIII 1 L; r MIZUI‘HGAN ‘3 T. W , . EAST LAI' ’vG. MICH. -'I-'"{.‘-s.'3 This is to certify that the thesis entitled MARKETING CHANNEL ADMINISTRATION BY JAPANESE MANUFACTURERS: AN EXPLORATORY INVESTIGATION presented by M I TS UAKI SH IMAGUCH I has been accepted towards fulfillment of the requirements for Ph. D. degree in Jankem W%v Major professor Date 2' 7' 77 0-7639 It} - 24:er 2:" “0i? t-‘w A A AAA/NA” G3 K02: ' r~'.t' . 1~"‘? 1’ e .1“ 1t- ABSTRACT MARKETING CHANNEL ADMINISTRATION BY JAPANESE MANUFACTURERS: AN EXPLORATORY INVESTIGATION BY Mitsuaki Shimaguchi This study sought to identify the cultural rationale 'underlying Japanese manufacturers' channel administrative loehavior. In particular, it investigated two aspects of 1this behavior, namely, activity/customary trade practices and business philoSOphy. Cultural rationale is defined as the measure or unstated premise which underlies manufac- turers' administration of their marketing channel members. The unique characteristics of the Japanese distri- bution channel's structure, distribution and behavior, and the Japanese management (administration) system were dis- cussed in the context of a prOposed conceptual scheme. These characteristics also were examined in a review of the literature. Four hypothetical propositions then were deduced and offered as explanations of the cultural' rationale underlying Japanese manufacturers' marketing channel administrative behavior. These hypotheses were pseudo-harmonism, eclecticism, exceptionism, and economic Mitsuaki Shimaguchi nonfunctionality. These four abstract propositions then were broken down into twenty-one Operational hypotheses. Eighteen subjects from twelve companies in the pharmaceutical, dentifrice, and detergent industries were interviewed. These interviews were the main source of information for this study. Related data from industry experts and researchers were also used. Overall, the twenty-one operational hypotheses were fairly well supported, with a few minor exceptions and modifications. The proposition concerning pseudo-harmonism, that there is an expressed emphasis on harmonious human and social relationships but an implicit use of a cool econo- mic rationale, was well borne out in corporate management mottoes, marketing channel policies, subjects' opinions, and subjects' comments regarding industry practices relating to rebates and other dealer aids. Evidence was found that the economically stronger the wholesaler, the stronger he will be, and that the tendency toward an economic emphasis by channel members is the emerging com- petitive and social force. The proposition relating to eclecticism, that there is an equal balance of the economic and the human rationale in channel administration and that neither is extreme, was supported by subjects' opinions and statements about their way of doing business. It was also observed, although not strongly borne out, that some sacrifice of economic I ..¢ . .... v. , u ,. an. g. .U. ”Jo- _ . ”II "0'! - - Ibo: "‘us I u... f: :w‘ '“I.' ."On :- "'n-‘ 'l. l 9!. "Mr: « u i"; Mitsuaki Shimaguchi efficiency in channel administration is considered a cost of doing business, or is a necessary expense in order to maintain harmony in social and human relationships. The proposition concerning exceptionism, that there is some managerial discretion in manufacturers' administrative practices and activities regarding whole- salers, was well supported. The use of discretion, or failure to adhere to hard-and-fast rules, was observed to an especially strong degree in the actual provision of rebates and dealership and sales contracts, as other sources had led us to expect. Evidence of varying degrees of flexibility was also found in practices related to promissory note payment periods, frequency of delivery, and free goods returns, but those practices seem to be diminishing gradually among larger manufacturers. Evidence of the existence of adaptive and flexible behavior, situa- tional and tactical practices, and a free-style approach also was found. Furthermore, it seems that this flexi- bility and discretion contribute to overexpectations on the part of wholesalers, which, in turn, help create over- competition. The proposition relating to economic nonfunction- ality, that manufacturers' channel administrative Opera- tions are based more on human than economic considerations, was fairly well supported. An individual manager's name and personality are more important than his organizational position or job function. The human warmth of an Mitsuaki Shimaguchi administrator was eSpecially emphasized as an important factor. Many interviewees seem to regard channel adminis- tration as a ”human affair" rather than a "purely economic matter.” This meant they had to participate in many activities other than those strictly related to economics and business. This was an exploratory investigation intended to clarify Japanese marketing channel administrative behavior. No strict statistical measures or validations were attempted. Future research, therefore, should seek to find more detailed and concrete evidence concerning indi- vidual manufacturers' channel administrative behavior. An effort then should be made to determine how to operational- ize these overall findings in actual channel administration policies in the future. MARKETING CHANNEL ADMINISTRATION BY JAPANESE MANUFACTURERS: AN EXPLORATORY INVESTIGATION BY Mitsuaki Shimaguchi A DISSERTATION Submitted to Michigan State University in partial fulfillment of the requirements for the degree of DOCTOR OF PHILOSOPHY Department of Marketing and Transportation 1977 ACKNOWLEDGMENTS Very sincere appreciation is extended to Dr. William Lazer for his interest, encouragement, and many useful suggestions. He very generously and thoughtfully fulfilled his role as Chairman of my thesis committee. I would also like to acknowledge the immeasurable assistance of Dr. Dole A. Anderson, Director, Division of Research, and Dr. Richard J. Lewis, Dean, Graduate School of Business Administration, Michigan State University. Their continuous encouragement and valuable guidance aided in the completion of this study. Most of all, I would like to thank my wife, Duksook. The patient support and love she provided during the long months of this study were the most valuable. Last, but not least, I must thank Elizabeth Johnston for providing invaluable editorial assistance and Irene Orr for her skillful typing. ii TABLE OF CONTENTS Page ACKNOWLEDGMENTS I O O O O O O O O O O O O O i i LI ST OF FI GURES O I O O O O O O O O O O O 0 v LIST OF APPENDICES O O O O O O O O O O O O O Vii Chapter I. PROBLEM SETTING . . . . . . . . . . . 1 Background of the Problem . . . . . . 1 Overview and Sc0pe of the Problem . . . . 5 Delimitation of the Problem . . . . . . 9 Statement of the Problem . . . . . . . 13 Organization . . . . . . . . . . . 14 II. JAPAN'S MANAGEMENT AND DISTRIBUTION CHANNEL SYSTEM: LITERATURE SURVEY AND CONCEPTUAL FOUNDATION . . . . . . . . 16 Conceptual Scheme and Operational Definitions . . . . . . . . . . 1? Characteristics of Japan's Business and Distribution Channel System: Survey of the Literature . . . . . . . . 27 III. SOME CHARACTERISTICS OF JAPAN'S DISTRIBUTION CHANNEL BEHAVIOR AND MANAGEMENT SYSTEM . . . 54 Characteristics of Japan's Business/ Management System . . . . . . . . 54 General Behavioral Characteristics of the Japanese Distribution Channel System . . . . . . . . . . . . 7O Hypothesizing Cultural Rationale of Marketing Channel Administrative Behavior . . . . . . . . . . . 92 iii Chapter IV. RESEARCH METHODOLOGY . . . . . . . Pharmaceutical Industry . . . . . Soap and Detergent Industry . . . . Dentifrice and Toiletry Industry . . Development of Operational Hypotheses and Related Interview Questions . . Methodology . . . . . . . . . Research Limitations . . . . . . V. MAIN FINDINGS . . . . . . . . . . Pseudo-harmonism . . . . Eclecticism . . . . . . Exceptionism . . . . . . Economic Nonfunctionality . VI. SUMMARY AND CONCLUSIONS . . . . . . Summary of Major Findings . . . . An Interpretation and Evaluation of Findings . . . . . . . . Directions for Further Research . . Concluding Remarks: Some Future Implications . . . . . . . . BIBLIOGRAPHY . . . . . . . . . . . . . APPENDICES iv Page 99 99 104 111 113 116 120 122 123 151 171 188 199 199 201 217 219 224 240 Figure 2.1 2.2 3.2 4.1 4.2 LIST OF FIGURES Marketing Channel and Distribution ChannelSystem. . . . . . . . . A Conceptual Scheme: Relationship of Each Component in Japan's Marketing and Management System . . . . . . . . Procedure for the Study . . . . . . Distribution Channel of Meat, Cloth, and Dairy Products . . . . . . . . . Value of Transaction Among Wholesalers . Distribution of Wholesale and Retail Establishments by Size as Measured by Number of Employees, 1968 . . . . Annual Sales of Wholesale and Retail Establishments of the United States and Japan According to Size of Establishment, 1966 . . . . . . . Percentage Distribution of Retail Stores According to Sales Floor Space, 1968 . Sales Per Worker by Size of Outlet, 1970 . Japan's Business and Management System and Hypothetical Propositions . . . . . Distribution Channel Behavior and Hypothetical Propositions . . . . . Distribution Channel Structure in Pharmaceutical Industry . . . . . . Distribution Channel Structure in Detergent/Dentifrice Industry . . . . Page 20 22 26 32 35 39 41 42 46 95 96 101 106 Figure Page 5.1 Ultimate Criteria in Channel Administration by Industries . . . . . . . . . . . 128 5.2 Distribution of Firms by Criteria Used in Ranking Wholesalers . . . . . . . . . 133 5.3 Distribution of Criteria Used for Ranking on the Basis of Two Emphases . . . . . . 134 5.4 Manufacturers Dealer Aids . . . . . . . . 143 5.5 Factors Attracting Wholesalers in the Past and the Future 0 I O O O I O O O O O 146 5.6 Manufacturers' Overall Evaluation of Their Wholesalers . . . . . . . . . . . . 161 5.7 Changes in the Number of Wholesalers and Distribution Policy in the Past Decade . . . 167 5.8 Summary of Main Findings of Operational Hypotheses . . . . . . . . . . . . 195 6.1 Pr0positions and Supporting Phenomenal Characteristics . . . . . . . . . . 218 vi LIST OF APPENDICES Appendix . Page 1. Classification of Literature Reviewed . . . . 240 2. Request for Decision (Ringi-Sho) . . . . . 243 3. Classification of Persons Interviewed by Industry and Position . . . . . . . . 244 4. Interview Guide . . . . . . . . . . . 245 5. Selected Examples of Corporate Mottoes . . . 254 vii CHAPTER I PROBLEM SETTING Background of the Problem Japan's distribution system apparently has been considered an untouchable topic by Western academics. This neglect contrasts sharply with the recent popularity of studies concerning Japanese managerial systems and busi— ness behavior. Although work has been done on zaibatsu‘ (traditional Japanese aggregations of large companies), the ringi system (consensus decision-making system), life-long employment, the seniority system, trading companies (the so-called Sogo-Shosha), and Japan, Incorporated (the association of government and business), Japan's distri- bution system has been ignored almost totally. The subject is attractive to scholars, but Westerners are reluctant to tackle it because the field is so mysterious and complex. The few attempts to describe Japan's distribution system have been conventional and even superficial. General reactions to the subject are suggested by the following quotations: Those who have encountered the Japanese dis- tribution system say it may well rank as the most inefficient, most complex, and most costly of any of the industrialized world . . . . While Japan's well-publicized industrial efficiency grows, its distribution system remains a strange and stubborn anachronism (Hartley, 1973, p. 1). Nobody disagrees that the Japanese distribu- tion system is archaic, old fashioned (Schmuckli and Tajima, 1973). The Japanese distribution system (or, more accurately, systems) seems by Western standards archaic, inefficient, and wasteful . . . . The foreign businessman in Japan, confronted by what he considers a cumbersome and uneconomic distri- bution system, is eager to "streamline" it, to make it more like the system he is familiar with at home. The result all too often is friction between partners (Adams and Kobayashi, 1969, p. 189). Whereas direct selling has now become common in developed countries for a wide variety of industrial products and consumer goods, Japan, the world's fourth largest industrial power, still remains an ancient complex distribution system that was evolved for agricultural products (Glazer, 1968, p. 19). Despite such strong criticism, Japan's distribution systems remain basically unchanged. This raises several questions. Why does such an inefficient system survive when almost everyone believes it to be "archaic"? Exactly which structures, practices, and business customs and manners are inefficient and by what measures? Is the Japanese distribution system uniquely and well adapted to the Japanese cultural environment? These and similar ques- tions require much deeper exploratory study and analysis. The ”mysterious" Japanese distribution system needs to be systematically researched and evaluated. The complexity of the system stems mainly from the uniquely developed sociocultural tradition of Japanese society and the nature of the general business and distri- bution systems. Many international specialists in marketing and business as well as anthropologists often have emphasized the inextricable connection between the culture and the distribution channel system. In reality, Japanese distribution channels comprise a small business society. The pattern is strongly imbedded in Japanese beliefs, attitudes, norms, religions, family relations, business customs and manners, as well as other social relationships. Researchers, therefore, must analyze two sets of forces in exploring Japan's distribution channel system. First, an understanding of the people, culture, tradition, business climate, and general social structure surrounding the dis- tribution system must be developed. Second, the system itself must be analyzed. Western researchers' attitudes toward the Japanese distribution system, as typified in the previous quotations, have been rather ethnocentric. Their opinions have been biased by the Western emphasis on economic measures, and they show little comprehension of the Japanese sociocultural setting. Although the economic measure is an important one, and is more universal, each culture has its own way of rationalizing the social system. An understanding of the relevant sociocultural measures (in this case, Japanese rationales for behavior) is essential to a meaningful evaluation of the system. In this vein, DeBettignies commented upon Japanese organizational behavior as follows: It seems to me that to blame the Japanese for supposed "nonrationality" is to fall again into the ever-present trap of ethnocentricism. I would prefer to define rational behavior as behavior which is instrumentally functional in achieving a certain objective, and in this case I would think that the Japanese are highly rational within their own environment, with the goals they are pursuing. There are contradictions in the pattern of institu- tional behavior but they must be accepted and understood as built-in compliance to models of behavior congruent with some kind of upper-ordinate goals (preserve harmony at all costs; do not stick your neck out; respect your seniors, etc.) which. might not be perceived by the foreigner at first sight. . . . If we define the work organization as a subculture within a given cultural environment, we realize that the Japanese organizational behavior fits the means-end structure of the work organiza- tion, and then deserves to be called "rational" (DeBettignies, 1973, p. 92). This assertion is perhaps quite correct in the context of the purely scientific exploration of.a culture and its organizational behavior. Too much involvement in and emphasis upon culture, however, may result in some loss of reality. The distribution channel system exists mainly in the domain of economics, and economic measures remain important factors. The danger of "polycentricism," which implies "East is East, and West is West," also must be avoided. What is required is a search for fair criteria that include both economic and cultural measures in prOper proportions. This suggests a "geocentric" approach to the study of the Japanese distribution channel system (see Perlmutter, 1969, and Henley, 1971), perhaps preceded by an exploration of cultural characteristics and the logic of the system and by an investigation of how cultural adaptation to a more economically efficient system is accomplished. Overview and Scope of the Problem As has been pointed out, many people, especially Westerners, view the Japanese distribution system as overly complex and as generally ridiculous. How complex is it? Its uniqueness stems mainly from structural complexity and apparently mysterious human relations and behavior. Some examples of Western opinions follow: Structural Aspect In the typical Japanese distribution system as many as five (and sometimes more) middlemen stand between the maker and the consumer. In the United States, it may be noted, as in most other Western countries, there are usually only the wholesaler and the retailer, with in some instances the jobber (Adams and Kobayashi, 1969, p. 189). Says Mr. Wogsland of Morinaga General Mills: "The problem is you are far away from your consumer when you have to go through so many levels." He says promotion is difficult because manufacturers often can't learn the results of a campaign for many months. Goods get lost in the cycle too. "We're still getting back cake mix that we discon- tinued two years ago," sighs Mr. Wogsland (Hartley, 1972, p. 12). Distribution is multilayered. Products often move through trading companies several times; for example, ”wool to yarn to fabric" may go through a trading company three times. Products also go through primary, secondary, and even tertiary wholesalers before they finally reach the retail outlets (Paris, 1969, p. 48). Behavioral Aspect If he (the dealer) runs out of stock, he picks up the phone and says: "I need two cartons of so-and-so now.” Then it's delivered. So, the next thing the dealer says is "I want 120 days credit. Cash? Forget it. The other company gives me half a year credit. And what's your rebate?" (The foreign businessman asks:) “What do you mean rebate? I have firm prices. List price." "I know, but from the other company I get a 10 per cent rebate" (Schmuckli and Tajima, 1973—74, p. 102). Although cash is seldom used, there are many other means by which industrial sellers extend personal favors to buyers: entertainment at restaurants, bars, night—clubs, cabarets, and geisha houses is daily routine. The traditional summer— season and year-end gifts are so common that nobody regards them as special. Golf and Mahjong are used as instruments of building up friendly association rather than of relaxation and, incidentally, justify the acceptance of cash through betting. Whether this kind of business relation seems clean or dirty depends upon the view of the beholder (A. Hanawa, 1971, p. 187). All these aspects of Japan's distribution channel system and Japanese behavior may appear strange to the Westerner. Although there surely is much room for improve- ment, the system and related practices are how business is conducted in contemporary Japan. Although both the structural and behavioral aspects of the Japanese distribution system are complex and mysterious, the structural aspects are relatively more tangible, explicit, and fixed. Behavioral aspects are especially difficult for people, including both.Japanese and non-Japanese, to understand because they are intangible, implicit, and profound. The structure of Japan's distribu- tion channel system has been well documented, and the causal relationships explaining its development have been partially explored in several studies. Thus, the most difficult aspect of the distribution channel system to understand remains the behavioral one. Without knowledge of the deeply imbedded, underlying premises or rules of behavior, no one can view the system without confusion, and no improvement of or entry into the system is possible. As indicated earlier, a human orientation in busi- ness behavior seems to be more dominant in Japan than in the West, where an economic orientation is stronger. If the existing Japanese system could be evaluated and measured only by economic criteria, the problem would be much simpler. Such an approach usually is called "rational," and people, especially Westerners and those educated in the Western tradition, are more accustomed to such explicit criteria.1 It is when the human orientation is introduced that the system appears to be much.more complex; then more vague and variable criteria must be used in addition to the economic ones. Although not as clear as tangible economic criteria, a human orientation may have some underlying measures which govern daily behavior and thinking within the system. These unwritten and culturally imbedded rules may be diffi- cult for the peOple living in the culture to understand fully because they are too deeply involved. PeOple from other cultures may have particular difficulty because the system is so foreign to them. As a result, the situation may remain unchanged, no improvements are made, and the ignorance of cultural nuances perpetuates confusion and anger. 1Glazer terms this "Western rationalism," while calling Japanese attitudes and business practice "Eastern subjectivity” (Glazer, 1968, p. 51). The challenge is to find some underlying measures, especially human ones, to aid in understanding the Japanese distribution channel system. This is the only course for innovators or those seeking to revolutionize or improve the system. Although they are vague and variable over time, these human-oriented measures usually are based on some stable, underlying premise which has been developed through the long history of the society. The following quotation suggests the nature of the Japanese tradition: Japan is going through a period of cultural metamorphosis. There has been a massive infusion of Western ideas since 1945 which has left the old and the new coexisting in Japan. Yet through this cultural topsy-turvy the Japanese seem to move easily, for they have become "cultural amphibia." However, they find it hard to live an amphibious business life that would accommodate the Western businessman. Many of my colleagues in Tokyo say the old Japanese way of doing business is vanishing rapidly. But don't believe a word of it; tradition dies hard and it will take generations to change the basic thinking of the Japanese (Adams, 1969, p. 193, emphaSis added). The basic thinking is implicit in the Japanese distribution channel system. These cultural assumptions might not be recognized even by the Japanese unless they are clearly and logically defined. They may be buried deeply and subconsciously in daily behavior and practices, in opinions and philosophies, or in other aspects of the distribution system. The search for these implicit and deep-rooted premises, which hereafter will be called the cultural rationale, as compared to the economic, is the object of this study. Delimitation of the Problem The overall purpose of this study has been partially defined: to discover the cultural rationale underlying Japanese distribution channel behavior. In doing so, the nature of the system will be more clearly understood. Realistically, for operational purposes, this broad and general approach must be delimited to increase opera- tionality and encompass a feasible sample. The discussion of decisions concerning the selection of subjects within Japan's distribution channel system and the kinds of indus- tries involved follows. Type of Distribution Channel System Selected Japan's present distribution system takes the form of ryfitsfi-keiretsuka (a vertically integrated manufacturer distribution channel that is closely linked with indepen- dent wholesalers and retailers). Participation is volun- tary, but great cooperation is achieved under the aegis of a dominant parent manufacturer. The system is often characterized by traditional human relationships between a parent manufacturer (administrator) and channel system member. Most of the unique aspects of the Japanese busi- ness and distribution system are represented in distri- bution channel manufacturers' administrative modes. Yoshino, who made the first comprehensive study of Japan's marketing system, has described its dominance. After h! I!- I! l‘ I. II’ 10 reviewing historical changes in the Japanese distribution system (from wholesalers' to manufacturers' dominance), he wrote: One of the most significant develOpments in Japan's postwar marketing scene is the very exten- sive control attained by large manufacturers of selected consumer goods over their channels of distribution. In a number of consumer goods indus- tries we have witnessed the emergence of centrally coordinated distribution systems under the initia- tive of large manufacturers . . . . This pattern is most commonly found in those that have experi- enced extraordinarily rapid growth, including the automobile, electric home appliance, pharmaceuti- cal, and cosmetic industries (Yoshino, 1971, pp. 109-110). Yoshino suggested several factors which accounted for this pattern. Among many, two important ones were the successful establishment by manufacturers of a consumer demand for their products, and inability of the more old- fashioned intermediaries to cope with the new demands of the mass consumer market as well as their traditional, conservative mentality (ibid., p. 110). As a result, several large, innovative manufacturers in certain indus- tries began to make concerted efforts to establish and manage a vertically coordinated distribution system, often called a marketing channel system. Proof of their effec- tive administration lies in the powerful competitive edge they achieved, which led many other manufacturers to make similar efforts. McVey's often quoted statement that "a manufacturer may not even consider himself as standing at the end or the head of a channel, but only as occupying a link in a 11 channel that begins with his suppliers" (McVey, 1960) is not necessarily true in Japan. Rather, as strong supporters of other independent channel members and sometimes as pro- tectors of fragile wholesalers' interests, manufacturers affect other channel members, implicitly and explicitly, through various kinds of assistance, actions, or controls. In this sense, it is no exaggeration to say that any improvements or innovations are dependent upon manufacturers' initiatives and are under their control. If the manufac- turers' marketing channel administrative behavior and its rationale could be clarified, it would be much easier to suggest necessary actions or policies for improving the complex Japanese distribution system as well as enable foreigners to approach and adapt to the system realisti- cally. This study, therefore, is specifically concerned with the cultural rationale underlying Japanese manufac- turers' marketing channel administrative behavior in selected industries. These industries now will be discussed. Industries Selected A brief survey to select industries appropriate for this study resulted in the choice of three: the pharmaceu- tical, dentifrice and toiletry, and soap and detergent industries. The major reasons for their selection and their common characteristics are given below. 1. First, these industries are quite repre— sentative of both the traditional Japanese 12 marketing channel system itself and channel behavior. Second, most Japanese scholars and researchers agree that they exemplify the most peculiarly and typically Japanese distribution channel, namely, the manufac- turers' integrated vertically coordinated distribution channel. All these industries distribute products similar in nature (nondurable consumer goods based on chemical materials) and have a similar distribution channel structure (mostly, manufacturer-primary wholesaler- secondary wholesaler-retailer-consumer). As parent companies, all manufacturers in these industries are eagerly concerned with the administration of the distribution channel so as to gain competitive advantage. The most typical distribution channel struc- ture in all these industries is a loosely connected selective one rather than exclusive (for example, automobile, electric appliance) or extensive (for example, foodstuffs) channels. That is, one wholesaler usually carries several manufacturers' product lines, with preference for a few main manufacturers. This pattern is most appropriate for the exploration of channel administration because 13 the competitive efforts to select and administer channel members delineate Japanese channel behavior more vividly than do the other two forms. The range of channel administration in these industries usually extends down to the level of wholesalers. (There are a few exceptions, such as in a manufacturer's voluntary retail chain system.) This makes the research more direct by focusing on manufacturer-wholesaler relations without losing sight of the essential purpose. Statement of the Problem As a logical consequence of the above, the basic purpose of this study is stated as follows: To determine the underlying cultural rationale in manufacturers' administrative behavior toward wholesale channel members in selected consumer chemical product industries. More specifically, answers are sought to two questions: 1. What are the unique structural and behavioral characteristics of Japan's distribution channel system in general? What is the underlying cultural rationale (or unwritten rules) which explains Japanese manufacturers' administrative l4 behavior within vertically integrated dis- tribution channels (especially toward wholesalers) in the pharmaceutical, soap and detergent, and dentifrice and toiletry industries? Organization This thesis consists of six chapters. The main purpose, to seek the cultural rationale underlying manufac- turers' administrative behavior toward their marketing channel members, is stated in Chapter I. Chapter II deals with the problem setting and examines and analyzes Japan's distribution channel system. After providing a conceptual scheme and operational defini- tions of terms used in the research, a brief survey of the literature is presented. Based on the literature and available statistical data, structural characteristics of Japan's distribution channel system then are examined, followed by an explanation of the develOpment of this unique structure. Chapter III explores two other components of Japan's business system: distribution channel behavior and the management system. These two aspects are directly related to Japan's marketing channel administrative behavior, as will be indicated in the prOposed conceptual scheme. Based on the study of unique characteristics of Japan's 15 distribution channel behavior and management system, four abstracted core rationales are hypothesized. In Chapter IV, the four hypotheses are tested. The research methodology is described, including sample design, subjects chosen, and the interview method. Several operational hypotheses are then formulated, and the interview guide is explained. The limitations of the research are stated briefly at the end of Chapter IV. Chapter V presents the main findings of the research for each of the four main hypotheses and the general operational hypotheses. These findings are based primarily on subjects' opiniOns, acquired through a sup- ported-unsupported interview guide measure. Related data also are documented occasionally for each of the main hypotheses. In Chapter VI, the findings of the research are summarized and synthesized. Based on the knowledge gained, some interpretations and implications are sug- gested for future improvements and develOpments in system behavior. CHAPTER II JAPAN'S MANAGEMENT AND DISTRIBUTION CHANNEL SYSTEM: LITERATURE SURVEY AND CONCEPTUAL FOUNDATION The purpose of this chapter is twofold: to propose a conceptual scheme to guide and direct this research and to review Japan's distribution channel structure based on past studies. First, operational definitions and a pro- posed conceptual scheme are presented, followed by some detailed explanations. Based on these, an overall litera- ture survey is attempted of three systems relevant to this research: distribution channel structure; distribution channel behavior; and the management system. Following this overall review, distribution channel structure is then discussed in detail, emphasizing its unique characteristics and the rationale for the development of this uniqueness. The two other systems, distribution channel behavior and the management system, will be discussed in Chapter III. 16 1? Conceptual Scheme and Operational Definitions In the pursuit of the objectives stated in Chapter I, some simplified conceptual scheme as well as operational definitions of relevant terms will help clarify the Japanese distribution system and direct the study to follow. Opera- tional definitions of each component of the conceptual scheme first will be presented. The proposed conceptual scheme and its structural relationships then will be explained based on the operational definitions. Operational Definitions The nine terms defined below are components of the conceptual scheme. The cultural rationale in marketing channel adminis- tration refers to the underlying measures or unstated premises which rule the manufacturers' administration of their marketing channel. These are abstract or generalized concepts, unique to Japanese marketing channel administra- tion. Marketing channel and administrative behavior refers to the activity, customary trade practice, and business philosophy consciously or unconsciously expressed by a manufacturer in administering his entire marketing channel as one aspect of marketing mix. This term specifically refers to a manufacturer's attitude and action toward his marketing channel members. 18 Marketing channel structure refers to the tangible, physical arrangement of a manufacturer's marketing channel organization. The skeletal framework as shown in a manu- facturer's channel organization chart and the number of member wholesalers and retailers under a manufacturer are examples. Marketing channel behavior refers to the activity, customary trade practices, and business philosophy con- sciously or unconsciously expressed by a manufacturer in business and trade relations with another channel member. Manufacturer's management system refers to the unique methods or approaches used in a Japanese manufac- turer's administration of his own organization. Distribution channel structure refers to the tan- gible, physical arrangement of channel members in an indus- try as well as their physical characteristics, such as the financial composition of a channel member. This is shown as a sum total of each manufacturer's marketing channel structure in an industry. Distribution channel behavigr refers to the acti- vity, customary trade practices, and business philosophy consciously or unconsciously expressed by any channel member in business and trade relations with others in an industry. This is an aggregation of every channel member's 19 behavior, including wholesalers, retailers, and manufac- turers in an industry. Industry's management system refers to an aggre- gation of every manufacturer's management (administrative) system in an industry. (See manufacturer's management system.) Japan's marketinggand management system refers to the behavioral and structural characteristics unique to and inherent in Japanese business practice. In the Operational definitions presented above, two emphases should be noted as important. The first is the distinction between the marketing channel and the distribution channel system. The former term, as defined above and used here, refers to a parent man- ufacturer's point of view and his channel relationships. In contrast, the latter term does not specify any individual channel member's view but refers to the total industry's point of view. Such a distinction is shown in Figure 2.1. The second important emphasis is on the careful distinction between structure and behavior. As was indi- cated in the definition, structure is the "hard" aspect of a system. It refers to the interrelationships between the parts and may be depicted by organization charts, the number of primary wholesalers handling the manufacturers' product, and so forth. It is often visible or defined by statistical I." V:' 0‘ eh. I? 20 (1) Marketing channel system: A parent manufacturer's point of view m M (Parent manufac— '\ turer) ,wl wl W1(Primary whole— , ' !\\\\ ' saler) / ; - _ I / . , \‘ 1 w2 w2 w2 w2 W2(Secondary or wholesaler) , I , h I te ti ry I «I\ \ ‘a r r r r r r r r R (Retailer) (2) Distribution channel system: No Specific agent's point of view (an aggregation of all channel members in an industry) M M M (Manufacturer) I\\/\\ ,. / II I ,/ \\ ‘\./l/ X I W (Primary wholesaler) 1 W1 W1 [\\\ >< -1/>/-/ ‘ XI I//// i T\/-- \\\-\ 22 2 W2 W2 W (Secondary wholesaler) R R R (Retailer) Figure 2.1.—-Marketing Channel and Distribution Channel System. 21 figures and other tangible, physical data. Behavior, on the other hand, is regarded as the "soft" aspect of the system. It may be identified but is less tangible and quantifiable and may be quite subtle. For convenience, in the subse- quent discussion, behavior is conceptually divided into two dumensions: activity/customary trade practice and business philosophy. Conceptual Scheme Based on the terms defined above, the relationships of each component in Japan's marketing and management system will be explained below. (See Figure 2.2.) As was partly explained in the section on opera- tional definitions, the relationship of each component of the system is divided primarily into three levels: econo , industry, and individual manufacturer. Japan's marketing and management system at the level of economy is broken down into three subsystems at the industry level: distri— bution channel structure, distribution channel behavior, and industry's management (administrative) system. These three industry level systems are directly derived from Japan's marketing and management system and, in turn, influence it. This interdependence is shown by two-way arrows in Figure 2.2. Of these three industry level subsystems, distri- bution channel behavior and distribution channel structure have an especially strong interdependence. These two, in 22 “‘1 m .IHUHSHOMWDCMS .I e mcwuoxumz m.:ommn aw neocomEou noon mo mflamcowuwaom .Ewu.m>m Ao>aumuumacdsoflumuumwcweoac usefioomcmz m.»uum5©:H __-.I.-.-.HHHI uofl>mnom o>HumuumHGHEo< Hoccmzo II mcauoxumz m .u.ou5uommscmz , IIIIIII.IIrII - g Hoa>meom Hoccmnu .I mcauwxumz ,- . i m.umusuommscmz w I II- I_ I; e IIIII If: Eouuhm acofiommnmz .Eoummm unofiomoamz can "ofiosom Hmsumoonoo 4II.N.~ ousmwm HI I I. IIIIIIIIIIIIIIIIII IIIIII. p .--.-IP----. -. now>msom Andaman coausnauumao _ m .auumsucH TIIIII can mcauoxumz m.:mmwb LI. coaumuumacaec< Hmccmnu mcHumMHmz CA mHoGOHumm HMRDUHSU mo cod.um.odmaucouH -1 ououmsuum - chcmeo I. meauwxuoz M m ..Hmusuomuscmz _ - - gI-I ousuosuum I Hoccmso cowusewuumwo q m.huumooaH W . I I I Ho>wq m.nousa rummage: Ho>oq muuuuvcH Ho>oq heocoou 23 fact, are inseparable in actual business operations, but they are conceptually separated here for the purpose Of analysis and the examination to follow. Each of the three subsystems at the industry level is closely connected to the relevant systems at the indi- vidual manufacturer level. Marketing channel structure, marketing channel behavior, and each manufacturer's management system are aligned in the figure under distri- bution channel structure, distribution channel behavior, and industry's management system, respectively. The inter- dependence between each component again is shown by two-way arrows in Figure 2.2. Manufacturer's marketing channel administrative behavior, the main subject Of this study, is then recog- nized as a mixed result or a subsystem Of both the manu- facturer's marketing channel behavior and the manufacturer's management (administrative) system. This indicates that marketing channel administrative behavior shares common characteristics both with marketing channel behavior and the manufacturer's management system. The cultural rationale for marketing channel admin- istration is then identified directly from the manufac- turer's marketing channel administrative behavior. As the Operational definition indicates, the cul- tural rationale for marketing channel administration, identification of which is the main purpose of this research, is an abstract (or generalized) concept which up 7 f! 24 explains the unique sociocultural characteristics Of Japanese marketing channel administrative behavior. In pursuing this main Objective, it is useful tO examine two higher systems Of marketing channel administrative behavior: marketing channel behavior and the manufac- turer's management (administrative) system, given our knowledge of the marketing channel structure. These three systems, including the marketing channel structure, at the level of the individual manufacturer are the means through which we can identify the cultural rationale Of marketing channel administrative behavior. Procedures for the Study These subsystems at the manufacturer level, namely, marketing channel structure, marketing channel behavior, and the manufacturer's management system, have been noted as the most important aspects in this exploration. Know- ledge about these three subsystems, however, is not easily attainable without direct investigation, which is the purpose Of this study. The construction of hypothetical propositions is useful in guiding the exploratory investigation. To con- struct them, a knowledge Of distribution channel structure, distribution channel behavior, and industry's management system is quite helpful, because each Of these areas represents an aggregation of each manufacturer's relevant systems. A knowledge of the systems is also more easily 25 attainable through secondary data sources at the industry level rather than at the individual manufacturer level. Therefore, this chapter first examines distribu- tion channel structure as the basis Of marketing channel administrative behavior, followed by an analysis Of its characteristics and rationale for development. Then, distribution channel behavior and the management (adminis- trative) system are examined and analyzed, based on past studies, both to provide knowledge and to enable us to hypothesize the cultural rationale underlying marketing channel administrative behavior (Chapter III). These efforts do not concentrate on any specific industries. The distribution channel structure Of and distribution channel behavior in the pharmaceutical, dentifrice and toiletry, and soap and detergent industries are briefly presented in Chapter IV. After Offering propositions, a direct investiga- tion is made of marketing channel administrative behavior Of manufacturers. Then, the cultural rationale underlying this behavior is identified and examined in Chapter V. The procedure for the study is shown in Figure 2.3. 26 Distributio ___ __-___n Channel Structure I (Chapter II) I ____-_u_ Distribution I Management Channel i (Administrative) Behavior System (Chapter III)J L (Chapter III) -__..- _ A___- I .-,I_ ,-- ”J, _,m Hypothetical propositions Of cultural rational under“ lying marketing channel administrative behavior (Chapter III) I Research If .—_— methodology I (Chapter IV) Investigation 1of marketing I channel administrative Ibehavior I L .-._-_._ _.--__—.—— -M — ._.., Determination of cultural I rationale j (Chapter V) I Figure 2.3.--Procedure for the Study. v. A." n.‘ r. .3. (Lew * Rs “ 'a .aatzflc imel . ‘ ..VPV\;.3 “ovum. A ‘\“ (fix: Ii. 27 Characteristics of Japan's Business and Distribution Channel System: Survey Of the Literature An Overview1 As indicated in the proposed conceptual scheme, identification of the underlying rationales of marketing channel administrative behavior could be accomplished through studies of each subsystem of Japan's management and distribution channel system. Therefore, each of these subsystems will be examined briefly on the basis of the past literature and factual data. Detailed descriptions and analyses of each subsystem then will be developed in successive sections. Japanese Distribution Channel Structure.--There are a great deal of well-documented literature and statistical data concerning the Japanese distribution channel's struc- ture. As noted earlier, the structural aspect of the i , distribution system is rather easy to understand, mainly because of its tangibility and stability. In fact, the various books and articles relating to the Japanese distri- bution channel system have more or less covered and described its structural characteristics, using exhibits, charts, and statistical data. Some studies have attempted to compare 1In this section, specific literature will not be quoted. Relevant literature for each of the following fields is classified and summarized in Appendix 1. ‘uayt-F 1 ‘ ~49..qu I ‘ I a ‘.‘r‘ u..." ha i‘ a“ I h“ ‘\ 28 the Japanese system with Western systems, statistically or descriptively. Among several structural characteristics, the most important are the lengthy multiple distribution channel and the large number and low productivity of distributors who are predominantly small scale. Other minor character- istics, such as family participation in dominant retailing operations and the large sales share of interwholesaler trade, could be explained in relation to the three charac- teristics noted above. These unique structural characteristics have been described, compared, and explained relatively well, not only in Japanese but also in English studies. The litera- ture includes both general descriptions and detailed industry-by-industry analyses. Although many works do not analyze why the system has developed as it has, some have attempted to "interpret" its uniqueness. No rigidly empirical and systematic explanations have yet appeared, but a few probable and insightful analyses have been made. Japanese Management System.--There is a large body of literature, written by Westerners as well as Japanese, concerning the Japanese business and management system. This abundance apparently is the result of Japan's great world-wide economic success, especially after the late 19508. Several Western scholars and practitioners ‘h 1 rank F. c: :‘loIvu \a . l “4 I?“ :N . , . mt uwme‘ 3;; ‘3.) 'Wctc \ "il‘fl... . I ‘ ’AlflrAfl M'.:‘ oi H... “ XL: 'Iy.A V NM“ . Mg. «4... 29 researched and evaluated the traditional Japanese business and management system to discover why Japan could achieve such.a high economic performance. The long-criticized Japanese management system subsequently was praised and honcued as being "well-suited" or "distinguished" because Of its success. Such topics as the close association of government and business, the role of SOLO-Shasha (trading gical that individual distributors are small in terms of rnmeer of employees, average sales per store, sales floor size, and type of Operation. Statistics of wholesale and retail establishments by size of employment are evidence of fragmentation in the Japanese distribution channel structure. (See Figure 2.6.) In 1968, nearly half of all wholesale establishments had four employees or less. Even more surprising, retail establishments with four employees or less accounted for almost 90 percent of all establish- ments (average number of employees per store for whole- salers and retailers in 1968 was 10.93 and 3.05, respec- tively). The average annual sales per establishment in 1968 were reported at about ¥ 238 million (roughly $79,000) for an average wholesaler (about eleven employees) and approxi- mately ¥ 9.6 million (about $32,000) for an average retailer (three employees). It is interesting to compare the Japanese small business figures with those for the United States in terms of size of establishment (see Figure 2.7). The average sales for Japanese wholesale establishments with 100 employees or more were nearly 1,000 times greater than those for establishments with two employees or less, compared with 86 times in the United States. The same comparison of retail establishments shows a figure of almost 819 times in Japan and 183 times in the United States. Judging from 39 Wholesale Trade Retail Trade Percent of Percent of Estab- Estab- No. of lishments No. of lishments NO. of Estab- with No. of Estab— with NO. cf Employees lishments Employees lishments Employees 1-2 63,571 22.6 932,951 67.1 3-4 62,076 22.1 295,481 21.3 5-9 80,453 28.5 116,148 8.4 10—19 43,733 15.6 30,829 2.2 20—29 13,430 4.8 7,080 0.5 30-49 9,483 3.4 4,163 0.3 50-99 5,609 2.0 1,801 0.1 100 and C>xrer 2,730 1.0 769 0.1 Figlare 2.6.--Distribution of Wholesale and Retail Estab— 1ishments by Size as Measured by Number of Employees, 1968. \ Scnllrce: Wagakuni no ShO'gyOi 1969 [Commerce in Japan, 1969] (Tokyo: The Ministry of International Trade and Industry, 1970), pp. 120-123. 40 tiris evidence and the fact that nearly half of all whole- sanlers and 90 percent of all retailers employed four persons orr less (see Figure 2.6), it may be noted that a large num- knez: of very small-scale distributors operate on a very small sales volume, while a very small number of large-scale dis- tributors have a very large sales volume. Concerning the sales floor space of retail stores, nearly 50 percent of all retail establishments in 1968 had less than 19 square meters (roughly 200 square feet), and afiLnncost 75 percent had less than 30 square meters (roughly 320 square feet). (See Figure 2.8.) Small distributors depend heavily upon family metubers. Yoshino has already pointed out that 29 percent <>f7 Vvholesale establishments and 77 percent of all retail st(Sires belonged in the category of family dependency for liikocar supply (Yoshino, 1971, p. 14). These retailers and WhOlesalers do not clearly separate store operations from the household budget. It is significant to note, however, that this dependence upon family members, especially in retail stores, is not unique to Japan. In Japan proprietors and their families com- bined amounted to 37.7% of all workers engaged in commerce in 1966. The figure was 15.5% for the United States, and while the percentage was a little higher in West Germany and the United Kingdom, it was still lower than that for Japan. The figure for Italy was 57.6%, which suggests that commerce in the country leans even more heavily toward family trade (Tajima, 1971, p. 32). 41 Wholesale Establishments Retail Establishments No. of Enqployees USA Japan USA Japan 0-2 1.0 1.0 1.0 1.0 3-4 2.0 3.3 2.8 3.5 5-9 3.4 7.7 4.9 8.7 10-19 5.7 19.6 10.2 18.4 20-29 ) 39.9 30.2 I 12.6 24.2 30—49 ) 72.4 47.4 50—99 31.9 145.8 54.0 94.6 1()() or nature 86.3 999.0 183.3 818.9 ‘ FEiSJIJre 2.7.--Annual Sales of Wholesale and Retail Estab- lishments of the United States and Japan According to Size of Establishment, 1966 (Sales of Establishments with 0.2 Employees= 1.0). \ t TOkyo: The Ministry of International Trade and Industry, 1968), p. 6. Source: Wagakuni no ShOgyo, 1967 [Commerce in Japan, 1967] 42 Sales Floor Percent of All Space (square Retail Estab- meters)* lishments 1-9 11.8 10-19 36.2 20-29 22.3 30-49 18.4 50-99 8.1 100-199 1.7 200-499 0.8 500-999 0.2 1,000 8 Over 0.1 E *1 square meter = 10.8 square feet. EEiSIIJre 2.8.--Percentage Distribution of Retail Stores According to Sales Floor Space, 1968. \ SCNerce: Wagakuni no ShOgyO, 1969 [Commerce in Japan, 1969] (Tokyo: The Ministry of International Trade and Industry, 1970), p. 84. 43 Prunily involvement in store operations also does not neces- sarily mean that the family income is totally dependent upuon.the store. Retail store Operations often are regarded as a side business or supplement to the main source of family income. Both Tajima and Yoshino explain this situation: Twenty percent or more of the retailers obtained more than half of their household income from sources other than retailing, indicating that retailing was a side business rather than their main occupation (Tajima, 1971, p. 27). It is not uncommon to find a situation in which wives operate small stores while their husbands have full-time employment elsewhere (Yoshino, 1971, p. 14). Limited capital and highly specialized retailers also are characteristic of the Japanese distribution system. (See Yoshino, 1971, pp. 1516, and Tajima, 1966, p. 11). 151GB average initial capital reported by small retail stores (with four employees or less) established in 1966 was only ¥ 780,000, or slightly over $2,000. Even for stores with 10 to 19 employees, the average initial capital was no more than it 2.7 million, or less than $8,000 (Yoshino, 1971, P~ 16). Because of limited financial resources and :Li“Mited physical size, there is a tendency for retail stores to be highly specialized in the types of products they ‘hauldle. The bulk of retail sales for many products still is made through smaller neighborhood stores, most of which are either single line or limited line stores. This is 44 especially true of food stores. Japan External Trade Organization (JETRO) has reported, based on the Ministry of International Trade and Industry's (MITI) Wagakuni no Shagyb, 1970, that "the various types of food stores in JEap>an appear to be about 80 percent specialized, that is about 80 percent of their sales are in their product 5, p. 27). Yoshino speciality” (JETRO Marketing Series No. also succinctly states the situation: In 1968 there were more than 100,000 stores specializing in liquor and seasonings, 20,000 meat shops, some 49,000 stores handling fish and related products, more than 60,000 fruit and vegetable stands, more than 238,000 confectionery and candy shOps (YoShino, 1971, p. 16). Whether or not these specialty shops are efficient “’1 ll be determined in the detailed discussion to follow, but the fact that these small-scale distributors operate in the dominant part of Japanese business is a result of i t 8 historical deve lopment . Low Productivity of Predominant Small Distributors.-- A third main structural characteristic of the Japanese distribution system, low productivity, has been often noted. One American expert on Japan's marketing system, for e“ample, obserVed‘ that a -small family retail outlet can s"lr‘vive on as little as $15,000 in annual sales volume (Paris, 1969, p. 48). ‘ Sales per person (laborer), although only one innong many, is an important measure of distribution produc- tivity. These figures for wholesaling and retailing 45 according to the size of business are shown in Figure 2.9. According to this figure, the annual sales per person of wholesalers with l to 2 employee(s) were about 50 percent axaéi 75 percent less, respectively, than those with 5 to 9 auaéi 50 to 90 employees. When per person sales for 1-2 ennp>loyee wholesalers are compared with those of 100 or 1nc>zse employees, the latter figure is seven times higher ‘tlazan the former. It is apparent that in wholesaling there 1153 a.wide productivity discrepancy between small-scale afllci large-scale operations, that is, small-scale wholesalers ‘W11<> dominante in Japan Operate with a very low sales per Person rate compared to a very small number of large-scale ‘V11c>lesalers. The tendency can be seen in retailing opera- tions. Per person annual sales of retailers with 1-2 emu£>loyee(s) (approximately ¥ 1.8 million) were also about 50 percent and 75 percent less, respectively, than those with 5-9 and 100 or more employees. This low rate of per person sales of Japan's small- SCale distributors is clearly evidenced by comparisons with selected countries. Yoshino notes: In contrast, in Great Britain, virtually no variation was found in sales per employee according to different size firms. In the United States the sales per person were reported to be highest among stores with 50 to 99 employees, but even here they are only about 50 percent greater than those of stores with two employees or less, in contrast to more than a threefold difference in Japan. These figures reveal the relative inefficiency of very small establishments in the Japanese distribution sector (Yoshino, 1971, p. 15). 46 (Uniti_ ¥1,000 Annual Sales) Y I I ? I // 50,000 i I l ';' _ . I I l _ +— ._ + ~ g ‘l / 20 000 I l i //// , ; . i. .__. _. _ «l _ __ ' Wholesalingxflpi// _1 /' i ’ l ‘I' l l “' _ l i“ ‘‘‘‘ -l " I-—- 10,000 I , I l --I——~- i . VIN-” .-- l ...... .4»- 5.000 l—e—t-e+--~———-: — 4 L n -4-.- ' “ I _ 1-2 3-4 Number of Employees 5-9 10-19 20-29 30-49 50-99 100 or over Figure 2.9.-~Sa1es Per Worker by Size of Outlet, 1970. \ =5;<=In.1rce: ”Commerce of Japan” ShOgyG). The Ministry of International Trade and Industry, (Tsusonsho, Waga Kuni no 47 In addition to this evidence, two points should be considered when interpreting the data. The first is the high dependency on family members as laborers in smaller Family members were not counted as business operations. laborers in the data; if they had been the discrepancy in productivity between small-size and large-size establish- ments would be greater. Second, manufacturer-paid or Wholesaler-paid detailmen and demonstrators were not Most big department stores and large— Counted as laborers. Scale wholesalers depend heavily upon this unique Japanese c31-181:om (to be discussed later), but those workers were not included in the per person sales figures (Korekara no Therefore, the large discrepancy of MEL, 1972, p. 88). per person sales between the two extreme scale sizes should be discounted in this case. Although several other factors could be taken into acczount, the evidence of low productivity among small-scale Tajima cited the three most distributors is irrefutable. ba-czkward aspects of Japanese distribution activities as being labor intensity, lack of standardization, and lack of These are apparently slfstematization (Tajima, pp. 37-40). ScDine of the causes of low productivity, but productivity Environmental factors, Qannot be considered in a vacuum. especially consumers' shopping convenience, must be taken lhto account. JETRO has described Japan's dominant pattern 9f neighborhood stores: 48 In most urban areas shopping areas are located within a few minutes walking distance of almost any residential area. While there is much to be said for the shopping center as it has developed in Western nations, with its large parking area and variety of stores, the Japanese neighborhood shop- ping center [districts] also has much to offer in convenience to the shopper. . . . For example, the super market will usually handle several types of tea, but not the variety that the specialized neighborhood tea shop handles (JETRO Marketing Series No. 5, p. 28). Another source says: Limited income, lack of storage facilities, and the strong preference for freshness led housewives to make frequent shopping trips, sometimes several daily. And of necessity, they had to confine them- selves to neighborhood shops. Women had ample time on their hands and lacked opportunities to utilize their spare time for economically productive activi- ties. Besidesshopping constituted to many house- wives the only opportunity for social interactions (Yoshino, 1971, p. 23). The situation described above still exists today, and neighborhood stores are extremely convenient for the con- sllmer. Thus, the degree of productivity cannot be deter- ItIii-.lrled only by sales measures. It must be considered within ule overall cultural context. EESEEflEionale for the Development of EgglEEique Distribution Channel \tructure Why have the various structural characteristics of (J-aqpan's distribution channel system develoPed as they have? I"\lll examination of this question might require several ‘9‘31umes, especially if proper consideration were given to (Fultural, geographical, social, economic, and techn010gical factors. Although such studies are extremely important and 49 interesting, the topic will be summarized rather succinctly here on the basis of previous research simply because it is rust the direct aim of this study. In investigating why the Japanese distribution cluannel system evolved into its present form, G. A. Elgass and L. P. Dowd enumerated six reasons for the length and Intrltiplicity of the channel (Elgass and Dowd, 1963). lesthough published more than a decade ago, most of their ‘9(>1:k still is relatively widely accepted. <=11£1nne1 1. 2. 3. \ As the key factors behind the lengthy multilevel structure, they enumerated the following: The national market covers a great distance because of the long, narrow shape of Japan. The 94 million consumers, with a 1961 income per capita of approximately $360, constitute a broad but thin market.3 The buying habits of consumers make very intensive retail distribution necessary for some types of products. Housewives shop daily for food. In a large city there are strips of small convenience-goods shops within a short walking distance from almost every residence. The atomistic size of the large proportion of manufacturers, wholesalers, and retailers, plus their limited capital, encourages, if not requires, that the firms which perform the functions in the channel system make use of an additional link or two. Secular unemployment, coupled with cultural patterns which favor individual proprietorship, tend to retard the growth of large-scale busi- ness units except when technology requires large-scale operations. 3This factor is outmoded today because 1974 income 19:3: capita in Japan was almost ten times as much as that Of 1961. This factor, however, was a very important }1%storical cause in formulating today's unique Japanese stribution structure. 50 Manufacturers often perform little or no part of the marketing task, thus leaving a big job for the middlemen. As reasons for manufacturers' use of multiple cflnannels, they found the following four factors: 1. appears For a given product or product line the specific market tends to have a wide range of diversity for example, from Tokyo to a tiny rural village; from cottage industry to a giant corporation. Similarly, the middlemen vary from the very large and financially strong to mamma and pappa shops. With the economy's rapid growth rate and new diversification of industry, there are no tradi- tional channels for some new products. If dis- tribution through several types of retail stores is needed, this may well require the use of several types of wholesalers. Recently, some supermarkets and discount houses have been born, to add to the diversity of retail types that the producer must reach. Scrambled merchandising by established channels of distribution is not lacking in Japan. As shown above, today's distribution channel system to be the result of its unique cultural environment, 3Larlcluding geographical, sociopolitical, economic, and demographic factors, consumer shopping behavior, and the general business and management system, all peculiar to {JrEiEEuh torical ~More recently, Yoshino also has analyzed the his- and environmental development of the Japanese dis- ‘t3111bution system (Yoshino, 1971). He questioned why the d~5-stribution sector has been virtually unaffected by the t‘ather sweeping changes that have taken place elsewhere in tShe economy. Not far different from Elgass and Dowd, he gave four major reasons for this situation: 51 1. the absence of a broad consumer market 2. the continued importance of small manufac- turing establishments 3. the role of the distribution sector to absorb a large share of the surplus labor force 4. inadequate infrastructure To his first reason, the absence of a broad consumer market, Yoshino added that "not only was the average con- sumer's expenditure limited, but small income forced him to purchase goods in small quantities at frequent intervals" (ibid., p. 23). Also, observing shoppers' behavior in Japan, he pointed out that “the lack of consumer mobility and the need to shop frequently have provided a powerful rationale for the existence of a large number of small Stores” (ibid., p. 23). Expanding on his second reason, Yoshino emphasized that small manufacturing establishments long have occupied all extremely important place in the Japanese economy, IF>Eirticu1arly in the production of consumer goods. Using true available data, he suggested that in 1967 90 percent ()1: manufacturing establishments fell in the 1-29 employees Qategory (74.0 percent with 1-9 and 16.6 percent with 10‘29 employees). He concluded that ”the continued presence Qf a large number of highly fragmented small production urtits requires the services of equally many marketing il'ltermediaries" (ibid., p. 24). He also explained the 11istorical development of the country's industries, begin- r1ing with the feudal Tokugawa era (sixteenth to nineteenth century) . After briefly explaining the extensive 52 geographic specialization of products in the feudal days and their later nationwide distribution and recognition, rue reasoned that ”since the great majority of those produc- jang units typically have been small, the marketing of their crutput also requires complex arrangements and multiple lxevels of marketing intermediaries" (ibid., p. 24). Concerning surplus labor, Yoshino explained the sseerious and nagging problem of unemployment throughout the 1?]:ewar decades, as well as during the early postwar years. lies reasoned that easy entry into commercial activities, ‘VIIich had attracted a large number of the unskilled who <>tflherwise would never have been employed, had resulted in 1the proliferation of marketing establishments. Finally, using available data, Yoshino enumerated £3<§veral inadequate features of the infrastructure which deter the smooth flow of information and materials, such iii; poor road conditions, storage facilities, communication, ialmd transportation. He then concluded that these inade- ‘(Ifiaacies had been an important factor contributing to the ‘3fiavelopment of highly fragmented and specialized marketing jLntermediaries. Several other authors4 have dealt with why Japan's (listribution structure has resulted in today's form, but ‘Ihe studies by Elgass and Dowd and Yoshino are the most \ 4See, for example, the following literature: Adams and Kobayashi (1969); Tajima (1971); Nakamura and ’Tajima (1969); Paris (1969); Kubomura (1967); and Weigand (1970) . 53 comprehensive. As noted above, the complexity and multi- plicity of Japan's distribution channel structure appears to be the product of its unique environment. Although the future is not certain, it seems the development of the system in the past was well adapted to its surroundings. The present and future challenge to the system involves its adaptation to new, emerging socioeconomic conditions vvliile remaining compatible with the traditional aspects 0 f Japanese society . CHAPTER III SOME CHARACTERISTICS OF JAPAN'S DISTRIBUTION CHANNEL BEHAVIOR AND MANAGEMENT SYSTEM This chapter examines and analyzes Japan's distri- bution channel behavior and management system. These two aspects, as explained in the previous chapter, are directly related to marketing channel administrative behavior, which is the subject of this research. To provide back- ground knowledge, the unique characteristics of Japan's distribution channel behavior and management system are noted. Based on a survey of the literature, four proposi- tions then are hypothesized. Characteristics of Japan's Business/Management System A recent article in the Wall Street Journal succinctly described the Japanese business/management SYstem and compared it to Western-style management as fOllows: Japan's economic iconoclasm appears to defy economic analysis: it would serve as a textbook model of how not to succeed in Western—style business. Under our system, promotions are largely based on ability. But the rise to 54 55 Japan's executive suites is largely up the escalator of seniority. A guaranteed job for life is considered economically impractical in the U.S., a sure bet to stifle progress and impede change. Yet lifetime employment is entrenched in Japanese corporate life. American executives are celebrated for being able to make bold decisions. In the Japanese system, individual initiative is dis- couraged by decisions arrived at by consensus after extended debate, consultation and discussion. And when Japanese workers define their goals by echoing Samuel Gomper's succinct "More!" they mean "more" for their employer as well as for themselves (McDowell, 1974). Another recent article in Business Week identified three characteristics of Japanese management as being the most responsible for that country's current success in business Operations. They are lifetime employment, payment by age and length of service, and decision making by consensus (Diebold, 1973). As clearly indicated above, it seems appropriate to consider the Eigqusystem (consensus decision making), 1ife~ time employment and the seniority system, and harmonious group-oriented management as characteristics of the Japanese business/management system. These three topics, plus Western influences on the Japanese management system, are discussed below. Ringi System One of the most widely known components of the Japanese management process is the giggi_system, which involves decision making by consensus. Yoshino devoted an entire chapter in his book on Japan's managerial system to its discussion. As he pointed out, it is "much more 56 than just a procedure" for decision making and "represents a basic philosophy of management deeply rooted in Japanese tradition” (Yoshino, 1968, p. 254). JETRO's booklet, Doing Business in Japan, also suggests that "a recognition of the operation of this custom (the {Egg} system) will be useful in interpreting attitudes shown by Japanese busi— ness partners“ (JETRO Marketing Series 8, p. 29). The ringi system is, in fact, fundamental to an understanding of Japanese management or administration. What does the term mean? Yoshino defines it literally as follows: The ringi consists of two parts--£i2, meaning "submitting a proposal to one's superior and receiving his approval," and gi_meaning ”delibera- tion and decision." The ringi system has, indeed, all of these features (Yoshino, 1968, p. 254). Since the authority and responsibilities of lower echelon nmnagers in Japanese organizations are ill—defined and since they receive no policy guidelines from their superiors, they ”must refer all but a few routine decisions to top management" (Yoshino, 1968, p. 255). In doing so, a cer« tain procedure is needed. A document, known as a ringisho, is drafted, and in it the matter to be decided and recom- mendations for action are described. This ringisho is then Presented in such a way as to seek top management's approval of a subordinate's specific recommendation. The working 0f the ringi system is described as follows: When the formal rin isho is ready, it must be circulated among various sections and departments that will be affected by the decision, or whose 57 cooperation will be necessary in its implementation. As each manager evaluates it, he indicates his approval (if he concurs) by affixing his seal. By complex and circuitous paths, the ringisho slowly works its way up to top management, eventually reaching the president. When the president approves the ringisho by affixing his seal, the decision is final. The ringi document is then returned to the original drafter for implementation. When a deci- sion to be made is of some importance, it is quite likely that a considerable number of prior con- sultations will take place with those who may be affected by it, as well as with those who are in a position to influence its outcome. In formal meetings and by informal means, an exchange of views and some bargaining will take place. It is only after a consensus is reached that the rin isho is prepared and circulated among various executives' for their formal approval (Yoshino, 1968, p. 255). In this manner lower ranked peOple in the organization share responsibilities and risks with the entire management by asking their approval. "Decision making then becomes a group activity and individual responsibility is avoided“ (Adams and Kobayashi, 1969, p. 80). This harmonious consensus decision-making system is believed to stem from the Japanese family system and is a kind of paternalism. Perhaps this origin gives the system its slightly archaic quality. All those involved in making the decision are obliged to support the outcome, even when they disagree with the choice. Of course, an effort is made to have the process appear democratic. Outwardly, the ringi system may seem to be very democratic, because everyone has participated in the decision. However, it is also a convenient way of avoiding responsibility, and can be considered collective irresponsibility. There is no space on the ringi forms for disapproval. Sometimes an executive has to put his hanko (personal stamp like a seal that all Japanese Have) on a form because everybody else has done so. He then affixes the 58 hanko sideways to show that he has seen the paper SEE—does not positively approve of it. When he is violently against a decision, he places the h§gk2_ upside down (Imai, 1969, p. 83). Although the system has been improved by the use of a more simplified ringisho form and an executive committee meeting for decisions, the basic philosophy of a consensus decision arrived at under a paternalistic management seems to be deeply rooted in the Japanese management system, and the system itself never has been abandoned. In fact, a recent survey of Japanese companies reported that "about 90 percent of them still used the ringi system," although "about one-half of the firms indicated that they were modifying their procedures to expedite decision making" (Imai, 1969, p. 83). Lifetime Employment and the Seniority System Lifetime employment and the seniority system also are unique to Japanese management. Most employees are hired by a company immediately upon graduation. The company then provides in-plant education and training and continues to employ them until the compulsory retirement age of 55 is reached. Employees are unlikely to be dismissed before retirement, or to change jobs. Under this system of §h§shin~koy§ (lifetime employment), ”the longer the service of the employee, the higher will be the payment and the position to which he is assigned” (Grasshoff, 1969, p. 96). Thus, the nenkB-joretsu (seniority system) is a natural 59 outgrowth. As a result, employment becomes fixed, and Japanese management is often criticized because it does not adjust its workforce according to business fluctuations. There is virtually no layoff of employees, and employee turnover is very low (Imai, 1969, p. 77). In fact, layoffs and turnovers often are considered evidence of a company's bankruptcy. Even in such a situation, employers try to be as benevolent as possible (Butterfield, 1974, and "Death in the Family," 1974). As indicated by the above, lifetime employment and the seniority system are inseparable; only with the former is the latter possible. Also, the latter strengthens the former; because employees are guaranteed permanent jobs in the company, the seniority system provides the incentive for senior and experienced employees to remain in the organization and receive promotions and seniority payments (Hazama, 1973, p. 43). Within the literature on the subject, Takada has ably analyzed and summarized the lifetime employment System based on past studies and his own insights. He Cautioned that the system, which is often misunderstood by Westerners, is only possible under the following condis tions (Takada, 1974): (l) lifetime employment assumes that employees do not make egregious mistakes and are not malicious. For example, they do not steal or leak corporate secrets; (2) it is a customary, not legislated system; (3) it permits voluntary retirement by the employee. 60 Employees also may transfer to another company at any time without being under any obligation to the company; and (4) the system sets a compulsory retirement age of 55, except for top management, although there are strong demands for extending it. Takada also gave three reasons for the historical development of lifetime employment in Japan. First, there was a need to integrate laborers. After winning two signi- ficant wars against China and Russia in the early twentieth century, the economy expanded greatly, accompanied by an increase in the work force. This increase necessitated a new management philOSOphy and a system such as lifetime employment to integrate these workers into the economy. Second, modern technology required that companies keep capable employees as long as possible. Third, pressure from the labor movement forced companies to provide secure employment. Whether or not lifetime employment and the seniority system are desirable is still moot. Many factors must be considered in their evaluation. In general, Westerners who have written about the Japanese management system favor these practices, while Japanese opinions vary. Some well- known Western business professionals such as James C. Abegglen and Peter Drucker strongly advocate their impor- tance as contributing factors to Japan's economic and business growth. Most Japanese writers are more cautious in their evaluations. 61 Among the many advantages of the systems, the most important is employment security. This results in stable employee income, company loyalty, some economies in the long run, smoothing of the impact of technological innova- tion (because of no dismissals and maintenance of good quality laborers), and the social responsibility of management (through providing secure employment). The disadvantages are discouragement of employee motivation, lowered morale, inflexibility in adapting to economic fluctuations, a fixed rather than variable amount of labor, and an imbalance between ability and job position. The system also places continuous pressure on business to expand because companies have high fixedvlabor costs. Apparently this creates the excessive domestic and inter- national competition characteristic of Japan. At present, as part of the new Japanese style of paternalistic management, many companies are attempting to promote the advantages and reduce the disadvantages. In an effort to increase flexibility, part-time and tem- Porary employment has been widely used. Raising the compulsory retirement age also would reduce inflexibility, but this is a controversial issue. One solution would be for companies to recruit from the pool of retirees after examining recruits on the basis of ability and health. To improve employee morale, some companies make regular inter- Organizational transfers or establish special promotion channels for able employees through qualifying examinations. Some firms provide various educational training courses. 62 Attendance at outside management seminars, held at the company's expense, by many employees, including senior ones, is almost compulsory. If they take advantage of these opportunities for self-improvement, many employees can keep abreast of environmental and technological changes (such as in the computer field). Based on corporate and literature surveys, Takada has summarized the general trend and direction these systems will take in Japan. Lifetime employment will per- sist as a corporate philosophy, but the seniority wage system may be improved gradually by implementing a merit- based payment system (Takada, 1974, pp. 45-55). Regarding the seniority system, Nakane maintains it is especially suited to and is even necessary in Japan's vertically structured society. PeOple would become confused if they believed everyone equally endowed with talent. The system preserves harmony and loyalty. It is said that the seniority system works when authority is ill-defined and rules are lacking, which are Characteristics of Japan's business system. In this situa- tion, experience acquired through the seniority system becomes an especially important and useful guide, although. this does not necessarily constrain behavior. Respect for upper echelon personnel is quite meaningful, as the follow- ing quotation suggests: A corollary to the rigidly hierarchical organi- zation of Japanese enterprises is the deeply ingrained belief that older men of long experience 63 merit the respectful attention that accompanies their advanced status, while younger men, no matter how clever they may be, are too inexperienced to be listened to. Executives feel that the man who can solve management problems is the man who has successfully done so over the years (Adams and Kobayashi, 1969, pp. 103 and 126). Management Based on Group Orientation and Harmonious Human Relations More than a decade ago the London Economist des- cribed the Japanese management system as follows: For a variety of historical and sociological reasons there does seem to be a sort of inbred collectivism in the Japanese people, whose out- ward manifestations (this is a wild over-simplifi- cation) bear some caricature-like resemblance to the atmosphere in the heartier English public schools. This atmosphere disconcertingly for the visiting analyst, can overlay the attitude of the Japanese worker (as well as the Japanese executive) in the more successful industries to his job: up the old firm; Mitsubishi Heavy Machinery plant for ever; act as a fag in your pockets when passing the headmaster, and expect in return to be treated by him as one of "my people" to whom he has a special responsibility in times of trouble; feel a genuine personal involvement in the factory's production record and other collective achievements; actively prefer to live together cheek by jowl and spend a lot of your leisure time in group activities (often of a self-improving sort) sponsored by the firm (Correspondents of the Economist, 1963, pp. l6-17). TV Although the Economist-exaggerates slightly, its description is basically true, even today, of a typical Japanese laborer's behavior and attitude. And although the reporter was surprised, few Japanese would consider this situation remarkable. What they do find curious is the astonishment of so many Westerners. The latter may lament the lack of individual initiative and independent thought in Japanese 64 corporate life, but these concepts have little place in a society whose highest values are harmony, human dignity, group consciousness, and togetherness (McDowell, 1974). Collectivism, groupism, togetherness, the family, and paternalism as well as the ringi system, lifetime employment and the seniority system already discussed, all have been used to describe the Japanese management system. The element common to all of these is a group-value orien— tation as opposed to the individualism expressed in Western philosophy. The following quotation elaborates: Nurtured in the traditional collectivity orien- tation, it is readily understandable that Japanese management would emphasize loyalty and duty to the group, harmony and cooperation among group members, rather than individual functions and responsibilities. Permanently committed to the interest of the collec- tivity, each member is expected to do whatever is deemed most important in the fulfillment of the goals of the collectivity at a given moment in time (Yoshino, 1968, p. 203). The Japanese management system, based on collecti- vism or paternalism, thus places the highest priority on the group value of the company as a whole. The value of the individual is secondary or is sacrificed to this group orientation. Of course, individualism may be pursued, but only through the group. In an extreme sense, the interests of the individual and the group become one and inseparable. It is widely known in Japan that this emphasis on the group value stems from the vertical social structure which has been developed throughout Japan's history. 65 It (subordination or superiority) is all deter- mined by the symbiosis of Japanese society. The hierarchy of the vertical relationship is not determined from the outside, nor is it imposed from above; it is the actual working of the relationship, namely of the people involved. It would be erroneous to construe it along the lines of western individual- ism. It has been noted repeatedly that even in present-day Japan expressions of individualism (Kojin-shugi) are negative in the sense that they are negations of loyalty to the group (giri) (Ballon, 1971, p. 13). It should be realized that group orientation is a social norm in Japan. It is often said that Japanese business firms pursue two objectives. One is the pursuit of business profit, as is common in Western nations, the other is the maintenance of the group. Hazawa characterizes this situation as 'quasi-gemeinschaft,” using Tennes's gemeinschaft- geselschaft scheme, because many Japanese companies exhibit both an economically rational profit orientation on the basis of individualism (geselschaft) and a more emotional group orientation (gemeinschaft) (Hazama, 1973, pp. 18-20). Management based on group orientation, such as collectivism and paternalism, tends to emphasize ng (harmony). W3_does not mean merely cooperation and coordi- nation. It is based on the willingness of the individual to compromise and sacrifice for the group value (or main- tenance of the group). The ringi_system, lifetime employ- ment, and the seniority system apparently are based on this philosophy. There are several manifestations of Japanese com- panies' efforts to maintain this harmony in their management 66 policies. The first is the method of personnel recruitment. When considering a new college graduate, most companies emphasize jinbutsu (general human character). Personal ability is important, of course, but even if a candidate's ability is outstanding, he will not be employed unless he is cooperative, liberal, and harmonious. Applicants for management positions with elite Japanese industrial organizations are required to take a battery of exams spread over several months. Only a small percentage survive, since those who pass the aptitude or physical exams still must be judged on the basis of whether they will fit smoothly into the organization, an economic family that provides protection and security in return for the submersion of one's individual identity. Those who survive the weeding out process are then sent to company training institutes for orientation in spiritual consciousness and company pride, They learn the company song and memorize company mottos (McDowell, 1974). Furthermore, individual behavior which threatens to decrease the morale of others is severely frowned upon. For example, if an employee eats a sandwich outside lunch hours he will be criticized, even though he performs his job well, because he acted alone and may lower others' morale (Hazama, 1973, pp. 26-27). A third manifestation lies in the efforts companies make to keep harmony by subduing competition and discrimina- tion and softening conflict and tension within the company. For example, managers, clerks, and other laborers often eat lunch together in the same cafeteria, wearing the same uniforms. Equality seems to be especially emphasized to keep harmony on the surface. 67 Finally, companies try to encourage group spirit. There are many opportunities for employer and employee to mingle. New Year's Day ceremonies, the company's founda- tion day, morning meetings, and so forth, are times for spiritual encouragement to be given to the group bond. In addition, many companies aim for total involvement. Employees receive free medical care, commuting allowances, subsidized lunches, cut—rate groceries, and bachelor quarters . . . At many companies, girls can attend company-sponsored bridal schools. Newly- weds can honeymoon at company villas or company vacation cottages, buy company-built homes on company-owned lots with company-subsidized loans (McDowell, 1974). Because of so many fringe benefits employees feel loyalty to the company. Takada has observed that employee loyalty is the result of these various company efforts. He main- tains that what prevails in Japan is paternalism, not mere benevolence. The system is based on a quid pro qug between management and the worker. In exchange for lifetime employment, the seniority system, and fringe benefits, the worker offers gratitude and loyalty, and this loyalty has played a significant role in the growth of Japanese corpora“ tions. Western Influences on Japanese Business and Management Although the Japanese cling to many traditions, it is not difficult to find evidence of enormous Western influence. As is true of many less developed countries, Japan's modernization has been aptly termed westernization 68 or, more narrowly, Americanization, especially since World War II. After the devastation of war, Japan was eager to introduce and imitate Western technology and culture, although a tendency toward westernization had existed since the Meiji era (1868). In addition to technology, the West has influenced almost all the sociocultural aspects of Japan. Dean has termed this situation Asian westernism. More than any other country in Asia, Japan has adopted the ways of the West. With modern Western science, technology, business methods, military arts, even Western sports, music, and now pinball machines at its disposal, Japan has been recognized for half a century as one of the powers in world affairs (Dean, p. 151). Despite its enthusiastic adoption of much of Western cul- ture, Japan also has kept its traditional ways. In fact, it adds a quality of its own to what it borrows from abroad. Tradition dies hard in Japan, as indicated by the following: A girl may wear a miniskirt to work, but for any real important occasion she will want to wear a kimono and an obi. She may marry in a Western—style wedding gown, but for the reception afterwards she will change to traditional dress (Adams, p. 806). As Dean has said: Japan may look American to an Asian, but to one who first visits Japan from the United States, Japan has many alien characteristics. As the Japanese continue to find themselves in the years ahead, what they find will be clearly distinguishable from the growing range of things we and the Japanese have in common (Dean, p. 175). The amalgamation of two cultures, modern Western and tradi- tional Japanese, has been smoothly promoted because most JaPanese have been educated to believe that Western culture is right and good. 69 Corporate adoption of new Western technology in the business and management field is no exception. Many Japanese firms have introduced American business practices and technology, sometimes bravely abandoning traditional Japanese methods, but usually mixing the two. To be sure, change is creeping into the Japanese system. Strikers sometimes shatter the industrial calm, though they are relatively rare and workers continue to wear company lapel pins and sing company songs. Innovation no longer means merely copying or improving upon Western technology initiatives. Merit promotions, here- tofore limited to tOp management, are no longer unknown in middle management ranks. And recent books telling how to change jobs at a profit have lately found a ready market here (McDowell, 1974). The Japanese are eager to know about foreign business methods. One survey reported that about 80 per— cent of top Japanese executives had traveled abroad more than three times. In terms of exposure to international business, tOp Japanese executives perhaps have more experi- ence than their American counterparts. It is also reported that 40 percent of Japan's tOp executives have been stationed abroad for more than three years (Imai, 1969, p. 78). Many Japanese firms provide in-company management courses for employees and often send them to outside seminars to learn higher management skills. Information Provided in these programs mostly involves American techno- 109y and business and management techniques. It is also Very'popular for Japanese business groups to visit U.S. ~70 companies and institutions. Economic efficiency and productivity are especially emphasized in business adminis- tration courses. American business models, paradigms, and contemporary issues are also the topics of concern to Japanese business today. General Behavioral Characteristics of the Japanese Distribution Channel System There are two aspects of behavioral characteristics: practice and activities, and philosophy and thinking. In the following, these two aspects of the general behavioral characteristics of the Japanese distribution system, which often are considered backward, will be discussed. Practice and Activity Rebate System.--One of the most interesting but most complex business practices and trade customs in Japan's dis- tribution world is the provision of rebates as an incentive to distributors. In fact, it is widely said that if one understands the heart of the Japanese rebate system, one can be an expert on Japan's distribution system. A rebate is generally understood to be a portion of business profit given to resalers in order to motivate their purchase. Types, purpose, and methods of payment for rebates vary widely in Japan. For example: There are straight rebates on the amount of goods sold. A maker may give the wholesaler a 2 or 3 percent commission on sales after the sales have 71 been completed. For a new product the maker may increase the percent of rebate for the first year to about 5 or 6 percent. The exact level depends upon the type of product. Some producers in addition rely on progressive rebates to motivate wholesalers. Wholesalers who meet a given level of sales receive for example a 3 percent rebate, but wholesalers who meet a higher level of sales may receive a 5 percent rebate (JETRO (7), p. 6). Rebates often are offered on a case—by-case basis to individual distributors. The confidential nature of rebates is especially important; if one distributor finds that another receives more than he does, he may request more or at least the same amount. To preserve harmony and loyalty, the rebater often pretends that he is giving the best offer to each. Each distributor, in turn, believes that he will receive a larger rebate if he demonstrates the greatest loyalty. To prevent distributors from feeling uneasy and distrustful, many manufacturers have initiated more explicit rebate systems, but in such a complex system this effort seems to have had little effect. In fact, there reportedly are almost 500 names for the various types of rebates (Kanai, 1970, p. 16). The purposes of the rebate system, which determine rebate provisions, are summarized in the following (Fujieda, 1970, pp. 6-7): As sales_promotion (l) to motivate distributors' purchase and enhance resale (2) cultivate new sales routes (channels) (3) acquisition of new customers (4) sales expansion for weak product line (5) market entry and expansion of new product (6) quick disposal of unfavorable inventory (7) provision of stable distributor's margin 72 As rewards (1) for a good location and space provided for display (2) for an effort at sales expansion (3) for cooperation in a sales campaign (4) for installment of a special display corner (5) for cooperation in an advertising effort As control (l) maintenance of price system (2) promotion of earlier payment (shorter term promissory note) (3) promotion of cash payment (4) limited dealing in competitor's products (5) limited return of goods sold (6) participation of a manufacturer's channel member Varieties of types, purposes, and functions of rebates make the operation very mysterious and complex. A drug wholesaler in Tokyo reportedly employs five full-time clerks solely for complex rebate calculation. One electric applicance wholesaler supposedly utilizes thirteen employees for 25 full days a month for calculation of rebates (Kanai, 1970, pp. 14-15). Those manufacturers who can afford to now use computers for these calculations. Although there are several possible ways to improve rebate calculation, mechanical methods do not necessarily work well. Rebates often are provided sporadically and for ambiguous reasons, such as "the degree of a wholesalers' cooperation" (Tajima, 1971, p. 44), loyalty, and so forth. Experience and intuition still seem to dictate the appro- priate time, place, and occasion for providing rebates. Soon after World War II, the rebate system was born. Manufacturers had high hopes that it would be a 73 sales promotion secret weapon. To distributors, it meant additional pocket money and a windfall profit given by manufacturers. "As the rivalry among manufacturers grew keener, rebates gradually became institutionalized as a method of competition and as a means of controlling distributors" (Tajima, 1971, p. 44). Once institutionalized as a trade custom, rebates no longer were regarded as "additional profit"; they came to be regarded as necessary. Tajima explains this situation, which may finally lead to a dealer's subordination to a manufacturer, as follows: In the fields of mass-produced commodities and goods publicized in the mass media, there are now more than a few instances of goods being sold with no margin whatsoever. These wholesalers cover their selling expenses with the rebates they receive from the manufacturers. When things reach this stage, no trace remains of the control of distribution by wholesalers, and the subordination of wholesalers to manufacturers is achieved (Tajima, 1971, p. 44). Today, this system is widely criticized as a "vicious cycle" or a ”narcotic" practice. Despite such criticism, this practice has never been abolished because it is so well received by distributors and is such a power- ful weapon with which manufacturers can motivate, stimu- late, and attract distributors under keen competition. The weakness of the distributors' financial position, as previously discussed, creates their reliance on rebates to supplement their profits (or offset their deficits). Furthermore, in contrast to some other nations, such as the United States, Japan's antitrust legislation does not 74 place many restrictions on the levels of rebates which can be granted (Weigand, p. 28). The rebate system apparently has had a comfortable environment in which to develop. Promissory_Note and Deferred Payment System.-- Another unique aspect of the Japanese distribution system is the popularity of trade credit based on Tegata (promissory notes or IOU's). Whereas the promissory note system has largely disappeared from use in the United States, it is still very much alive in Japan. The Tegata may have originated from the harmonious trade relationships among dealers and manufacturers and from the fact that there is a minimum amount of capital in the Japanese distribution system. In any event the very liberal extension of trade credit is commonplace at every stage of the distribution process. It is widely used by almost every purchaser and accepted by every seller. Payment periods range from 60 to 120 or sometimes 180 days, but it is not unusual to find much longer credit periods in some industries and in some Special cases. One Western businessman in Japan observed that "everyone uses them [promissory notes] and some are referred to as 'pregnancy'notes, in that they may not become due for nine months or more" (Glazer, 1968, p. 20). Given the extreme scarcity of capital at the retail level, financing is a very important aspect of the whole— saler's function (Yoshino, 1971, p. 22). This is evidenced 75 by the fact that the major trading companies are the largest source of industrial financing and hence the largest borrowers from banks (Glazer, 1968, p. 20). Wholesalers in Japan must accept long-term promissory notes from retailers. Wholesalers then ask their suppliers (other primary wholesalers or manufacturers) for equal or even longer credit terms. It has been suggested that this archaic structure persists because of this financial reliance; "the more middlemen, the more spreading of the risk" (Glazer, 1968, p. 19). The chain reaction of deferred payment thus has been institutionalized easily as a trade custom and industry sales promotion tool. Once the system was institutionalized, not only financially weak dealers and hundreds of thousands of tiny pOp-and-mom type retailers, but also financially strong distributors and retailers requested deferred payment as a matter of course, sometimes receiving more favorable terms. This chain reaction of financial reliance, however, often leads to a chain reaction of bankruptcies. If a company's notes are dishonored and become uncollectable, its smaller creditors go to the wall. When, therefore, a large company gets into financial difficulties, the inevitable "domino effect" that follows knock over a number of smaller companies down the channel of supply. In 1960, there were 1,172 bankruptcies; in 1967, the figure had risen to 8,486 (these were all bankruptcies involving over ¥ 10 million) (Adams and Kobayashi, 1969, p. 68). The promissory payment system is very flexible, having no specific pattern, because its validity largely 76 "depends on the trustworthiness and honesty of the payee" (Glazer, 1969, p. 20). As is the case with the rebate system, credit is provided on a situation-by-situation basis, depending upon the buyer's financial position, and the strength of loyalty and human contact between buyer and seller often determines credit terms. The human factor is again essential in this practice. Liberal Return Privileges.--Return of goods privileges are relatively liberal at all levels of the Japanese distribution channel. Many suppliers automati- cally expect a certain proportion of goods sold to be returned after delivery. These returns are not necessarily attributable to deficient or damaged goods. Customarily, "your goods would not sell" is the reason given. As is true of other unique Japanese trade customs and practices, the privilege of purchaser returns seems to stem from several business conditions. The most important of these is the already mentioned financial weakness and limited capital positions of middle- men, especially dominant small retailers. They simply cannot afford to keep unsold products in stock in their limited store space at their own financial risk. Close human relations and long associations between small retailers and wholesalers also work in favor of the liberal return of goods. The financial weakness of the purchaser, however, is not the sole cause for large quantities of returns. 77 Efforts to balance the market and acquire economic power, coupled with supplier competition, are other important factors. For example, large Japanese department stores usually are granted this privilege by wholesalers without much question. To attract these stable, large-volume outlets, which often enjoy strong consumer loyalty, wholesalers permit liberal returns. Wholesalers, in turn, transfer the burden of returned goods to manufacturers to minimize their losses. Again relying on past associations and the forces of com- petition, they request return privileges of their suppliers. In highly competitive industries, manufacturers often ship their products to wholesalers on a judgmental base. Without any specific orders, manufacturers send a mihakarai-okuri (a shipment based on the manufacturer's estimate of a wholesaler's stock level) because manufac- turers must dispose of a certain volume in order to main“ tain economies of scale in production. Wholesalers accept these shipments, although grudgingly, and usually try to sell the excess further down the channel. But such an aggressive "pushing" of products would be unacceptable without the manufacturer's tacit consent to liberal returns from wholesalers. Therefore, most overshipments from manu- facturers in competitive industries presuppose a liberal return privilege. In addition, many manufacturers who have estab— lished a brand image and are reluctant to damage it by 78 price-cut competition at the distribution level accept the free return of goods to maintain their list price. This is especially true of those industries which are affected by resale price maintenance, such as pharmaceuticals, toiletries, and cosmetics. There is, however, much criticism of this trade practice. Improvements are being made slowly, but it will be some time before the system is completely abolished. Frequent Delivery.--The general manager of Polaroid Corporation of Japan once described the typical Japanese order and delivery system, based on business experience: Japan is only as big as California. At home we have a couple of salesmen in California. So, that sounds good . . . . The small dealer, he only covers over the telephone twice a year. The big dealer he goes and sees once or twice a month. But then he comes here (Japan) and starts to study the system a bit closer. He finds out first of all that the dealers expect to be called on once a day, certainly once a week. If I'm a big dealer, I want to pick up the phone and the guy's here in half an hour. If he runs out of stock, he picks up the phone and says "I need two cartons of so-and-so now." Then it's delivered (Schmuckli and Tajimav1973/74: Po 102). If Japan's unique business characteristics, such as the smallness of most retailers and many wholesalers, their limited financial resources, the strong competitive pressure in many industries, and the tradition of close human association are understood, the above situation seems natural. Japanese wholesalers are forced to sell to retailers in small quantities and at frequent intervals. Yoshino wrote that in highly competitive industries, such 79 as drugs, processed food, and home appliances, and certain lines of soft goods the daily shipment of merchandise from wholesalers to retailers is not unusual (Yoshino, 1971, p. 22). Many wholesalers must act as they do, despite long-standing criticism of the system's economic waste and inefficiency. Government hearings about the delivery situation in fifteen industries revealed that there were no rules or contracts between wholesalers and retailers governing the minimum delivery amount or minimum order in most industries, except for instant coffee, which has a stable demand at large supermarkets (MITI, 1972, p. 116). It is important to note that delivery service in Japan is considered an additional service, and therefore cost, by both wholesalers and retailers. In general, within reasonable limits, Japanese distributors seem to prefer quick service as a trade-off to increased costs. Competitive Pricing.--Japanese distributors, including retailers, apparently tend to rely on price com- petition. This issue is related to the Japanese employment structure, as Weigand has observed: As a consequence of the Japanese commitment toward their employees, Japanese sellers must view prices as a highly flexible marketing instrument. The notion of marginal pricing and the importance of selling at prices that contri- bute to unavoidable costs is well understood both by businessmen and by academicians . . . . Prices may be cut at any level in the marketing channel by firms that must have sufficient immediate 80 income to meet their unavoidable costs, but the move ultimately will affect the retailers' cost of goods (Weigand, 1970, p. 24). In addition to the employment structure, several other factors tend to make price a competitive tool. First, to make enough money to survive, financially weak wholesalers and retailers in competition with hundreds of thousands of other pop-and-mom stores often face great price pressures. It is natural that cash-poor wholesalers and retailers offer large discount rates for cash. Second, as a result of Japanese business customs, these middlemen sometimes cannot avoid a volume rather than profit approach. It is on the basis of volume that they receive the largest rebates (which often are higher than the margins they make). Third, other than close human relationships, small whole- salers and retailers have no weapon except price competi— tion. Human associations alone, moreover, are not enough to ensure survival in Japan's highly competitive business world. To increase sales volume, price competition is the major, most effective, and most immediate tool at their dis- posal. Finally, family-run stores, whether wholesale or retail, can afford to lower prices because they can regard all their labor and Operating costs as zero. It then is no wonder that a specialist in Japanese marketing advises U.S. firms entering the Japanese market as follows: ”On the whole, the Japanese tend to look to price competition as a major way of stimulating demand" (Paris, 1969, p. 53). Another observer also states: 81 With not much exaggeration it could be said that pricing is an open-end affair as well for the seller as for the buyer. More than anywhere else, it is difficult in Japan to form a precise idea (if one wants to!) of the cost of a product because of the many unaccountable or not properly accounted for "human" commitments resulting from the vertical relationship (Ballon, 1971a, p. 15). With the exception of a few internationally known large Japanese enterprises, it is safe to say that the majority of firms still are considered price competitive. Close Human Associations.--It is widely known that Japanese businessmen emphasize harmonious human relations not only within the organization but also with other trade partners. Doing Business in Japan, published by JETRO, provides guidance about business practices and suggests that the significance of human relations in the distribu- tion channel system should be strongly stressed. One of the (detailing) forces' main functions is to establish a personal relationship between the producer, the wholesaler and the retailer. While the detailing force does not visit the retailers as often as the wholesaler, he provides a presence as the representative of the producer on one or two occasions each month and allows the wholesaler and the retailer to express their frank opinions concerning the product and its prospects. Where both wholesalers and retailers are very small enterprises, this personal relationship can be very meaningful to the proprietor in charge of the neighborhood shop (JETRO Marketing Series 8, p. 20). Another example which shows the importance of human association in trade relations as well as general business contacts is the unique Japanese custom of gift giving. Gift giving reaches its peak twice a year, at ochflgen at 82 mid-year and oseibo at the end of the year. Almost every company in Japan sends out vast numbers of gifts, ranging from very inexpensive to very expensive, depending upon the importance of the recipient to the company. Adams comments as follows: [Gift giving] can prove a special headache for the unwary foreigner, who may unconsciously go wrong by being either too lavish or too cheap or by giving something unsuitable. Perhaps nowhere else in the world has the art of giving a present been so refined and so hedged in by protocol, and perhaps only a native—born Japanese is capable of evaluating all the considerations that enter into the choosing of a suitable gift. The foreigner is best advised to leave this thorny problem to his Japanese associates (Adams and Kobayashi, 1969, p. 208). For these business gifts, almost all department stores have special sales departments because this market is too large for them to ignore. In addition to gift giving, entertaining guests is another common technique for establishing friendly associa- tions with trade partners or customers. Evening entertain- ment at restaurants, bars, nightclubs, and cabarets is quite popular, and golf and mahjong are also relatively well established vehicles for promoting friendship and mutual understanding. Many Japanese businessmen want to know the "real” person they are dealing with rather than just his superficial aspects. Contact outside of business hours is considered a good way to discover what peOple are really like. Of course, this method also is used as a simple com- petitive effort to sell the product. According to Tax 83 Administration Agency figures, somewhat more than five in each one thousand yen of sales turnover in Japan in 1969 was spent in this manner, the so-called Kosaihi. The total amount of social business expenses in 1969 was reportedly ¥ 773 billion (or about $2.6 billion), a figure nearly equal to the government's social security budget for that year (Boyle, 1971). This system has been compared to the American businessman's martini-lunch: In contrast to business practice in the West, little or no business is actually conducted by those who make use of expense accounts. In fact, to invite a business guest to an evening of enter— tainment only as a pretext for engaging him in the discussion of business matters would usually be considered rude. If business details need to be worked out there are other times which are more appropriate. If favors are to be asked they are usually asked with crisp indirection. A simple “sozo yoroshiku" (please take care of me) at the end of a convivial evening is one of the most effective soft-sell techniques employed anywhere (Boyle, 1971, p. 193). Heayy In-channel Promotion (Dealer Aids).--In addi- tion to margins and rebate systems, relatively free delivery privileges, promissory notes, and frequent delivery, dealers receive several other incentives or aids from manufacturers or upper-level wholesalers in the dis- tribution channel. These generally are called dealer incentive plans. Examples are an invitation to take a trip or visit a resort area, or tickets to the Japanese theater. Weigand writes: Dealer incentive plans are well known in the United States, but they appear to be much.more common in Japan. A night at Kabuki or a large 84 cabaret, a weekend in Hong Kong, or even a week in Hawaii are rather common incentives for retailers (Weigand, 1970, p. 28). This practice helps create a group feeling and closeness to business associates. Manufacturer-paid demonstrators in retail outlets also are used to strengthen the manufacturer—dealer rela- tionship. Fortunately for Japanese manufacturers and dealers, "Japan's proscription against the use of paid demonstrators appears to be less restrictive than the American interpretation of the law" (Weigand, 1970, p. 28). When a manufacturer or wholesaler sells to a department store, particularly, their agreement often requires the producer to provide a number of sales personnel and main- tain a minimum level of sales. Manufacturers often pro- vide sales girls to supermarkets and larger retail stores (JETRO Marketing Series 8, p. 23). Manufacturers often pay for management education proqrams for dealer personnel in vertically integrated channel relationships. Modern management and marketing techniques are taught at manufacturer—sponsored seminars for wholesalers' personnel based on each level of organi- zational rank. Manufacturers also provide sales promotional tools, such as store display kits and business and managerial information, as well as various types of financing. Send- ing detailmen to dealers is a special dealer aid. "Very often the producer's detail man will visit retailers 85 together with the wholesaler's representative. If he visits the retailers alone it will usually be with the understanding of the wholesaler. In some cases the detail man will also take orders and pass them along to the whole— saler” (JETRO Marketing Series 8, p. 21). Although many may complain that the system is too costly, and change may occur in the future, nevertheless, the provision of dealer assistance is still essential to doing business in Japan. Philosophy and Consciousness Dependency and High Expectancy.--Doi, a leading Japanese psychiatrist who wrote a best-seller, Amae-no-Kozo ("Anatomy of Dependence” 1974), pointed out that Amag (indulgence) is a unique national characteristic. Amgg here refers to the indulgent, passive love which surrounds and supports the individual in a group, whether family, neighborhood, or the world at large. Close dependence and high expectancy of others in a group seems to be the way of life in Japan. This dependency or expectancy can be observed especially among Japanese distributors, and most foreign businessmen are confused by this attitude. As already observed, after a trade relationship is established, dealers expect frequent visits from suppliers (manufacturers or wholesalers) and the best possible service from whoever sells to them. They often regard frequent visits as an expression of a supplier's interest in them or as evidence 86 of their importance to him. A Western manager of Polaroid Corporation of Japan has described this attitude: The dealer expects this service (frequent visits). And this is what most foreign companies do not realize-—this service expectation. It means you must have a very large sales force that can pro— vide that expected service. It must be big enough to cover these dealers at a reasonable frequency. That sales guy can call on the dealers once a week and maybe just drink a cup of tea. But that's expected (Schmuckli and Tajima, 1973/74, p. 102). It is widely said that true economic reciprocity is almost impossible in Japan because of the obvious differ- ences inherent in its vertical social and organizational stratification, exemplified by the boss-follower relation— ship. If two parties are equal in ability, in order to achieve social balance, harmony can be created in two ways: through artificial relationships of the boss: follower type, or through parallel, independent, and irre— concilable relationships, typified by many of the sects within Japanese political parties. Vertical rank differ- entiation, whether based on seniority, merit, or some artificial measure, is essential to preserving harmony. This makes true give—and—take reciprocity difficult. Glazer illustrated this mentality of the Japanese business- man in connection with the capital liberalization of the U.S. and Japanese automobile industries. He first noted that ”the footprint of General Motors on Japanese soil would seem much larger to the Japanese than the footprint of Nissan or Toyota on U.S. soil." Then he said that ”to the Japanese, reciprocity is inconceivable because 87 one is not dealing with equals when one discusses the U.S. and Japan using any acceptable measure, which negates the concept of reciprocity" (Glazer, 1968, pp. 58-59. This paradigm could also explain the mentality behind Japanese distributors' dependency and expectancy. Most distributors regard themselves as weaker than the manufacturers who supply them with goods. They have expectations of and depend upon the manufacturer. Given the lack of true reciprocity, contracts between manufacturers and dealers often are meaningless or disregarded. In a vertical society, one feels that he must protect his subordinate, and his subordinate expects it. This is society's tacit promise. The following state- ment in the JETRO booklet, Planning for Distribution in Japan, illustrates this: These small wholesalers tend to value personal contacts with large wholesalers, retailers and producers much more than written contracts. The smaller wholesalers usually know all of their customers by name and many details of their business. The retail stores are also generally in debt to the smaller wholesalers and the smaller wholesalers in turn in debt to the larger whole- salers, since most sales are made on a 30, 60, or 90-day payment basis. The smaller wholesalers tend to be passive and look to larger wholesalers for information on new products and guidance in many areas of managing their business (JETRO Marketing Series 4, p. 16). Glazer also saw the difference between Japanese and Ameri- can attitudes toward contracts. The Western view of the contract is that a legal contract between two parties whose validity is upheld by the courts is binding upon the parties. 88 The Japanese view is that a contract is a piece of paper and people are human beings (Glazer, 1968, p. 59). Although Glazer did not state them explicitly, he seemed to believe there are two reasons why Japanese busi- nessmen disregard contracts in this manner. First, the Japanese may have a much stricter social code concerning obligation. “The penalty for failure to discharge the obligation is dishonor of oneself, one's name, and one's family, perhaps for generations to come. This is a much stricter penalty than commercial codes exact in the West and hence the Japanese lesser concern for the paper con— tract and excessive concern for the nature of the obliga- tion and the human beings involved" (Glazer, 1968, pp. 59-60). The second reason may be the Japanese feeling of extreme uncertainty about the future. "The Japanese side prefers that contractual obligations be left as vague as possible, in order to provide for a maximum of flexibility." In a vertical society, people believe that another party will not punish them even if they do not exactly ful- fill a contract because mutual compromise based on human concerns is regarded as more important than a piece of paper. Of course, it should be realized that such a rela- tionship is reached through a very careful and selective process. Glazer again explains: In a vertical system, the lower party performs some loyal service for the higher party which then compensates the lower party. But in this feudal 89 system, the upper party does not develop such links with everyone below it because the obligations would be too great. Hence there are strong lasting ties and there are strictly temporal ties. For example, small firm bankruptcies in Japan are mostly due to the fact that the upper party has cut off its tempo- rary business with the lower party which is help- less because it has no strong vertical ties with anyone else (Glazer, 1968, p. 61). Dependency and high expectancy apparently are related to the consciousness of the group member. As stated earlier, wholesalers or manufacturers are expected to show their commitment with occasional presents at the appropriate time. They are also eXpected to provide their trade partners slightly larger margins or rebates than others (JETRO Marketing Series 8, p. 21). This partially explains why rebates cannot be offered to all trade partners. The provider must pretend that he gives the highest rebate and margin to each. Sales Rather Than Profit Orientation.—-There are many indications that participants in the Japanese busi- ness and distribution system are more oriented toward sales volume than profit. After enumerating cases from selected industries as examples, Hanawa explains: Kami yori usui kosen(margin thinner than paper) is a common saying in the Japanese business world. . . . In some cases, totally disregarding manufac- turers' list prices, Japanese agents sell machinery on a negotiable basis, often ending with prices lower than those listed. Why such a thin margin? There is a prevailing Japanese philosophy that "some business is better than none at all" (Hanawa, p. 186). 90 A sales orientation which may even disregard profit- ability may stem from the Japanese lifetime employment system discussed earlier. Permanent employment means that labor becomes a fixed rather than variable cost (Weigand, 1970, p. 24; Baron, 1971, p. 15; and Paris, 1969, p. 43). There is extreme pressure on the Japanese firm to operate at nominal capacity so long as revenues just cover raw material costs. The unique Japanese system of rebates could be another cause. Rebates are based in large part on sales volume. Rebate recipients therefore must sell a fairly large volume, even reducing the gross margin to zero, because the rebates given by suppliers are huge. In addie tion, bank credit, which is extremely important for the poorly financed majority of Japanese firms, tends to be given according to sales volume. A larger scale of opera- tions better qualifies one for bank credit (Baron, 1971, p. 16). It is also worth noting that the term profit tends to be disregarded in Japanese society. According to Ito, historically Japanese merchants were bitterly criticized and often ostracized because they sought profits. An often quoted proverb says: "Bydbu to ShOnin wa magaraneba tatanu” (A folding screen and a merchant cannot stand up unless they are crooked). This means that profits can be obtained only at the cost of some social injustice. In Japan, more emphasis is placed on the national or group interest. Ito 91 further explains that even today the pursuit of optimal profits, now a definite possibility for large Japanese enterprises, is not totally accepted. In support he quoted the 1964 White Paper of the Japanese Government's Economic Planning Agency's slogan: "'Business recovery without the feeling of good business,‘ i.e., business prosperity without business profit. Quite clearly, maxi- mum profit-pursuit as a Japanese motivational force is excluded, for it does not fit the Japanese image of a corporate entity." Today's Japanese businessman often prefers to use the term "normal" or ”legitimate" profit. Ito defines ”normal” profit: ”Normal profit" means that the cost of capital is covered. For the Japanese enterprise, capital means essentially borrowing. Thus in the final instance, a "normal profit" in Japan is obtained when interest on borrowed capital is paid on schedule: it is measured by its interest rate (Ito, p. 100)! Conservative and Noninnovative.--The conservatism of the Japanese participating in distributive activities long has been pointed out and criticized by many Japanese and foreigners. Tajima, a specialist in the Japanese dis- tribution system, considers this traditional mental atti- tude the most significant backward element in the system. The most important aspect is the lag in mentality. Apparently the sequence here is that the backwardness in mentality leads to various other forms of back- wardness on the part of the distributor; this prevents self-reform and consequently causes a lag in the cone stitution and activities of distribution. Furthermore, I would like to categorize the lag in mentality as being, flatly, "negative attitude toward innovation" (Tajima, 1971, p. 26). 92 Although it is quite difficult to measure conser~ vatism, there is much supporting evidence. Tajima, for example, noted that "42.2% of the proprietors of marginal retail stores are aged fifty or over, and those who are sixty or over account for 17.4%" (Tajima, 1971, p. 22). Using the sociological relation between age and innovation adoption, he pointed out that they are more likely to be categorized as "die-hards" or laggards. Tajima's point is weak since a correlation between age and innovation in the distribution world has never been established, but it is quite suggestive of noninnovativeness. There are other suggestive facts: 40 percent of retailers expressed satisfaction with the existing state of their business. 42.6 percent of small-scale retailers forecast that the state of their business would remain roughly the same three years later, while 24.1 percent replied that they expected a slight improvement (Nakamura and Tajima, 1969, p. 136). As the inefficient practices noted in the earlier discussion indicate, most small retailers and distributors are reluc- tant to adapt new Western techniques and economically efficient methods. Rather, they seem to favor warm, cozy, human-based business associations, although they sometimes realize that they must adapt to a new, changing environment. Hypothesizing Cultural Rationale of Marketing Channel Administrative Behavior As shown in the previous section about operational definitions and the conceptual scheme, the cultural 93 rationale of marketing channel administrative behavior lies in those abstract concepts which explain it, especially its culturally unique characteristics. It was also assumed that the Japanese marketing channel administration system is a subsystem of two higher ones, the Japanese business/management system and marketing channel behavior. Overall Distribution Rationale Based on DedUction There are only limited empirical observations and facts available concerning Japanese marketing channel administration. Therefore, it seems appropriate to draw logical deductions from observation of the two higher systems to identify the cultural rationale underlying Japanese marketing channel administration. It seems apparent that among Japanese manufacturers' in the market- ing administration of distribution channels, both human and economic rationales are equally important factors. The specific blend or mixture of these two basic rationales comprises the manufacturers' unique approach to behavior in marketing channel administration. The rationale depends upon and is influenced by direct and indirect sociocultural factors. Based on this overall deduction, four hypotheses which might explain the Japanese manufacturers' unique behavior in marketing channel administration have been developed. The deduction process and the abstract concepts (hypothetical cultural rationales) are shown in 94 Figures 3.1 and 3.2. These four concepts hereafter will be referred to as hypotheses. Brief explanations of them follow. Hypothetical Proposition 1: Pseudo:harmonism Pseudo-harmonism refers to the prOposition that the channel administrator (manufacturer) emphasizes harmony, but a cool economic rationale does deeply exist in channel administration. "Expressed gemeinschaft, but implicit geselschaft" is the—underlying philosophy. Almost every past study has emphasized the human rationale underlying Japanese business systems. This human involvement in business has been the source of criticism by domestic and foreign analysts. However, the Japanese human-related business approach has been reevaluated recently. This reassessment stems partly from Japanese economic growth and partly from the human orientation trend in the business world. Despite this favorable reevaluation the Japanese system seldom has been analyzed equally from the viewpoint of both human and economic rationales. If Japanese administrative behavior in business relations (channel relations) is based solely on a human rationale, which was the traditional Japanese emphasis, how could Japan have achieved its economic success? To answer this question, the above hypothesis was formulated. 95 .mcofluwmomoum Hobaumnuommm was Emumhm uswEommcmz can mmosflmsm m.cmmmnnn.a.m musmwm Ech0flummoxm muwamsofiuocsmcoz EmflcoEHmmuocsmmm EmwOAuowHom mummocoo oouomnumnd mamfiocwum IIIIIIIIIIII Hmumcmw mo uomHmmz no mosmuocmH meow IIIIIIIIIIII mocmflnmmxm I uuuuuuuuu I: Emwamflawsmmnoosmmm IIIIIIIILIII cowmwomo msmcmmcou cowuomuumnd sunfloosuoucH suhasnm nun-unuun-uun nuamca\suwfiwnaxmam ooucmeOIsmfism nnnnnnnnnnn In Emummm wuwuowcom \ COHUMNHGHTuomTB 3&2 ucmfimmmcmz cw cowumucmfluo moouo\aH«Emm ..-..-..-....-.. I r ucmssoflasm meanness uuuuuunlunlul Emumam wmcwm msowum>u0mno 96 .mcowuwmomoum assaumsuommm can How>mnom Hoscmno cowusnfluumwall.m.m musmwm no: oo mmmnu Omaa INMflHmcoHuocsmcoz Emwcoflmmwoxm EmflGOEHmslocsmmm mcoaumamu amass msoacoeums mcwcwmm Mow umoo omuufifiom cufl3 EmflowuooHom mumoosou omuomnumns .mummocoo oouomuumnm nuwz mmflnchAHmHmu Hmmsmo 303m hawummmmoms mwamcoquHmH Hmzoaaomlmmon so comma cowmwooo no cowmwomc smalmco =0Hsu on» o» coaumooxm one: au0fl>mson moms» Hmcoaumsuwm .Acsu uno£m may as hcoeumn vow Isflmucwma maan3 .csu mood on» as mascofiumu anocoom Hooov pumnom Iammom awowamsa usa ummnowCHmEmm commoumxm mmascowumu Aosmv OfiEocoom can Amsmoev cues: co anon mammnoem mumwoosuoucH .mocoow>m Hmowuwmsm Assommm usosuws oouooaom mum mcoflum>nmmno moose; \ mocmowsm How mass 0: i no mmsmooa mocmflummxo ammo so mocmwaom J muoamoc acme mo cowumummo complmaflEmm . uos mum muonuo maws3 much 00» who 050m rcowmfloop 30am moEwumEom .xowsv mmEHumsom \ Amcowumuw>cfl was mcfl>wm umwmv mmocwmsn mo ocwmuso cofluwummsou saucy on cam .muomuusoo .mmuoc >H0mmflsonm .mmumnmu mcfloummmu coaumuomwo Hmwummmcmz mumammo Hanan acme msoem cofiuflquEoo mum>om Amamum mommy mcowumaou moon» r cw How>mnon Hmowuomu was manflxmah \ ummcouum 080009 mumammo Homcouum one mouom Hmwoom cam g o>fluflummeoo mcwmumEO 0:» mm mascowumu -J‘g owsocoow use .Euoc Hmwoom may no maofiumm Aoamcoflumu anocooo on mocoocmuv mmusmmmum . Hafioom Hoods scowusao>mm coflusnfiuumwo: mocsuwuum r m>wum>occwcos can mcwofio>slxmwm mmco ucmwowumo no flaws mm .mnmammo fl usmwowwmocw .HMhoa mo mucoumwxm _ AEmflEmHuxm A Icocv cam oaeocooo mo awomusm 0:» ca sophomwc cmssn\amwoom mcHNHEwcwz f mcowusaou moon» cw ucosmoH0>oooo can mucoumfixmoo so mammnmso commoumxm cmcofium>ummno omuomamm 060m 97 Hypothetical Proposition 2: Eclecticism Eclecticism refers to the proposition that adapta- tion to the westernization of management and administration in the traditional human-oriented business climate has necessitated compromise, a mixture of both an economic and human orienta- tion. The human-harmony aSpect in channel administration is regarded and expressed by the administrator as necessary, even though it incurs some additional costs. The cost of this harmony is a sacrifice in economic efficiency. In the past, the Japanese business administrative style has been discussed only on a practical business basis. Because economic and human rationales were not treated equally, full exploration has not been made of the means-end relationship. Of the two rationales, the economic one seems to come first in a strictly business sense, followed by the human, which serves to smooth and facilitate the economic process. Hypothetical Proposition 3: Exceptionism Exceptionism refers to the proposition that Japanese channel administration is conducted without specific rigid rules or by ignoring existing rules. This attitude, deeply imbedded in Japanese philosophy, permits flexibility and adaptation in channel admin— istration, while it arouses higher expecta- tions and creates confusion among dealers. This hypothesis was formulated to clarify why prac- tices and behavior are so complex in distribution channel administration. At the philoSOphical level, the adminis~ trator might realize the means-end relationship between the human and economic rationales, but in practice, 98 confusion occurs because of the wide discretion the indi— vidual may exercise in choosing between the traditional human concerns and business considerations. Hypothetical Proposition 4: Economic Nonfunctionality Economic nonfunctionality refers to the proposition that Japanese channel adminis- tration is founded on an individual human basis rather than a functional economic and business basis. This means that some .individuals in channel administration are extremely busy while others are idle, although a compensation system based on group merit and seniority may modify this situation in the future. Nonfunctionality also makes administrative behavior appear complex and mysterious. The hypothesis that administrative behavior is based on human rather than functional considerations con- cerns the means-end problem. It already has been shown that the human rationale is the means to an economic end. When the Japanese channel administrator behaves according to a human rationale, he cannot operate within just one functional area. He often must go beyond and become an expert on "all problems" across many functional areas. Dealers who know this system, often unconsciously, seek out the man widely recognized in any given organiza- tion for these abilities rather than go to the person whose function would seem to make him the correct one to negoti- ate with. This tendency may be another reason why the Japanese style seems so complex. CHAPTER IV RESEARCH METHODOLOGY The main purpose of this chapter is to describe the research methodology by which the four hypothetical propositions developed in Chapter III are investigated. First to be discussed are the industry structure, distri- bution channel structure, and distribution channel behavior of each selected industry. Twenty-one Operational hypotheses related to each of the four basic hypothetical propositions are then developed. After presenting this information and operational hypotheses, the sample design, selection of respondents, and interviewing procedures are discussed. At the end of this chapter research limita- tions are briefly presented. Pharmaceutical Industry1 Industry Structure The pharmaceutical industry in Japan consists of approximately 2,700 manufacturers, but as of 1971 the 1General information about the pharmaceutical industry in Japan was gained from the following sources: Outline of Japanese Distribution Structure (1973), 99 100 20 largest controlled 54 percent of the industry (Outline of Japanese Distribution Structures, 1973, p. 150). This industry usually is referred to as an industry of the "top 10" or "big 20" because of the dominance of these largest firms. Only the tOp 30 companies seem to be con- cerned with marketing. Distribution Channel Structure _ National wholesalers of ethical pharmaceuticals (medicines) are believed to number roughly 3,000. The list of the Japan Pharmaceutical Traders Association, however, shows only 1,059 members as Of June 1970 (ibid., p. 150), but it does not list tertiary wholesalers. Yet the latter are used for direct transactions with medical facilities, hospitals, and clinics. Although there are some manufac- turers who sell directly to medical facilities, their number and market share are negligible in the industry as a whole (ibid., p. 150). The general distribution channel in the Japanese pharmaceutical industry is shown in Figure 4.1. Ryutsfi ChOsa Report No. 21: Pharmaceutical Product (1973), JETRO Marketing Series 4, Iyakuhin no Nagare: Sono Torihiki- kanko no Jittai ni Furete (1971), Ryutsfi kikO ni odera KourijgyO no GenjO to Shorai no TenbO (1970), Growth Oppor- tunities in World Markets for HealthTPrOductsprountry Re ort NO. 82--Japan (1971), Torihiki JOken no Tekiseika (1973), and Ryfitsfi kindaika no Tenbo to Kadaifi(1968). 101 467 2.686 1 Manufacturer of Mowlicmns (or (.‘nmmcrmal L'se Manufacturer , Importer of Mi-dicmcs General i’ropl'u-tary Processor £33” 32%;") “0‘" for Medical Use Manufarturer Manufacturer Manufacturer Manufacture-r J\ L f"\ f‘\ j'\ r /K __f\ i .1 Primary Wholesaler [ J'\ I#\_ Secondary Cash (“xii-wry Wholesaler mm...- LJI L———— i ,_________/‘\_. f \___/‘\_____Avvi\____l __f\, I 1 [[JR j Joint Buying .i[ ii. L - Organizations f t | I I I I Hospital. : I I g - . 7.973 , I _ I I i ii i i i I | Clinic : r l i . . 60.997 ' : : Pharmacy Others 9 24.005 100.018 c '5 ‘6 U 2 -u U :9. ‘6 o W 0 I- Q- Consumers Source: Outline of Japanese Distribution Structures, Com- piled by the Distribution Economics Institute of Japan, 1973. I"iguire 4.1.--Distribution Channel Structure in Pharma— ceutical Industry. 102. Distribution Channel Behavior The rebate provision is a very general practice among pharmaceutical manufacturers and wholesalers. Rebate terms, however, are seldom publicized. Although there are many types Of rebates, money rebates are Often used. The two most common rebates are a Special one based on the sales of a single item and a general or quantity rebate (bonus) based on the total sales of all of a manufacturer's products during a certain period. The former Often is applied to seasonal products, and its rate is relatively high. The latter is given on the gross sales of the manu- facturer's items for a base period, and its rate is usually relatively low. Because of the pOpularity of rebates, vir- tually no quantity and cash discounts are given. In essence, quantity and cash discounts are subsumed under certain rebate provisions. Promissogy notes (or deferred payments) are common in transactions among pharmaceutical wholesalers and manu- facturers. Cash settlements are seldom made for items pur— chased; rather, a form Of credit is used. The average credit settlement period as of 1973 was about 150 days (Torihiki Joken no Tekiseika, 1973, p. 89). Interestingly enough, in transactions between wholesalers and medical facilities, cash payments are becoming more common. Also, where credit is used the length of the credit period is becoming shorter. In the 103 case of deferred payment, the average period Of payment in 1973 was reduced to a range of 120 to 130 days. Return of goods privilege is also a general practice in the pharmaceutical field, although transactions are principally made on a nonconsignment basis. The rate of return of goods from medical facilities to wholesalers is estimated to be approximately 5 percent. The rate from wholesalers to manufacturers is even higher, estimated to be between 5-8 percent (Outline of Japanese Distribution Structure, 1973, p. 146). The reasons given for these returns are the forced sales of suppliers, the necessity of adjusting inventories, miscalculations made in buying, and the appearance of similar but lower priced goods after the original purchase has been made. Frequencypof delivery is very high. About 70 per- cent Of pharmaceutical wholesalers deliver products to medical facilities every day. Another 25 percent deliver once very two to four days (ibid., p. 146). Yet there are no wholesaler agreements with medical facilities con- cerning minimum order amounts per delivery. Reportedly, this situation is unavoidable because of the emergency nature of the merchandise, but in reality the practice imposes a heavy economic burden on wholesalers. As for other trade_practice§, cho~ai (payment on account) is common, while tempu (granting an additional 104 quantity based on amount purchased), though very popular in the past, was not emphasized during the early 19703. But since 1974 the practice has gradually been revived because of changing economic conditions. Soap and Detergent Industry2 IndustryVStructure IThe soap and detergent industry consists of approxi- mately 60 manufacturers; however, the top five companies control 70 percent of the market. If the third largest manufacturer, Shiseido Company (which is more accurately categorized as a cosmetic firm), is removed, the top two manufacturers (Lion Fat and Oil CO., Ltd., and KaO Soap CO., Ltd.) account for more than 60 percent of the total sales volume. Because the fourth, fifth, and sixth ranked firms recently have established a joint sales company to fight the dominance of the top two companies, the number of major manufacturers for practical purposes is considered by the trade to be three. 2General information on this industry was gained from the following sources: Busshibetsu Ryutsfi Jittai (1)5 KeshO-hin, KeshO-sekken no Ryptsu (1971), JETRO Marketing Series 4, KeSH3_Sekken no Ryfitsu (1970), Outline of Japanese Distribution Structures (1973), R fitsfiichosa Report NO. 16: Detergent and Deatrifrice 1972), and Torihiki Joken no Tekiseika (1973). 105 Distribution Channel Structura It is reported that there are approximately 3,000 wholesalers and 300,000 retailers of soaps and detergents (Outline of Japanese Distribution Structures, 1973, p. 165). Among the wholesalers, the upper 30 percent is considered to control about 70 percent of sales. Neverthe- less, the smaller wholesalers are regarded as important in helping supply the 300,000 retailers scattered all over Japan (ibid., p. 166). The living patterns and shopping habits of consumers necessitate such a large number of both wholesalers and retailers. Two types Of distribution channel are mainly used in the soap and detergent industry. One is represented by the Kao Soap's system, which primarily uses its own sales company but supplements it with a few wholesalers. The other is illustrated by the Lion Fat and Oil system, which uses wholesalers exclusively. However, a third type of distribution channel was recently established as a joint venture by three manufacturers (Ashahi Denka Kogyo K.K., Dai-Ichi Kigyo K.K., and Mitsuwa Soap CO., Ltd.). Operating through a common sales company, Nippon Sunhome CO., Ltd., this system is a mixture of the pre— vious two. It uses a sales company, but also relies heavily on primary and secondary wholesalers. These three systems are illustrated in Figure 4.2. 106 wussncoo .muumsocH moanmwucoa\ucmmuoumn cw j mcowunwoomnd o>wusummoou HousuHsoauma mo cowumuocom mcfimmsousm chowumz ousuosuum Hangman coausnauumaaun.~.c magmas O mumauo mumoouo ououm hutcsm a auuoawos ououm owumsmoo museumsm uoxumsuomsm .oo moanm anon aux usmmd .Jacmmsou snow own no sounam oowum can Housman cowusaauunao as. 107 ncowustOmma m>wumuwmooo Housuasowuod mo cowumumomm mcwnmnousm Hmcowumz .oossfluc003|.~.¢ ousmwm umssmcoo mumnvo humoouu uuoum whocom a Nuuoawoa uuoum owumamou museumnm HOHMmmHoaz musccoowm Hmammmaonz musswum HHO a umm cons was umxunsuomsm .sauasoo she a you cows one no smumsm manna can Hmcamao conuanwnumaa inc 108 umESmcoo .muH-mma .aa .mnma .cmamn mo musuaumau mowsocoom cowusnwuumwo one .mun:MuqHHmIaaHHdaHHunflaluwudmmodluuluddduqd "mousom .omsswucoo::.~.e owsmfim 0>ausu0moou n.uossmcou mnmauo i ) mumoouu ououm museum a huuoafioa ) mqum oaumsmou momeusnm a mummcommwo JeteseIOqM Krepuooss umxumfiummsm mason sauna N 7 .m. .qu .mcmmfioo d .d .\\\\\ omom mssmuaz 1 o . m. u e S .u m .M.M Camox u. - anoHiflso M O 7 U. m m. e a .3 1//// .s.s cases 9 o D» o T. l a 1 I 3 m. .cuq ~..OU oeoassm commwz no Ewumhm ouwum can Hoccmnu coausnwnunwo any 109 Distribution Channel Behavior The rebate provision is a common practice, and the types used are basically the same as those used in the pharmaceutical industry. The rebates, however, tend to be paid more in accordance with the performance of business functions. Approximately 5 percent of sales is paid to the primary wholesaler by the manufacturer as a base commission (or margin). Because this commission also must be paid to the secondary wholesaler by the primary wholesaler, the latter actually makes no profit from this commission. In such instances the manufacturer pays another 3 percent to the primary wholesaler to cover the transaction with the secondary wholesaler. This is referred to as a cho-ai rebate (a rebate for accounting fees). In reality it is a payment related to the position in the distribution hierarchy for functions performed. Several other rebates are also used. A rebate is paid by some manufacturers to both primary and secondary wholesalers when they keep the retail stores under their control. This assures the implementation of desired policies and practices. A stipulated percentage of sales is also paid for satisfactory performance of the physical distribution function by wholesalers. This is known as a performance or delivery control rebate. In addition, an overall performance rebate, or bonus, may be paid based on total sales made within a specified period. 110 Promissory notes (or deferred payments are often used, but the payment period is far shorter than that employed by the pharmaceutical industry. Payment periods usually range from 45-75 days after shipment (Outline of Japanese Distribution Structures, 1973, p. 176). Cash payments are encouraged, and rebates Often are used to reward immediate payment. For cash payments, an amount roughly equivalent to the rate of interest for the term of the promissory note is allowed by the manufac- turers. Although this payment is similar to a cash dis— count, such an amount is included as a rebate because it is still paid on a subjective basis in this industry. It is not the regular cash discount available to all. Return Of goods privileges are extended to every level in the distribution channel, although transactions are made principally on a nonconsignment basis. This tendency to return products is actually decreasing, how- ever, because some manufacturers provide rebates for non- return of goods. Yet, returned merchandise is still a problem. In 1972, 20 percent of wholesalers reported that they suffered from the undue return of goods from retailers (Torihiki JOken no Tekiseika, 1973, p. 74). Delivery frequency to both retailers and whole- salers is generally high (ibid., p. 76). Manufacturers deliver merchandise directly to both large-scale retailers and wholesalers. Economic factors are now receiving 111 greater attention, however. Because the high cost of delivering bulky merchandise is recognized, there is a general tendency toward more systematic logistic planning. Dentifrice and Toiletry_Industry3 Industry Structure The dentifrice and toiletry industry is Oligo- polistic in structure. Two firms, Lion Dentifrice CO., Ltd., and Sunstar Dentifrice CO., Ltd., have approximately 80 percent of the market share. Lion has a 59.5 percent share and Sunstar 20.8 percent as of 1970. The third ranked company is a foreign firm, Colgate-Palmolive CO., Ltd. It has 7.3 percent of the market and is not included in the study. The fifth ranked company is a cosmetic firm (Shiseido CO., Ltd.), with 3.4 percent. The channel administrative behavior of three Of the tOp four companies, Lion, Sunstar, and Kao Soap,was studied. Distribution Channel Structure Both primary and secondary wholesalers are used in the distribution of dentifrice and toiletry products. Primary wholesalers engage in the sales of manufacturers' 3General information on this industry was gained from the following sources: JETRO Marketing Series 4, KeshO-hin no Ryfitsfi (1971), KeshO-hiny Toilet£y_Gyokai no Ryfitsfi Sengo-shi 71972), Outline Of'Japanese Distribution Structures (1973), R fitsfi ChOsa Report No. 16: Detergent aad Dentifrice (197 , Shiseido_Handbook‘Ii§69), and Torihiki JOken no Tekiseika (1973). 112- products in a specific territory. They numbered about 300 in 1972. Wholesalers at the secondary levels are those that purchase from the primary wholesalers. They numbered about 2,500 to 3,000 in 1972. Retail outlets in dentifrice and toiletry numbered 200,000 nationwide in the same year. Of these only one percent, about 70 firms, or 2,000 stores, are supermarkets (Outline of Japanese Distribution Struc- tggaa, 1973, p. 175). The concentration of sales among primary whole- salers is Obvious. More than 70 percent of total sales is controlled by the top 30 percent of dentifrice wholesalers (ibid., p. 175). However, because of the convenience nature of dentifrice products, manufacturers cannot ignore entirely the utilization of secondary and tertiary whole- salers if they wish nationwide distribution. The actual pattern of distribution channels used varies somewhat among dentifrice manufacturers, but basically, the channel alternatives are the same as those for the soap and detergent industry. Distribution Channel Behavior There is an overlapping of some distributors and manufacturers in this industry with those of the soap and detergent industry. The basic trade practices and business behavior utilized, therefore, are much alike. They include rebates, promissory notes, frequent deliveries, and return of goods privileges. 113 Develppment of Operational Hypotheses and Related Interview Questions Prior to the formal interviews, the four proposi- tions discussed in Chapter III were broken down into opera- tional hypotheses. Six of these were develOped relating to the proposition concerning pseudo-harmonism. Similarly for the other prOpositions, eclecticism, exceptionism, and economic nonfunctionality, twenty-one Operational hypo- theses were developed. Some of the operational hypotheses advanced were in the form of industry practices believed to exist. Since no formal studies had been made of them in the past, they are included in this study to determine whether these practices are prevalent and whether they exist in the changing environments currently confronting each of the industries. The hypotheses are listed and explained below. Proposition 1: Pseudo-harmonism H1: The Japanese manufacturers studied tend to express the importance of human and social relationships as a base of busi- ness mahagement behavior at the corporate policy level. H2: The ultimate criterion of marketing channel administrators* tends to be an economic measure rather than human con- siderations. *For simplification, in the following material the refer- ence to Japanese manufacturers as marketing channel adminis- trators will be shortened to "channel administrators." H4: H5: 114 Channel administrators tend to express aspects Of togetherness, coexistence, and codevelOpment with wholesalers in their marketing channel policy. Channel administrators are reluctant to own or subsidize economically weak wholesalers, even if ownership or complete control is possible. Although channel administrators give various types of dealer aids to wholesalers, the most important tool in attracting whole- salers is believed to be a channel adminis- trator's product competence (research and develOpment, high product quality and image, and so forth) and not his human aspect toward wholesalers. The economically stronger wholesalers are given more favorable rebates and margins. Proposition 2: Eclecticism with Admitted Cost for Harmony H7: H10: H11: In dealing with wholesalers, channel administrators avoid an image of being economically oriented. Although channel administrators and whole— salers have close human contacts and relationships often extending beyond the boundary Of trade and business, these relationships do not extend to family involvement. Each marketing channel comprises some intensely loyal wholesalers who are willing to sacrifice their own business interests to a considerable extent for the sake of the channel administrator's interests. In providing dealer aids, channel adminis— trators regard the human factor as an important lubricant in dealing with whole- salers in the future. Channel administrators tolerate some economi- cally weak wholesalers by considering them a regular cost of doing business. H12: 115 Efforts to promote economic efficiency of the marketing channel in the past decade have resulted in no substantial changes in marketing channel policy and structure. Proposition 3: Exceptionism (The Excaption Is the Rule) H13: H14: H15: H16: H17: H18: Although channel administrators have estab- lished a formal rebate system, the actual rate is Often determined at management's discretion. There are many types Of rebates that are greater than the stated business margin, and they allow room for discretion on the part of channel administrators. The payment periods of promissory notes for wholesalers is not standard but varies with the particular conditions and considerations Of each wholesaler. The delivery of inventory is not generally made on the basis of a manufacturer's logistical planning and scheduling but, rather, on the basis of dealers' requests. Manufacturers generously permit the free return of goods from wholesalers without any special charge. Although manufacturer-wholesaler sales and dealership contracts exist, business is not really controlled by these contracts. PrOposition 4: Economic Nonfunctionality H19: H20: The human character Of the personnel in charge of dealer relations is regarded as very important by channel administrators in dealing with wholesalers. The character of the individual is more important than the individual's job function to wholesalers in doing business with manufacturers. 116 H21: Effective channel administration requires COping with a wide variety of problems inside and outside the firm involving both human and economic concerns in addition to the normal marketing considerations. To gather information concerning each Operational hypothesis, questions related directly to the prOposition were explored in depth in each personal interview. These questions were arranged in an interview guide so that dis- cussionstith subjects proceeded smoothly and naturally from a macro to a micro view (See Appendix 5 "Interview Guide"). The number Of formal interview questions totaled twenty-nine. In-depth interviews were held with each of the respondents and exceptional cooperation was received. Methodology Sample Design The sample for this study was selected on a judg- mental basis. It was a three—stage process involving: (1) selection of apprOpriate industries; (2) selection of the specific companies in these industries; and (3) selection of individual respondents in each of the com— panies. Prior knowledge of each of the industries, their structures and marketing practices, and the policies of companies was gained through a survey of the literature and exploratory conversations with experts in Japanese distribution channels. Industry executives helped identify 117 the most important firms in each sector. The companies finally chosen in each of three industries were then selected on a nonrandom basis. Eight companies were selected from the pharmaceu- tical industry. These included three from the top ten in terms of sales, three from the second ten, and two from the third ten. The tOp 30 companies were regarded as the relevant population for research concerning manufacturers' marketing channel administrative behavior. Three companies were selected from the tOp five in the dentifrice and toiletgy industry. In this highly Oligopolistic industry, the tOp five were considered to be the relevant population. The top five, however, included a foreign establishment and a cosmetic company. When they were deleted, the remaining three, for all prac— tical purposes, became the population to be studied. Thus, essentially 100 percent coverage was achieved. The soap and detergent industry presents an unusual situation. This is reflected in the sample chosen, which includes two of the top five companies. In this industry a cosmetic company has the third largest volume, and the fourth, fifth, and sixth ranked firms may be regarded as one company from the perspective Of distribu- tion channels. They have jointly established their own sales company. Thus, the number of relevant companies is reduced from the tOp five to the top three. 118 The total sample chosen, therefore, numbered thir- teen firms. The Kao Soap Company was unique in that it belonged both to the dentifrice and toiletpy and the soap and detergent industries. Because of this overlap the actual number of individual companies studied was twelve. In each industry, however, the top two companies were always included in the sample. Selection Of Individual Respondents The following procedure was adopted for selecting respondents to be interviewed in each company in the sample. First, executives in each of the firms selected were contacted by either this researcher or senior profes- sors at Keio University to determine the appropriate knowledgeable people to be interviewed about the company's distribution channel administration. Three companies were approached by the author and nine through the introductions Of senior professors. In every instance complete coopera— tion was assured. At the personal interviews, one company was represented by five persons, three firms by two, and the rest by one person. Thus, the total number of inter- viewees was nineteen. Although the respondents' job functions varied, all were very experienced management personnel and were extremely knowledgeable about their company's marketing channel administrative system. They held the following positions in their organizations: director (3), deputy 119 director (5), manager (3), and assistant manager (1).4 A list of the respondents interviewed is shown in Appendix 3, indicating job titles and positions in their respective companies. Interviews All interviews were conducted by the writer between August 22 and September 27, 1974. Interviews were held in the subjects' offices, with one exception, an interview conducted inaatxmel after accompanying the inter- viewee on a business trip. When detailed explanations and descriptions were required for complex situations, the respondents used detailed diagrams which were appended to the interview guides. Interview times ranged from two to three hours. The respondents proved to be highly knowledgeable, very explicit, and totally COOperative. An interview guide was used to assure that all the desired areas were covered while giving respondents an Opportunity to express themselves in an unstructured, frank, and comprehensive manner. Immediately following each interview the author reviewed the notes taken and fleshed them out to capture the full meaning of the infor- mation provided. 4For companies which sent two or more people, only the highest positions were counted. 120 To determine generally whether the Operational hypotheses and therefore the subsequent questions were supported or unsupported, three general guidelines were adOpted. First, when at least 75 percent of the respon- dents agreed (disagreed), the assertion was considered to be strongly supported (unsupported). Second, when 50-75 percent of the respondents agreed (disagreed), the asser- tion was considered to be fairly well supported (unsup- ported).' Third, if less than 50 percent agreed (disagreed), the assertion was considered to be unsupported. Research Limitations The major limitations of this research investiga- tion are noted below: 1. The study is a preliminary investigation of distribution channel behavior. There is a lack of data available to plan a sophisticated study and replicate results. This is a pioneer study and is largely descriptive in nature. 2. A nonrandom judgmental sample was used. There- fore, the techniques of statistical analysis and inference cannot be applied. 3. The study was limited to manufacturers' administrative behavior relating to whole“ salers rather than to the whole marketing channel, including retailers. Therefore, 121 although the term "distribution channel administration" is used Often because of its popularity, its use here is limited to admin— istration concerning wholesalers. Every effort to Obtain the facts was made in this research, but, as is true in any interview, there is no way Of being abolutely sure that all of the respondents revealed the total situation as it exists. It is difficult to conduct research in Japan; conduct interviews in Japanese; gather information and ideas according to Japanese concepts, language, and cultural traditions; and then translate them into the American marketing equivalent. Some preci- sion is always lost in the process. Yet, every effort has been made to preserve preci- sion and clarity. CHAPTER V MAIN FINDINGS The purpose Of this chapter is to discuss the main findings based on information from the interviews with twelve subjects in the three chosen industries, pharma- ceutical, dentifrice and toiletry, and detergent and soap. The 21 Operational hypotheses stemming from the four main propositions are examined one by one, based on the results of data gathered from the interviews. As was explained in Chapter IV, a supported-unsupported method of measure- ment was used to determine the general tendency. Because Of the nature of this descriptive survey, the main findings were qualitative in nature. Yet, some simple tabulations were made to note any trends or tendencies. Classification of results by size of company was undertaken. In pursuing the analysis it was found that the pharmaceutical and the dentifrice/detergent industries basically proved to be the same with regard to channel administration. Therefore, in the analysis the three industry categories were finally reduced to two. 122 123_ Pseudo-harmonism l) Expressed harmony in corporate mottoes. H1: The Japanese manufacturers studied tend to express the importance Of human and social relationships as a basis of busi- ness management behavior at the corporate policy level. This operational hypothesis was very strongly supported by the interview through Question 1. Eleven out of twelve respondents interviewed answered that their com- panies have explicit or expressed corporate philosophies or management mottoes. These usually are called sha-ze (general principle), sha-kun (admonishment), or EEEXQ (general guideline). These philosophies or mottoes are usually written out and communicated and known by most employees. They are, however, very abstract, vague, and idealistic. The mottoes almost invariably refer to such groups as the "nation," "society," "people," and "man— kind." They Often stress humanity. All eleven reapondents from companies with expressed mottoes indicated the importance of factors such as society and humanity as they relate to their businesses and products. For example, "contribution to the nation's health through our high-quality medicine" was the motto of a pharmaceutical manufacturer, and "contribution to society through cleaning technology" was a detergent manufacturer's motto. Based on their mottoes it would 124 appear that,at least outwardly, the social justification of business seems to be quite important to Japanese com- panies. However, mottoes may Often serve as window dress- ing. (See some selected examples of mottoes in Appendix 5.) Styles and forms of mottoes vary. A few companies have only one simple and succinct statement of their busi- ness philOSOphy such as: ”spirit of harmonious OOOpera- tion" (a detergent firm), "science for the world's welfare, medicine for human happiness" (a phammaceutical firm), or ”the nation and people will flourish with cleanliness" (a soap and detergent firm). Most companies'mottoes, however, contain from three to ten related guidelines under one general principle. The guidelines are still abstract and general. Several companies' mottoes originated with their founders. As such, they are often difficult for young employees to understand, accept, and relate to because of the Old-fashioned language. Some companies, therefore, provide interpretive pamphlets. It seems that, in general, the older, well-established companies place more emphasis on the nation's welfare, humanity, and the happiness of mankind. The newer companies have more succinct and easily understood mottoes. It is interesting to note that mottoes seldom refer to business profits. One exception is that of a 125 medium-sized pharmaceutical firm, which emphasizes three important aspects: the pursuit of social welfare, the pursuit of humanism, and the pursuit of the company's economic welfare. Mentioning economic and business profit in corporate mottoes tends to be regarded as gauche by Japanese society. In contrast to the above, one medium-sized pharma- ceutical company's motto, using its founder's words, admonishes: "Don't fall into a sheer profit orientation (or be profit-minded), but pursue human love through our business.” Yet, this particular company is well known in the industry for its very aggressive, competitive sales effort and outright pursuit of profit. Close human relationships and cooperation within the organization were also referred to as very important elements in management philOSOphies. Some pamphlets on corporate mottoes stated that a healthy business results from the cooperation and harmony Of all employees. One smaller pharmaceutical company even noted that the com- pany is an extension of home and family by printing in the guide to its philosophy: "Connect your company with your home." In some of the companies studied, all employees, including executives, factory workers, and clerks, recited the firm's motto in unison at every morning meeting. But employees, especially the younger ones, consider such 126 customs "nonsense" and "Old-fashioned" and believe they will disappear before very long. The emphasis on humanity and social justifications for business and the lack of an apparent emphasis on business profits goals may be the result of the histori- cal development of Japanese business. In feudal days, merchants were ranked lowest, politically and socially, after soldiers (the ruling class), farmers, and craftsmen, even though they held the greatest power through their control of the economy. Perhaps the main reason for holding merchants in low esteem was accrual of profit without physical labor. After the modernization of Japan in 1868, however, merchants sought to improve their image by developing a social justification for their business and resulting profits; sometimes they expressed their importance to the nation's welfare in idealistic and unrealistic terms. 2) Implicit pursuit of economic efficiency in channel administration. H2: The ultimate criterion in the adminis- tration of the marketing channel studied tends to be an economic rather than a human rationale. This hypothesis was fairly well supported by answers to Questions 3 and 4 in the interview. Question 3, which referred to the respondent's preference fOr either harmonious cooperation or the pursuit Of economic 127- efficiency, seemed to be a difficult one for all subjects to answer. Eight out of twelve, however, selected economic efficiency as the ultimate criterion in their own market- ing channel administrative behavior. Two re3pondents, on the other hand, insisted that cooperation and harmony with their wholesalers was the most important. The other two would make no conclusive choice and insisted on taking a middle position. This may even suggest an unwillingness to admit the significance of the economic over the human rationale. Some differences among industries and company sizes were observed (see Figure 5.1). All respondents interviewed in the dentifrice and detergent companies stated that economic efficiency was the ultimate criterion. But in the pharmaceutical industry, four respondents (one small and three large-sized companies) opted for economic efficiency. Two medium-sized companies preferred harmoni— ous COOperatiOn, and the other two (a medium and a small- sized company) took a middle stance. This distribution seems to relate well to industry structure and environ- mental pressures on the two types of industries. In the pharmaceutical industry, which has many competitors at the manufacturers' level, but still enjoys fairly high profits, cooperation and harmony are expressed as being important factors in marketing channel adminis- trative behavior. This tendency is especially true among medium- and small-sized companies. As a general rule, 128 .mmfiuumsosH an coaumuumwsHEOG Hmcsmsu ca swumuwuu mumeuaDII.H.m musmwm .omuflmIESAOOE mm oco nunsow on“ can msuflm ocuwmlmmuma mm cooummmu haamcofiuco>coo mum moacmmEOo owns» unuflm on» .wuumsccfl usmmumuOO\oowumwucmp mnu cH .>H0>fluoommwu .ownwm Hanan was .EOHOOE .omHMH mm onus on OOHHOMOH mum mute .OH than» mnu ca saw was sun can .oa mo» uxmc m.>uumsocw 0:» CH sum smacks» suv .oa mo» m.muum5tcw may aw OCOHOQ 00st» mo» 0:» .muumsosfl Hmowusmomspsnm 0:» GH .tha cw mmEsHO> mmamm Hmuou onu an consanoumo ma munwm .mmflcmmsoo mo xsmmc hocmwOHmum Owsocoom mocufluflmmm ossocoom hosmwowmmm Oweocoom hosmwOflmmu owsocoom mosmun OHUOHZ mocmwowwww OHEOGOOM coaumnmmooo mSOHcOSHmm mosmum oaocwz coaumummooo msOHCOEHmm mocmHOHmmw oweocoom hOCOHOAMMO Oflsosoom hocmwowmmm owsocoom HNMQ'IOWI‘GJ ucmmuouoo\OOHHMHuc0o Hmowusoossumnm aaxcmmv muumscsH on» a“ mmflsmmeoo mo muwm 129 the pharmaceutical industry may be regarded as being more traditional in its channel administration than the more Oligopolistic dentifrice/detergent industry. The latter also has lower manufacturers' margins. In both industries, it is noted that the larger firms prefer economic efficiency as an ultimate criterion. Respondents from the pharmaceutical firms that ranked in the second and third ten leading companies seem to place more emphasis on other criteria than simple economic measures. When asked about the compatibility of the two criteria in their own channel policy, all twelve respon- dents who suggested economic efficiency as the ultimate criterion indicated that the economic preference did not mean that they could ignore human associations with whole- salers. Without the COOperation of wholesalers, these respondents explained, good business was not possible. On the other hand, those respondents who held that coopera— tion and human associations were the most important cri- terion, believed that in the future they would shift to more emphasis on economic measures because "it is a trend." Overall, most of the .respondents heSitated to take an either-or position. Six companies that selected economic efficiency as the ultimate criterion indicated that in the future they would seek even stronger control over their whole- salers and try to obtain greater market stability, which 130 in turn would benefit the channel system as a whole. For example, one respondent from a large detergent manufac- turing company expressed the view that its own margin was so low compared with the margin the firm provided whole- salers that he believed the company might take stronger and more aggressive economic measures to increase the _manufacturer's margin. Yet, manufacturers seldom wished to drOp any of the present, high margined wholesalers. Under these contradictory conditions, according to this respondent, economic efficiency must be sought for the entire channel system in the detergent industry, including wholesalers and retailers. One respondent from a large pharmaceutical company, who expressed a preference for the criterion of economic efficiency, also suggested that "although economic effi- ciency is inevitable we will never out our present whole- salers." He added, however, that ”if they cannot follow our way to pursue economic efficiency for the total channel group, they may naturally go out Of business in the future." In sum, the prevailing attitude of manufacturers toward wholesalers seems to be "leave them alone." Manu- facturers do not adopt social aggressive measures to pro- mote economic efficiency in the channel. Of the two firms whose spokesmen replied that harmonious association with wholesalers was the ultimate priority, one is known in the industry for Once having 131’ attempted to establish its own sales company. But this firm now recognizes that it is much more effective to use independent wholesalers to supplement its own sales company. The spokesman of the other firm strongly believes that economic efficiency can be achieved only through harmoni- ous cooperation with wholesalers. Question 4 concerning the use of any ranking or grading system for wholesalers as well as any criteria used for rankings is also related to hypothesis number two. As was expected, since ranking was thought to be a general industry practice, companies ranked their wholesalers. One firm of the remaining three has its own sales companies but these were initially ranked and selected from among many independent wholesalers. Thus, this firm also is recorded as having a ranking system. One other company has had its own sales companies since its inception. Thus, in essence, only one firm does not have a ranking system, and it was the smallest of all the manufacturers studied. Wholesalers are usually grouped into A, B, and C wholesalers, or primary, secondary, and tertiary wholes salers. Primary or A wholesalers are, of course, the most important trading partners of each manufacturer. Most manufacturers have organized a kai (a circle or association mainly consisting of the primary wholesalers under the parent manufacturer's name). The number of wholesalers in a kai varies from about 60 to 300. 132 In general, firms in the pharmaceutical industry have smaller numbers Of wholesalers in their kai. Kai members receive several privileges from a parent manufac- turer, such as special rebates and bonuses, invitations to manufacturer-sponsored management seminars, and enter— tainment at restaurants and resorts. Primary wholesalers were estimated by respondents to account for 60 to 70 percent of total sales, customers, and territory covered. They sometimes control secondary and tertiary wholesalers under them. The ten respondents using a ranking system noted that sales volume of their brands by wholesalers is the major criterion used in selection of customers for a kai, Nine of the ten companies also considered the importance and strength of wholesalers in the company's territory coverage. In addition to the above criteria, others were also used. Human association (OOOperation and loyalty) and historical connections with wholesalers were considered by seven companies in the pharmaceutical and four in the dentifrice/detergent industry. The financial strength of wholesalers, which is especially significant in determin- ing the ability to pay, is used by five of the manufac- turers. Other replies indicated that the management skills of wholesalers, the future potential of wholesalers, and the wholesaler's customer mix are also important. This is recorded in Figure 5.2. 133 Number of Firms Using.Criterion Industry* Dentifrice/ Criterion Used Pharmaceutical Detergent Total Historical connection 3 1 4 Territory coverage & strength 4 4 8 Sales volume 5 4 9 Human aSsociation 4 3 7 Financial strength 4 l 5 Other 6** - 6 *The effective total number of pharmaceutical and dentifrice/ detergent companies studied are 5 and 4, respectively. **Some companies answered more than once. Thus, the total may exceed the number of companies. Figure 5.2.--Distribution of Firms by Criteria Used in Ranking Wholesalers. 134‘ To relate the above answers to the Operational hypothesis, the answers were categorized into two broad classifications based on the main emphasis: economic or human/cultural. The former included sales volume, terri- torial coverage and strength, and financial strength. The latter included past relationships between manufac- turers and wholesalers and human association. The data are presented in Figure 5.3. The results clearly show that there is a strong emphasis on the economic measure in ranking wholesalers. Dentifrice/ Main emphasis Pharmaceutical Detergent Total Economic l9 9 28 Human/cultural 7 4 ll Note: The figures were obtained by simply adding the numbers in Figure 5.2. Figure 5.3.--Distribution of Criteria Used for Ranking on the Basis of Two Emphases. 135 3) Expressed humanity in channel administration. H3: Channel administrators tend to express togetherness, coexistence, and codevelOp- ment with wholesalers in their marketing channel policy. The answers to Question 2 strongly supported this Operational hypothesis. KyOzon-kyOei (coexistence and codevelOpment) seemed to be the most important philosophy held by parent manufacturers' in their marketing channel administrative behavior. Surprisingly, ten out of twelve respondents used this word in describing trade relations with member wholesalers. All the respondents noted the difficulty of doing business without the cooperation of independent wholesalers. They also suggested that a direct sales system which bypasses independent wholesalers, while it is desirable, would be virtually impossible. In this regard it is interesting to note that one pharmaceutical firm, which once had its own sales company, also emphasized the impor— tance Of harmonious relationships with independent wholes salers because wholesalers are necessary for supplementary coverage Of the national market. Under the kyOzon-kyOei policy, manufacturers seek economic benefits for the distribution channel as a whole. They educate, persuade, and directly assist wholesalers. Togetherness, coexistence, and codevelOpment are stressed in channel policy. 136 An institutional expression of kyOzon-kyOei is the organization or circle called kai, which was described previously. All upper—ranked manufacturers in the indus- tries studied had their own kai, Member wholesalers of this circle, or club, sincerely promote their parent manu- facturer's products. In return, manufacturers provide more favorable rebates and bonuses as well as other special dealer aids. ,Throughout all interviews, additional evidence of the importance of togetherness between manufacturer and wholesaler was revealed. One dentifrice company, for example, was very impressed with the recent growth of large-scale supermarkets. Yet, despite an attractive economic offer from a large supermarket to handle distri— bution and provide sales volume, the manufacturer decided to move cautiously. Another respondent reported: "If supermarkets visit us and agree to carry the physical dis— tribution function by themselves we will sell them products directly because their sales volume is too attractive to reject. We may, however, move slowly so as to gradually increase trade with them. Otherwise, our wholesalers will suffer a shokku (shock)." At present, this manufacturer gives £2223 (an accounting fee expressed as a percent of sales) to wholesalers based on the sales volume done directly with supermarkets. In fact, the 2222i! or back margin, is a very common practice in the three industries studied. 137 The respondent of a large detergent company stressed human association with wholesalers in marketing channel policy as a major consideration. This company formulated a threefold policy statement which was printed and delivered to its member wholesalers, The stated goals were: strengthening of wholesalers, strengthening of company products, and strengthening of human associa- tion as a channel group. Under these three main policies, the company detailed some general guidelines. One is that "our company will never establish its own sales company, but always will COOperate together with its member whole- salers.” Another line reads that the ”cooperation factor would be considered in rebates," and "human association is the most basic to our business." Economic factors are always important as an ultimate criterion. This was suggested before, yet the Japanese manufacturers studied never forget to "express" and ”emphasize" human association and harmonious COOpera— tion with member wholesalers. Outwardly they stress kyOzon-kyOei, or togetherness. 4) Economic rationale as a priority in harmonious channel relations. H4: In spite of the harmonious setting Of Japanese channel relations, channel administrators are reluctant to acquire economically weak wholesalers as sub- sidiaries when they are requested by such wholesalers to do so. 138 This hypothesis was strongly supported by responses to Question 5 and 6. The results of Question 5 showed that only two out Of eleven manufacturers studied had their own subsidiary wholesalers.l One manufacturer is in the phar- marceutical industry and the other is in the dentifrice/ detergent industry. At the same time, however, these two do use other independent wholesalers in different degrees to cover the national market. .A representative from one large pharmaceutical company which owns some subsidiary wholesalers explained its reasons for involvement with ownership as follows: (1) Financial control over important wholesalers is the effective defensive strategy to adopt against foreign competition, and (2) financial aid based on human associa- tion with some wholesalers in the past naturally resulted in a subsidiary system. Apparently this company's present subsidiary wholesalers are mostly economically stable and not at all weak. According to the interviewee, some financially weak wholesalers were sometimes guided and aided financially. Such arrangements were, however, made by the manufacturer Only if they were strategically impor- tant to the company. The respondent added that the acquisition of subsidiary wholesalers basically results from economic factors. He commented that in the past, lOne manufacturer among twelve was excluded simply because its system did not fit the question. 139 however, noneconomic factors centering around traditional human relations were surely the major stimuli. Another large company in the detergent/dentifrice industry also had subsidiary wholesalers. Some of those wholesalers, even though they are weak economically, are quite important strategically in a given territory. It is only in such situations that the above mentioned com- pany helps and subsidizes them and even then quite reluctantly. Several interviewees whose companies did not have subsidiary wholesalers indicated that today subsidiary wholesalers are considered to be old-fashioned channels in their industry. In addition, large risks are involved, and the distribution system is too rigid relative to the changing environment. Question 6 related to manufacturers' attitudes toward financially troubled but strategically important wholesalers. Most respondents indicated that their firms' attitudes and actions depended upon individual situations. Such factors as the length of time the trade relationship had been maintained would be weighed in such a decision. The respondents felt no need for subsidization since their firms already had established good distribution systems. Yet, it is interesting that none of the respondents reported that their company would disregard a financially troubled wholesaler. Most (nine out of twelve) felt some aid, such as favorable rebates and bonuses or prolonged 140 payments, would be granted. A few subjects from large firms suggested that their company might even permit such a wholesaler to use the company's name in establishing a trading channel connection. This could imply a guarantee on the part of the established manufacturer, so that the financially troubled wholesaler might Obtain a loan more easily from financial institutions or other sources. This practice, however, seems to be possible only when the manufacturers involved are large and well established. The response to this question indicates that most channel administrators do not want to lose even their economically weak member wholesalers. At the same time they cannot afford to subsidize them or unduly assist such wholesalers financially. The course of action chosen in dealing with such wholesalers is some support and sympathy for their position, but not direct aggressive positive support by manufacturers. An interesting attitude related to this question was expressed by a respondent from a pharmaceutical come pany. He reported that a manufacturer will be happier if a financially troubled wholesaler visits him first. Then the wholesaler is more likely to be accorded help by the manufacturer. By visiting the manufacturer first the wholesaler has expressed his loyalty. By the same token, if the wholesaler visits a second manufacturer, the latter would not be pleased, for he would feel he was of 141 secondary importance. The likelihood of the second extend- ing help naturally would be low. 5) Product competence over human relations as an impor- tant. tool to attract member wholesalers. H5: Although channel administrators give various types of dealer aids to whole- salers, the most important tool in attracting wholesalers is believed to be the channel administrator's product competence (R & D expenditures and achievements, high product quality, good image, and so forth) rather than human relations with dealers. This hypothesis was strongly supported in the interviews by responses to Questions 7 and 8. Question 7 concerned the types of dealer aids offered by manufac- turers such as: personnel (detailmen or managers); materials (sales promotion materials or other in-store equipment); money (special rebates or financing); and management information (manufacturer—Sponsored manage- ment seminars or data). All companies studied provided special detailmen, sales promotion materials, and Special rebates to whole- salers of various kinds. Management seminars to educate wholesalers' personnel were provided by ten companies out of twelve. These ten had their own kai, and seminars were given for kai members. In some instances special financing was arranged. However, this practice was limited to a few large 142 manufacturers. It was given to wholesalers in the form of loans. (See Figure 5.4.) As was explained very briefly in Chapter III, the use of detailmen is unique in Japan. Manufacturers' detail- men essentially make sales to and take orders directly from wholesalers' customers. Although these detailmen belong completely to the manufacturers in a legal, financial, and managerial sense, they work for wholesalers from morning to evening to sell their own brands at the wholesale level. One subject indicated that this practice produced a vicious cycle: If the manufacturer sends his detailmen to wholesalers, the wholesalers' salesmen depend on them and do not sell that manufacturer's brands. The same respondent added that at present his company required that their detailmen visit customers together with the whole- salers' own salesmen. Another respondent noted that because the develOpment of wholesalers' customers and sub- sequent wholesalers' sales were generated substantially by manufacturers' detailmen, the manufacturers then could allocate these accounts to particular wholesalers and thus increase their control over the wholesalers. This allocation of accounts (gppai) by manufacturers produces, according to one respondent, a strong source of control or power over wholesalers. Management seminars for selected wholesalers are another pOpular service provided by manufacturers in the 143. Dealer Aid PeOple Aids: Sending of detailmen Sending of management personnel Material Aids: Sales promotion materials Other in-store equipment Money Aids: Special rebates Special financing or loans Information Aids: Management seminars Data Number Of Companies Offering the Aids* *Total number of companies = 12 Figure 5.4.--Manufacturers Dealer Aids. 144 industries studied. The seminars include such topics as general marketing and management skills, environmental changes, and new products and policies of manufacturers. Because seminars are sometimes held at resorts, including Hawaii or Hong Kong, seminar invitations Often are intended as rewards. However, purely educational seminars are also held by manufacturers for wholesalers. The seminars are conducted by outside consultants as well as by the manufacturers. Sales promotion materials and special rebates are provided freely. Sales materials include pamphlets, display counters, calculators, and even cars. Special rebates are commonly provided based on both past efforts and accomplishments, and the degree of financial difficulty of the wholesaler. As a whole, manufacturer and dealer aids provided are quite numerous. Such aids in reality often take the form of a manufacturer's grant to wholesalers, rather than a gpid pro quo business transaction. As such they may increase a manufacturer's control over wholesalers. Question 8 was designed to obtain manufacturers' opinions about the most important ways to attract whole- salers. The responses were direct, Simple, and clear: They had a past and future dimension to them. The impor- tant methods of the past relate: to rebates and discount rates based on human relations considerations and past 145 trading relations. In the future, however, they will be based on product strength. This is depicted in Figure 5.5. All subjects answered that ”product strength" would become the most important attraction in the future. Pharmaceutical companies as compared with dentifrice/ detergent companies have a slightly different emphasis, which reflects each industry's characteristics. Pharma- ceutical firms, as might be expected, stress new product development, or R 8 D, as a major factor. Dentifrice/ detergent companies emphasize high quality products, image, and high turnover of present products. The pharmaceutical industry is well known for its great dependence on foreign technology and for its eager search for innovative new products as a competitive weapon. Industry spokesmen estimate that more than two-thirds of present sales are derived from products of foreign origin. The Oligopolistic dentifrice/detergent industry, in contrast, is more eager to heighten and ensure the good image of present product lines. Spokesmen for three companies (one in the dentifrice/detergent and two in the pharmaceutical indus— try) also noted that human relations and personal associa- tions would be as important as product strength in the future. However, they admitted the latter would have a much higher priority. The three all represented middle- to small-Sized companies. 146 Pharmaceutical Dentifrice/ Large . . . 3 Detergent Size Type Of Medium . . 3 Large . . 3 Company Industry Small . . . 2 Medium . . 2 Human : 2-1/2 Human : 3 PaSt Prod : 1/2 Prod : 0 Large F t re Human : 0 Human : O u u Prod : 3 Prod : 3 P st Human : 3 Human : 1 a Prod : 0 Prod : 0 Medium Human : 1/2 Human : 1/2 Future Prod : 2-1/2 Prod : 1/2 Human : 1-1/2 PaSt Prod : 1/2 Small Human : 1/2 Enture Prod : 1-1/2 Note: This figure is based on two simplified categories, the human and product-strength factors. When a company stated both factors as important, the company was listed as human 1/2 and product 1/2. Figure 5.5.--Factors Attracting Wholesalers in the Past and the Future. 147. Also listed as important future factors to be con- sidered were provision of management know-how to whole- Salers, demand-pull advertising Of manufacturers, and aid in management and financial problems of wholesalers. Concerning the past, most respondents agreed on the main factor that traditionally had attracted dealers. All four dentifrice/detergent company Spokesmen admitted that human associations, including rebates and discount rates based on them, had been the most important. These four did not especially mention the past importance of product strength. On the other hand, six out of eight pharmaceutical companies responded that margin, rebates, and discounts had been the most effective consideration, while four out of the same eight answered that human associations were the key (three answered that both were important). It Should be noted, however, that margin, rebates, and dis— count rates, in the past, were often (but not necessarily) related to the degree of human association. Thus, representatives of two pharmaceutical companies also said that product strength (R 8 D efforts) had been as impor« tant as human associations with wholesalers in the past. It is interesting that one of the companies is a top- ranked firm, while the other is a relatively smaller but technologically oriented firm. Respondents were questioned about the reasons for abandoning the past system of relying on human relations 148 to establish rebates and discount rates and whether they felt there would be a shift to product strength in the future. One respondent from a pharmaceutical company indicated that the old system no longer provided a competi- tive edge. Two other respondents mentioned that while dealers would accept a manufacturer's merchandise to save face, the merchandise, nevertheless, would eventually accumulate at some level in the distribution channel and have to be returned to the manufacturer. Therefore, many manufacturers increasingly are realizing that distribution practices based merely on human relations do not pay Off in the long run. One pharmaceutical company representa— tive, commenting on the future shift-to a product emphasis, said that in today's international economy a firm cannot rely on foreign technology. Research and development will be indispensable both in obtaining cross licenses from foreign firms and in developing new products at home. Times are changing. It apparently is inevitable that economic strength based on strong product offerings will be an important, if not the important, factor for manufacturers in attracting wholesalers as channel members in the future. 6) The stronger wholesaler as the higher income earner. H6: The economically stronger wholesalers are given more favorable rebates and margins. 149 This hypothesis was also supported strongly by the respondents in their answers to Question 17. Without doubt, and despite the prevailing belief in Japan that rebates based on human consideration are quite common, all subjects agreed that sales volume is the single most impor- tant factor in providing rebates. As a result, larger wholesalers receive more favorable rebates. Rebates in the industries studied proved to be variable. They are basically determined on the basis of sales volume. Other economic factors are also considered. These include the degree of cooperation given by whole— salers, the ability to pay (eSpecially shorter term promissory notes), the growth rate of wholesalers, and the ability to fulfill quotas. The rather ambiguous factor of cooperation is Often used in assessing total rebates or granting special economic incentives. One respondent, for example, explained the following situation. If rebates were based strictly on economic criteria, a wholesaler who received a 15 per- cent total rebate in one period might not receive the same in the next period, despite the fact that he extended the same effort. Yet, if this wholesaler is important to the manufacturer, it is quite likely he will receive the same 15 percent rebate. His earned rebate may take the form of Tsutsumi-kin (wrapped money), tokubetsu kansha-kin (special remuneration), booby-sho (booby prize), or some other rebate supplement. These supplements are quite 150 dependent on the cooperation extended and on human rela— tions factors. But it is important to note that they are nothing more than supplements. Maintenance of the manufac- turer's suggested price, the willingness to accept the manufacturer's over shipments during Slump periods, and the continuous efforts extended to sell the manufacturer's brands are all indications of the extent of cooperation. It is this aspect of rebates that cannot be calculated in strictly economic terms. One pharmaceutical company's spokesman explained the recent shifts in rebate practices on a more economic basis. According to him, ambiguous rebate provisions based on human associations often make it difficult for wholesalers to plan financially since too much uncertainty is involved. He added that wholesalers gradually are requesting a more explicit rebate system based on economic considerations. Throughout the interviews it was found that larger manufacturers rely more on economic determi- nants for setting rebates. The medium-sized firms emphasize both human factors and economic strength. It seems that industry followers, not leaders, are more likely to place greater value on human associations in adminis- tering distribution channels. The total rebate rate varies, depending upon such factors as type Of product, sales period or season, and ease of selling the product. The rebate rate, moreover, often includes margins, and when it does it ranges from 151 12 to 14 percent in both the pharmaceutical and dentifrice/ detergent industries. The highest average rate was 17 to 18 percent in the dentifrice/detergent industry. These rates apparently were awarded to those wholesalers, more specifically, larger wholesalers, who had performed cooperatively and achieved a large sales volume at the same time. It is important to note, however, that high rates do not necessarily mean high wholesaler profits, since some portion is often passed on to secondary whole- salers, retailers, or other trade customers. Eclecticism 7) An avoidance of the economic image. H7: In dealing with wholesalers, channel administrators avoid an image of being economically oriented. This hypothesis was supported by the responses to Question 9. However, if one reflects on the recent tendency toward an economic emphasis by manufacturers, the support is not very strong. All respondents agreed that Question 9, about their preferred image from the point of View of channel policy, was difficult to answer. However, seven out of twelve respondents reported their companies pre- ferred an image of being a human-oriented firm rather than an economically oriented innovator. Four reported their firms preferred the image of setting channel policies based on economic factors. One spokesman indicated the 152. response would have to be made on a "case—by-case" basis. NO special distinctions among type of industry or size of company were observed. Respondents who preferred the humanistic image reasoned that most wholesalers, except for a few strong ones, could not exist without a manufacturer's special patronage. Therefore, wholesalers tend to be fearful and suspicious of manufacturers who have an economically- oriented channel policy. One respondent from a top-ranked dentifrice/detergent company noted that his firm, in order to diminish uneasiness, occasionally sent letters to whole- salers assuring them that they would never be neglected or bypassed. Another subject from a medium-Sized company declared that human associations are indiSpensable to doing business in the industry, and that losses would be enormous if the firm publicly stated that it would bypass whole- salers. This respondent added that good human contacts were almost like "Japanese blood." Another medium—sized firm's Spokesman said that his company could not cut just a few wholesalers, for if any should be drOpped, the others would become very suspicious of the firm's channel policy. The morale of all wholesalers would then decline. It is also interesting to note that one company which was regarded in its industry as neglectful of human associa- tions with wholesalers preferred a humanistic image, although its preference may result from purely economic factors. 153 Respondents who stated their companies preferred the image of being economically oriented explained their positions as follows. One pharmaceutical company repre- sentative emphasized that technology, research and development, and superior products would be the determinants. of survival in the future. He added that even wholesalers would become less satisfied with only the humanistic image of manufacturers with less than competitive products. A subject in the detergent/dentifrice industry explained that his firm already had established strong channel rela- tions. It did not need the added impetus of a humanistic image because it had a strong brand backed by ultimate user demand. All respondents who preferred an economic image worked for firms with an established identity and high levels of technology, quality products, or strong channel relationships. However, none denied the importance Of a humanistic image in their industries. In reality, whether a manufacturer has an economic or humanistic image it seems to be a matter of degree. It is no doubt a problem of achieving the proper balance. It is probably safe to say that both are important images. The human factors seem to be assumed; the economic then take on greater emphasis and will continue to do so in the future. 154 8) Human Relationships. H8: Although channel administrators and wholesalers have close human contacts and relationships often extending beyond the boundary Of trade and business, these relationships do not extend to family involvement. This hypothesis was strongly supported by interview Questions 10 and 11. Question 10 refers to the degree of personal, friendly contacts with business partners. Nine out of twelve company reSpondents claim that their companies have fairly close contact and friendship with wholesalers' personnel. Spokesmen for two medium-sized pharmaceutical companies claimed to have moderate contact, while one medium-Sized pharmaceutical firm reported "little contact." Subjects from large companies in both industries indicated very close personal relationships with whole- salers' personnel as friends. At least three subjects mentioned that the length of employment in an industry is very closely related to the degree of personal associations. It is interesting to note that three pharmaceutical firms whose representatives had claimed little or moderate personal contact had relatively shorter histories in their industries. Question 11 then asked about the nature of these personal associations. Were these people mere business acquaintenances, recreational companions, or close, personal friends? Ten out of eleven of the subjects ] Iii-ii Ali ill: 155 considered them both business acquaintances and recrea- tional companions. But business relations, as was mentioned, are not limited strictly to business dealings. Managers or executives at the wholesaler level often consult their counterparts at the manufacturer level about such manage- ment problems as their wage systems, tax questions, and labor relations. They often dine or play golf together. Several subjects suggested that if these wholesaler friends visited their company, they would drOp their work and meet them.without an appointment. Two subjects in the pharmaceutical industry sug- gested that sometimes close personal friendships were established between wholesaler and manufacturer executives. One interviewee said that family involvement or the arrangement of a marriage between a daughter and son some- times had resulted after long contact, but this is not a usual occurrence. Overall, despite the fact that deep personal acquaintanceships were common between executives of whole- salers and manufacturers, close personal friendships seem to be vanishing gradually. This occurs especially as organizations become larger and more modern and as the older generation is replaced by the newer. Yet, friend- ships are still important. For example, one respondent noted that, although they are diminishing, such business friendships are very useful and important in actual trade and business relations. Several respondents indicated 156- that because of their friendships they could ask or grant rather special favors to one another. Friendship apparently also accounts for the flexibility of business relations which is so characteristic of Japan. 9) Loyalty Of Wholesalers. H9: Each marketing channel comprises some wholesalers with intense loyalty, willing to sacrifice their own business interests to a considerable extent for the sake of the channel administrator's interests. This hypothesis was fairly well supported by the answers given by respondents to Question 12. Positive responses, however, tended to come from larger companies with a longer period of existence. Eleven respondents out of twelve answered that they have some wholesalers as business partners who are willing to sacrifice their own business to a certain extent for the benefit of manufacturers. The one company which answered it did not have such partners was the Smallest of the twelve studied. The nuances of the meaning of the positive responses, however, is interesting. All four dentifrice/ detergent companies along with the top four pharmaceutical companies differed slightly in their answers from the other three pharmaceutical companies, all medium or small sized. Representatives from the top eight companies studied (the four dentifrice/detergent firms and the top four pharmaceutical firms) stated that their firms 157 received such sacrifice from.wholesa1ers purely because of friendship or loyalty based on human associations. The three smaller pharmaceutical companies noted that whole- salers will make such sacrifices because of the strong- weak economic relationships between manufacturers and wholesalers. One of these respondents, however, added that personal relationships between manufacturers and wholesalers were important in the consideration of sacri- fices. How is loyalty engendered? Respondents from all top eight companies said that past financial help to whole- salers in difficult situations was the reason for whole- saler loyalty. Several respondents went on to explain that their firms provided capital to financially troubled wholesalers purely because of the traditional close human associations. They did so without charging any capital interest. It was not merely an economic transaction. One subject commented that his firm had sent merchandise free of charge when a wholesaler's warehouse was burned out. Two other interviewees said that the presidents of their companies served as go-betweens in a merger of two com- peting wholesalers, thereby gaining loyalty. Another subject, from a large pharmaceutical company that has been in business for a long time, pointed out that some wholesaler firms have had trade relations with his firm for almost three generations. 158 The spokesmen for the top eight companies believed wholesaler loyalty stemmed from what is called gigi (human-based obligation). Examples of this loyalty were expressed by subjects in the following terms: "Our whole- salers would accept overstock without any Special charge." "Wholesalers are voluntarily cooperative without our having to use our power or control." "Ashi o mukete nenai (they never sleep with their feet in our company's direc- tion).” Some also said that their "giri may not appear in serene times but it would come out when an emergency happened to us." 10) Human considerations in dealer aids. H10: In providing dealer aids, channel administrators regard the human factor as an important factor in channel administration of the future. This hypothesis was fairly well supported by the interview responses to Question 13, which dealt with Opinions about the future role of human considerations in dealer aid. The majority deemed them to be "fairly important" in the future. Eight out of twelve company spokesmen took this position. One large company's representative suggested that human considerations would be "very important." Subjects from three companies took a contrary position, holding that the human factor would "not be very important." But it is interesting that no respondent replied that human considerations would "not 159 be important at all" in the future. Yet, almost all sub- jects agreed, in varying degrees, that in the future the emphasis might be less on human considerations and more on economic factors than is the case today. They were all convinced, however, that the complete neglect of human considerations would never occur in their own industries. No special differences in responses by type of industry or size of company were Observed. In reasoning that human contacts would remain fairly important, a respondent from a large manufacturing firm explained that by adding the human factor to rebate provision the manufacturer could establish a psychological hold on wholesalers through gi£i_(a feeling of apprecia- tion). All of these feelings are deeply imbedded in Japanese society. Another added that although formal arrangements are not specified, this feeling of Obligation helps wholesalers work especially hard to provide better service for a manufacturer. Another subject suggested that, as one might expect, if a wholesaler had exactly the same business Offer from two manufacturers, he Obviously would Opt for the one that provides human con- siderations. Some respondents who believed human considerations would not be very important in the future reasoned that the internationalization of business will mean greater emphasis on economic factors. Some also suggested that various social pressures, such as regulation, the power 160 Of consumers, and competition fostered by innovation and technology, would reduce the human quotient. A few noted that the present complexity of doing business in Japan stemmed from human considerations, and that future busi- ness practices should be less complex and more straight- forward, hence, based more on economic considerations. It seems that the overall importance of human con- siderations in channel administration will remain. This will foster complex relationships and structures. Yet, the degree of importance may be reduced gradually in the future. Channel relationships may adOpt more of a straight- forward economic posture. ll) Weak wholesalers as-acost Of business. H11: Channel administrators tolerate some economically weak wholesaler members, considering them a regular cost of doing business. This hypothesis was only weakly supported by the responses to Question 14, which first concerned the respon- dents' overall evaluation of their present member whole- salers. Then, after identifying their levels of satisfac- tion or dissatisfaction, the interviewees were asked whether they would take strictly economic measures for improvement, if necessary, or would tolerate 1ess satis- factory wholesalers. As Figure 5.6 indicates, no company representative indicated his company was ”very satisfied" with its 161. Dentifrice/ Pharmaceutical Detergent Evaluation* Company Company Total Very satisfied 0 0 - Rather satisfied 2 2 4 Rather unsatisfied 5 1 6 Very unsatisfied l 1 2 Total 12 *As an evaluation scale, a four-point scale instead of a five-point scale using "not sure" was employed. The inclusion of "not sure" in the preliminary tests intended to make respondents select that point. Figure 5.6.--Manufacturers' Overall Evaluation of Their Wholesalers. 162 wholesalers. Apparently, even strong loyalty from economi- cally weak members was not enough to gain a satisfactory rating. The subjects who answered the company was "rather satisfied" with its wholesalers were all members of large firms. All of these firms were regarded by themselves and others as placing a very heavy emphasis on the human aspects or personal relationships in dealing with channel members. The "rather satisfied" respondents admitted that their wholesalers' Sincere efforts to sell their products and their highly cooperative efforts based on loyalty were important to them. Their response was "rather" instead of "very" satisfied because their cooperative wholesalers did not always have sufficient economic power to perform the required selling and delivery functions. One subject explained that his firm basically sells and delivers its products to major accounts through its own direct efforts. It only depends upon wholesalers for collections and other minor functions. In return for these minor tasks wholesalers are credited for those accounts or territories. Because this practice is an industry custom, the firm's Slight dissatisfaction seems to stem from the industry practice and not from wholesaler performance. Respondents from six companies (one in the dentifrice/detergent industry and five in pharmaceuticals) that answered "rather unsatisfied" apparently felt this 163 way because other competitors had much stronger ties with and control over their wholesalers. The common reason given for their "rather unsatisfied" response was that wholesalers do not push their products aggressively enough. Subjects from two fairly large companies in this category stated that their firms' ties with wholesalers were not as strong as those of other top manufacturers in their industries. They noted their companies were increas- ing their efforts to strengthen these ties. Four out of five respondents in this category from pharmaceutical companies said that their wholesalers were "not too cooperative" and "not enthusiastic in selling our product." Moreover, they explained "feedback from whole- salers about where our products are now and about customer trends is too Slow." The respondents also complained that their wholesalers were too weak financially to perform the prOper wholesaling functions. The respondents repre- sented four medium to small Sized pharmaceutical companies. Two respondents (one in dentifrice/detergent and one in pharmaceutical) said they were "very unsatisfied" with their wholesalers. Both were from the smallest com- panies studied in each of the industries. Their reasons were basically the same as those given by the "rather unsatisfied" group. Their feelings about them, however, were more intense. In addition, it was noted that the share of business at the wholesalers' level is small because the large manufacturers already have 164 relationships with the major wholesalers and command their strong loyalty. When asked if they intended to cut some weak wholesalers from their distribution channel, all four sub- jects representing "rather satisfied" companies answered "no." They reported that, on the contrary, even weak wholesalers would be helped and assisted. But the respondents did not explicitly say that their companies were tolerant of economically weak whole- salers. It was noted in the interviews that manufacturers had already invested too much in extending assistance to their member wholesalers (such as installing computer systems) to make the elimination of the weaker wholesalers a feasible strategy. Among the group Of "rather unsatisfied" companies, respondents' Opinions varied. Representatives of rela- tively large firms said they would continue to use basically the same wholesalers Simply because they had no better alternatives available for covering the required territory. Respondents from mediumrsized companies (all pharmaceutical) admitted they might drOp some wholesalers if they could find replacements. But they also noted that the probability of finding better replacements would be small, and much uncertainty would be involved. The policy of all the "rather unsatisfied" firms seems to depend more or less on the availability of better alternatives. Given the fact that almost all the better 165 wholesalers already are affiliated with a parent manufac- turer, it is unlikely that any will cut their present wholesalers from their distribution channel. Employees of two "very unsatisfied" manufacturers responded that even they might not cut their present wholesalers. They Simply needed more wholesalers to expand their markets and territories. Their problem seems to be one of obtaining enough wholesalers rather than screening them according to quality. Regarding the hypothesis, it seems that channel administrators appear to tolerate some economically weak wholesalers. The reason for doing so, however, is that they cannot find better alternatives. Thus, in this sense, even though channel administrators may consider some of the weaker wholesalers as a cost of doing business, the reason for holding such an attitude is not a result of administrative benevolence based on human associations and factors as was hypothesized. This hypothesis seems to be supported only weakly in the case of the respondents representing some of the "rather satisfied" manufacturers who tolerated weak wholesalers as a humane cost. 12) Changes in Channel Policy. H12: Efforts to promote economic efficiency of the marketing channel in the past decade have resulted in no substantial changes in marketing channel policy and structure. 166 This hypothesis was relatively well supported by pharmaceutical companies. The results, however, were indeterminant for the detergent/dentifrice industry. The data relevant to this hypothesis came from Question 15, which inquired whether respondents had changed the number Of wholesalers, their distribution policies, or system substantially to improve economic efficiency over the past decade. All respondents admitted that their companies had changed the number of wholesalers. But only one company admitted to changes in distribution policies or system. This is shown in Figure 5.7. In Question 15 the interviewer probed to find out how companies had developed their distribution system in the past decade. Within the pharmaceutical industry, subjects from the top Six of the eight companies indicated that they had reduced the number of wholesalers on a selective basis to improve economic efficiency. But they pointed out they seldom had taken any drastic measures to reduce the number of wholesalers. They did not change their basic distribution methods or policies. An employee of one top-ranked manufacturer, for example, commented that the firm had not changed its basic system drastically, although some wholesalers might have disappeared "quite naturally." A Spokesman for a relatively large pharmaceutical company, whose primary wholesalers had been reduced from 600 to 350, said that while many small wholesalers had 167 Pharmaceutical Dentifrice/Detergent Number of Policy/ Number of Policy/ Wholesalers System Wholesalers System Changed 8 0 4 1 Not changed 0 8 0 3 Figure 5.7.--Changes in the Number of Wholesalers and Distribution Policy in the Past Decade. 168 merged at the manufacturer's suggestion, new organizational arrangements and dramatic cuts had been few. He noted that while 200 out of these 350 primary wholesalers accounted for 95 percent of total sales, the remainder, 150 whole- salers, accounted for only 5 percent. Yet, the latter had not been cut because of long-standing, human-based trade relations, sometimes spanning two generations. The repre- sentative of a medium-sized pharmaceutical company commented along similar lines. The number of wholesalers used by his firm had been reduced from 600 to 300, but this was the result of mergers arranged with the cooperation of whole- salers. Moreover, wholesaler loyalty has been maintained so far. Another medium-sized firm's representative, however, Offered a slightly different vieWpOint. He reported his company could not change its channel policy drastically because such action would create distrust among other whole- salers. Thus, as far as the responses of subjects from the top Six pharmaceutical companies studied are concerned, the hypothesis was quite well supported. Respondents from two other pharmaceutical companies also answered that they had never reduced the number of wholesalers. But the number with which they had begun Operations was SO small that their problem was to expand and not reduce the number of wholesalers in order to increase territorial coverage. Although the operations of these two certainly supported the hypothesis, in reality 169 these companies did not belong to the same set as the others in the consideration of distribution policies. In the dentifrice/detergent industry, the situation is slightly different. Over the past decade, the number of primary wholesalers for each company had been reduced as a result of both more careful selection by manufacturers and manufacturer-directed mergers. Although this trend is also true in the pharmaceutical industry in the dentifrice/ detergent industry it has resulted from a change in channel policy. The resulting structure has, therefore, altered more drastically. Changes in the distribution system of the dentifrice/detergent industry have been stimulated by one of the top-ranked manufacturers. In the late 19608, this firm established its own sales company to perform some of the functions normally performed by traditional wholesalers. This change had an enormous influence on other dentifrice/ detergent manufacturers as well as their wholesalers. Many of the latter feared a chain reaction on the part of other manufacturers. Some manufacturers took advantage of this uneasiness by dropping some of their wholesalers and tightening their control over the remainder. Initially, however, the company which instigated this change lost a fairly large number of wholesalers and a portion of market share and suffered a decrease in sales. Another top-ranked competitor, therefore, enjoyed wind-fall sales increases with the Shift of some 170 wholesalers into its orbit. This rival company Since has strongly advocated kyOzon-kyOei (coexistence and codevelOpment) with wholesalers to alleviate their uneasi- ness and at the same time strengthen company control of independent wholesalers. It insists that it will never shift to a new distribution system without wholesalers. Followers in the industry after this experience adopted one of two policies: Either they established their own sales companies, or they strengthened their ties with independent member-wholesalers. But even followers who established a sales company did so in a manner so that they did not neglect their former wholesalers entirely. This was done in part to relieve wholesalers' uneasiness and to avoid being considered cold and calculating. In the dentifrice/detergent industry, therefore, hypothesis 12 was not confirmed. Some manufacturers did indeed try to improve economic efficiency through adopting new distribution measures. Others chose to strengthen their ties with their traditional wholesalers. At present, both methods seem to be equally well regarded in this industry. It is, however, quite important to note that the drastic change in channel policy made by the tOp-ranked company was preceded by an effort to mollify traditional wholesalers. Wholesalers were asked to participate in the new sales company's management or to become stock- holders. Also, special rebates were provided tO offset 171 some of the deficits the wholesalers would suffer as a result of the change. Furthermore, in reality this com- pany's policy itself may not have been so drastic. Prior to the change, the firm used its own sales representatives. They were sent to each wholesaler to make sales for them. Thus, it can be argued that the establishment of a sales company could be regarded as merely a modification of the traditional system, or the next expected development. Exceptionism 13) Rates of Rebates. H13: Although channel administrators have established a formal rebate system, the actual rate given is often deter- mined by discretionary management action. This hypothesis was strongly supported by the responses tO Question 16, 17, and 18. Question 17 con- cerned the existence of an explicit rebate system. In the dentifrice/detergent industry, respondents from all four companies acknowledged the existence of explicit rebates. In the pharmaceutical industry, representatives of four of the eight companies acknowledged they had them. However, two respondents claimed they had only vague rebate systems. The other two said they did not have them. Rather, the latter two companies provided rebates on a case-by-case basis. The two firms that reported having vague rebate systems also provided rebates on this basis. 172 Most manufacturers, especially the larger ones, did have explicit systems. The reasons given for such an explicit system relate to their usefulness in meeting both taxes and some of the recent regulatory pressures being exerted. Question 18 was directed to respondents whose firms had explicit rebate systems. It related to the possibility of changing the formal, eXplicit rebate, determining who made decisions to change them, and how much, if any, change was made. When asked about the possibility of changing the formal rebate, all respondents, except one from a top- ranked manufacturer (9 out of 10 effective companies, including those who answered "vaguely yes"), admitted that there were some areas of discretion between formal policy statements of rebates and the actual rebates extended. In the inquiry it became evident that even the dissenting top-ranked manufacturer seemed to employ discretion, although the spokesman said the firm did ”not employ it especially." Evidence for this conclusion lies in the fact that the same respondent indicated in another ques- tion about the criteria for determining rebates (Question 16) that degree of cooperation received from wholesalers was the important criterion. The assessment of the degree of cooperation is based on someone's discretion and evaluation since there are no explicit standards for measuring it. 173 Nine out of the effective ten subjects named the honsha eigyO-buchO, the headquarters marketing manager, as the one who had responsibility for providing actual rebates. Two subjeCts said it was the responsibility of the firm's president (one of these two subjects noted that both the marketing manager and president had the responsibility). One respondent from a medium-sized company, whose president decides the rebates himself, explained that he did SO because rebates were really the key to determining a wholesaler's fate. He explained that in today's system the Size of the rebates determines whether wholesalers survive or declare bankruptcy. Most subjects report that the shiten-chO (regional branch manager) or sometimes the sales representative had some say in the actual rebates realized by wholesalers. But they added branch managers and salesmen obtain permis- sion from the head office through the Eipgi system for any significant decisions they make in changing rebates. The range of discretion (difference between stated policy and actual rates) was considered on the upper side to be 2 percent2 by five company respondents, and on the lower side as less than one percent by three of them. 2Assume that a company calculates the formal over- all rebate given tO a certain wholesaler as 13 percent, based on an explicit corporate rebate system. If 2 percent is the range of discretion, this means that the actual rebate provided may be as high as 15 percent. 174 The other two effective subjects said that the range was between one and two percent. However, we must consider that seven companies previously reported that the degree of COOperation received from wholesalers was a rebate criterion. This was noted in replies to Question 16. Also, the degree of COOperation was not included in consideration of the "range of discre- tion' concerning rebates. Thus, in reality the actual range of discretion would appear to be much larger than the estimates given. One manager made an interesting comment during the interview. He reported "secret human-based rebates which are usually unknown to others and are very dependent on our discretion are in fact the source of our control power over wholesalers." Another manager also disclosed with some embarrassment that it was not unusual for the rate of rebates among top wholesalers and manufacturers to be decided while drinking or dining together. A third subject indicated that "as an industry custom we use rebates quite flexibly to fix the amount of total gains for each wholesaler at around a 15 percent range as chasei-waku (a coordinated range)." Flexible rebates seem to constitute a significant and unique characteristic of channel policy of these industries. 175 14) Rebates and business margins. H14: Many types of rebates exist with rates even higher than the stated business margin, thus allowing room for management discretion. This hypothesis was also strongly supported by both the answers given to Questions Hiand 20 and informa— tion gained as a result of probing concerning industry practices. In addition, data from Question 16, concerning the basic criteria used for determining rebates, also supported this hypothesis. Question 19 inquired about the kinds of rebates extended and under what condition they were provided. Both industries studied used a wide variety of rebates. In the dentifrice/detergent industry, rebates based on cash collec- tion, goal achievement (quotas), delivery performance, and quantity of sales were common. Rebates based on the acceptance of new products, COOperation in maintaining prices, preordering products during the off-season, exclusive dealerships, the amount of nonreturned goods, and the previously mentioned degree of cooperation were often applied. These findings are substantiated by the findings of other research projects.3 In the pharmaceutical industry, basically the same types of rebates are available. The Specific, economically based rebates such as those related to sales volume, cash 3See Torihiki Joken no Tekiseika, 1973, p. 73. 176 collection services, and delivery services are used widely. The more ambiguously human-based rebates, awarded for the degree of cooperation extended, the maintenance of price, or to supplement wholesalers' deficits, were also found to be important. One subject captured the essence of the situation in his comments. He noted that while there are numerous names for rebates, the name itself is unimpor- tant to wholesalers. What really matters is the total rebate amount wholesalers receive from manufacturers. The most pOpular form of rebate payment is a cash rebate offered on a straight rate basis. This is a fixed rate for each item regardless of the quantity purchased. However, payments made in merchandise as well as cash pay- ments on a progressive rate basis, such as higher rebate rates for purchases of larger quantities, are widely used. Question 20 was designed to investigate the ratio between rebates and margins. In the dentifrice/detergent industry, the margin was fixed at around 7 percent. In the pharmaceutical industry it was around 5 percent. These rates were fixed by manufacturers for their wholesalers and were explicit for_both industries. However, from the respondents' answers tO.Question 16 about overall rebate rates, the average total rate received by wholesalers, both margin and rebates, was determined to be 14-15 percent in the pharmaceutical industry and 12-14 percent in the dentifrice/detergent industry. The rebate rate alone, therefore, is equal to or greater than the fixed 177 margin rate. It may even be considerably more than the fixed margins. This relatively higher flexible rebate as opposed to the fixed margin seems to allow room for discre- tion on the part of management. It may make wholesalers even more reliant on the manufacturers they serve. 15) Length of credit of promissory notes. H15: Length of credit terms of promissory notes for wholesalers is dependent upon the conditions and considerations of wholesalers rather than a predeter— mined fixed policy. This hypothesis was relatively well supported by the answers given by respondents from the pharmaceutical industry. It was not supported by the responses received from the dentifrice/detergent industry. In both industries, the periods covered by promis- sory notes were found to be closely related to rebate rates. That is, if payment is prompt, more favorable rebates are gained. One dentifrice/detergent company, for example, even penalizes late payments of promissory notes by reducing the amount of the rebates. In the dentifrice/detergent industry, subjects from three top-ranked companies said that variations in the payment period of promissory notes are exceptions. One tOp-ranked detergent firm today receives about 95 percent of the payment for its sales in cash. The respondent from this company said that some of its member wholesalers had the option of a maximum 60-day payment period, but 178 the option is a costly one for them. The manufacturer provides an additional 3 percent rebate for each payment made on time, which is a very high rate. Because this rate usually is much more favorable than that extended by commercial institutions, wholesalers are better off pay- ing cash, even if they have to borrow the money to do so. Such a policy encourages cash payment by wholesalers. Another detergent company also reported using basically the same method. Companies in the dentifrice industry permit 60-75 days as the period for deferred pay- ments. A subject from one large dentifrice firm said its rate of collection made on time is 95 percent because it penalizes late payment, usually by adding 5-10 days to the 60-day payment period at the rate of 0.3 percent per day, a very high rate indeed. In the dentifrice/detergent industry variations in the payment period were considered to be exceptions. Yet, minor postponement of the payment date could be granted by regional branch managers or sales representatives with the permission of the head Office. In the pharmaceutical industry, on the other hand, there is a wide variation in payment periods. An average of approximately 120 days seems to be the industry prac- tice. Interviewees from five out of eight pharmaceutical companies reported that their company gave 90 days as the minimum period. The other three, which are medium or smaller sized firms, give from 110-130 day payment periods 179. as the minimum. The maximum payment period varies between 150-200 days. This, however, is very unusual. Representatives from all the pharmaceutical firms said their companies relate payment periods and rebates, the earlier the payment period, the more favorable the rebate. This flexibility of payment periods depends on the power of wholesalers, their financial strength, and the length of association with them. Most subjects indicated that decisions about a few days' postponement in payment might be made by sales representatives, section managers, or regional branch managers. Formally, these peOple need permission from their superiors to grant such extensions. In practice, however, the range of discretion seems to be relatively broad. It is important to note, however, that deferred payment privileges have recently been restricted to a con- siderable extent. This is especially so when wholesalers are concerned with another and perhaps more important factor, rebates. Relative to a tOpical and important factor, one subject added that, because of the energy crisis in 1974, the tendency in his company has been to shorten rather than extend payment periods. In general, exceptions to the practice of making payments on time seem common in the pharmaceutical indus- try. In the dentifrice/detergent industry, however, pay- ments are generally made on time. Also, the larger 180. companies in both industries tend to be in a better posi- tion to demand Shorter payment periods and receive more prompt payment. 16) Delivery of merchandise. H16: Delivery of merchandise is not made on the basis of the manufacturer's logistical planning schedule, but, rather, on the basis of dealer requests. This hypothesis was well supported by the respon- dents' answers to Questions 23 and 24, referring to the frequency and method of delivery. All subjects interviewed, except one, reported that companies delivered merchandise relatively frequently. Frequency was especially high in the dentifrice/detergent industry, which arranged delivery schedules varying from a maximum of every day to a minimum of every two weeks. One respondent from a tOp-ranked detergent company indicated that an order received in the morning would be delivered that evening. Another top-ranked detergent manu- facturer reported that, on the average, truck deliveries were made daily, while train deliveries occurred twice a week. The average delivery frequency for large-sized wholesalers was five times per week, and for small-sized wholesalers three to four times per week. In the pharmaceutical industry, the average delivery frequency was slightly less than for the dentifrice/detergent industry. Even here, however, 181 subjects from five of the eight companies reported their firms delivered merchandise every day. Some interviewees noted that because of the nature of their products, their companies had to deliver often to meet the emergency needs of dealers. Minimum delivery schedules averaged about once a month. But such Shipments may be deceptive, Since they were made to smaller and less significant local whole- salers. Several respondents indicated that a delivery schedule of twice a week was probably the average. Several subjects from the pharmaceutical industry admitted that their physical distribution system was very poor, which results in high costs. Most indicated, however, that in the future logistical planning by manufacturers and the development of logical delivery schedules would become more important. Respondents indicated some of the companies were now develOping mihakarai-okuri sales according to a planned delivery schedule based not on customers'orders but on the manufacturer's estimate of a wholesaler's inventory. Such deliveries were made once or twice a month. But they also admitted that the rate of collection for such deliveries was extremely low, and the rate of return goods was high. Delivery frequencies may well be reduced in the future. Today, the frequency and costs of deliveries are high. Government documents indicate that 67.7 percent of pharmaceutical wholesalers make deliveries to their clients (medical facilities or retailers) every day; 182 25.7 percent deliver once every 2-4 days.4 This same source reports that literally no wholesaler fixes minimum order quantities for deliveries made to customers. Frequency of delivery is apparently higher between wholesalers and their customers than between manufacturers and wholesalers, which was the relationship studied here. This is understandable. Nevertheless, there still seems to be great opportunity for better logistical planning on the part of manufacturers and hence opportunities for improved profit performance. In fact, many of the respon- dents interviewed reported that it was their intention to improve this aspect of their Operations. Some even suggested that the keys to future development and effective- ness are likely to be financial strength and better inven- tory management by wholesalers. In general, deliveries are seldom made on the basis of a planned delivery system. While several manufacturers have established rudimentary delivery schedules, whole- salers' orders,particu1arly to meet emergencies, are honored. This is especially true when the trade relation- ships have extended over a long time and when wholesalers themselves are strong. 4See Torihiki JOken no Tekiseika, 1973, p. 88. 183. 17) Return Of goods. H17: Manufacturers generously permit the free return of goods by wholesalers without Special charge. This hypothesis was supported to some extent by information gathered from some of the prior questions, particularly those in the section on liberal return privileges noted in Chapter IV. However, Question 25 is specifically concerned with determining recent trends as well as the details of return privileges. It was previously noted that many manufacturers still accept goods returned by wholesalers. However, it was also found that, because of changes in industry prac- tices, the quantity of returned merchandise in the deter- gent industry has decreased substantially. Manufacturers have tightened their control over merchandise returns by basing rebates on the quantity of ordered goods that are returned--the less returned, the higher the rebate. In the pharmaceutical industry, however, practices concerning returned goods and the quantities returned remain about the same. In both industries, it should be noted that exter— nalities have eased the situation. The energy crisis created a shortage of merchandise, which has reduced returns. Changes in practice were emphasized by several respondents. Subjects from two detergent companies, for 184 example, noted that their firms did not accept returned goods unless they were defective. Respondents from two dentifrice companies said that a rate of return of 5-6 percent of sales was about average. The rates on seasonal goods are, of course, much higher. They are estimated to range from 30-50 percent of sales. In the pharmaceutical industry, return rates vary depending upon the nature of the products--whether they are ethical or proprietary, or seasonal medicines such as cold tablets or stable items such as aspirin. The reported rate of return of ethical goods ranged from 2 to 6 percent of sales; for general prOprietary items from 7-10 percent of sales; and for seasonal proprietary items from 15-20 percent of sales. Consignment sales are also widely practiced in the pharmaceutical industry. In fact, three pharmaceutical companies handle sales on a consignment basis only. When this occurs, the question of merchandise returns is irrelevant. Several respondents from pharmaceutical companies also noted that returns come most often from the smaller and less significant channel members and not generally from primary wholesalers. Thus, manufacturers become con- cerned about the burden caused by weaker channel members. While five of the eight respondents surveyed reported they accepted returns, they also reported that they some- times assess a penalty by introducing charges for certain 185 returns. Such charges often take the form of reduced rebates for the wholesaler. As was noted earlier, since the onset of the energy crisis, pharmaceutical manufacturers have not received many returns. But this condition Of merchandise being in shorter supply will change. Until it does, many respon- dents reported that they will be more generous with their returned goods policy. 18) Contracts and dealer relationship. H18: Although manufacturer-wholesaler sales and dealer contracts exist, business is not rigidly controlled by the contract. This hypothesis was strongly supported in the interviews. Data received from answers to Question 26 dealt with the manufacturer-wholesaler contract. The neglect of the contractual agreement and lack of strict legal interpretation has been pointed out occa- sionally in past literature. Detailed analysis and explanations of working contractual arrangement have seldom been made. The responses received to the inter- viewer's question concerning this subject seems to confirm the vague nature of industry practice as stated in the contracts. Representatives from all the companies studied, except for one small-Sized pharmaceutical firm, acknow- ledged that their firms had business and trade contracts 186 with wholesalers. Yet, it is extremely interesting that not one subject reported that these contracts were impor- tant in their business relationships with wholesalers. Many respondents even noted that they had never checked their contracts after they were signed because there was no need to refer to them further. Thus, contracts appear to be a matter Of form and not substance. The respondent representing one tOp-ranked detergent company explained that the contract was often superceded by a sales agreement in which both parties mutually establish a sales quota. In the Western business world, if a wholesaler only sells 90 percent of his quota during the period, this would mean that he had not fulfilled his contract. He might suffer serious sanctions. In Japan, however, the situation is different. Although the wholesaler could be penalized, if a manager of the manufacturing firm believes the wholesaler did his best, he need not be. Sometimes, he may even be granted a favorable rebate simply because he did his best. Another respondent, employed by a tOp-ranked dentifrice manufacturer, indicated that if a large or primary wholesaler did not meet the agreed quota within the period Specified, punitive action need not be taken. The manufacturer might merely extend the time period in order to give the wholesaler another chance to reach the quota, rather than downgrade him to the rank of secondary wholesaler. 187' A subject from a tOp-ranked pharmaceutical company explained his firm's contract policy. At the beginning of a period the manufacturer meets with wholesalers to arrive at a consensus agreement on sales quotas. These are then codified. Each wholesaler keeps his document as an implicit contract. The manufacturer never requires a signature or papkp (a personal stamp or seal which is always used by Japanese businessmen as a signature). The agreement is a gentleman's agreement based on trust. (This company is quite famous for its business success.) Spokesmen for almost every one of the pharmaceuti- cal manufacturers studied indicated that contracts are "almost meaningless.” One suggested that while contracts exist, the more important items are the ShO-shfikan, the business customs existing in the industry. If a manufac- turer applies sanctions for breach of contract instead of following more lenient business customs, he very likely would be criticized as being cold and without feelings. Contract dealings with Western manufacturers are quite different, however. A subject from a dentifrice company explained that wholesalers naturally expect for- eign manufacturers to retaliate when contracts are broken. According to him, a wholesaler downgraded by a manufac- turer to the secondary level for failing to meet his sales quota will not criticize this action because the manufacturer is foreign and not Japanese. The wholesaler realizes that protest would be shikatagamai, useless. 188 "Quite interestingly," this subject added, "the wholesaler would feel this way even if the firm were staffed entirely by Japanese managers and salesmen." Wholesalers seem to apply different standards when dealing with Japanese and foreign companies. Economic Nonfunctionality 19) The human element. H19: The human character of a manufacturer's personnel in charge of dealer relations is regarded as a very important factor in doing business with wholesalers. This hypothesis was strongly supported during the interview by answers to Question 27. Question 27 sought to determine the importance of the human or personal characteristics of channel administrators in dealing with business partners. In response to this question, all subjects noted that personal characteristics were very important. One subject indicated that this human orienta- tion is at the heart of Japanese business, is its blood, and it never can be changed. Many other interviewees agreed that a fairly Targe amount of business is determined by human contacts, although these may not necessarily be the only basis. Three subjects reported that there were many instances when a human orientation was more important than economic rationality. All respondents representing large companies explained tolerance, broad-mindedness, and an understanding of giri (a sense of duty) and ninjo (an 189‘ understanding of humanity) were important in their indus- tries. The value sometimes placed on personal attributes is noted in the two instances that follow. One subject emphasized that human considerations when dealing with wholesalers are not only desirable, but also necessary. He claimed, for example, that very large, powerful regional wholesalers could even force manufacturers to dismiss lower-level managers if the manager's "nature and human dealings" were not agreeable to the wholesaler. In the same vein, another respondent explained that if a manufacturer's manager had very fine human relationships with large wholesalers, his position in the organization would probably be more secure. Several interviewees added that, in addition to the human aspects, a manager naturally must also have the dis- tinctive ability to control and administer the channel. But there seems to be no doubt among respondents that good human qualities are extremely important. H20: An individual's name and personal characteristics are more important than his job function to wholesalers in maintaining good business rela- tions between the manufacturer and wholesaler. This hypothesis received some support in the responses to Question 28. But it had more validity for manufacturers' relations with larger, primary wholesalers than with other wholesalers. 190 In answer to Question 28, which referred to the wholesalers' attitude toward a manufacturer's administra- tor, 9 Out of the 12 company Spokesmen replied that from a wholesaler's point of View, a manager's name and personality were more important than his mere organizational position or job function. This again adds evidence that business relations in Japan depend heavily upon personal relation- ships and associations. For example, one subject noted that in the pharma- ceutical industry he had immediate personal access to about 50 presidents of wholesaling firms should the need arise. Moreover, these individual relations were his main asset as well as the main company asset. Another subject pointed out that although there are many occasions for friendly contacts, such as at kai meetings, dinners, and seminars, these tend to be limited only to top-ranked wholesalers. Therefore, the hypothesis was true mainly for primary, not secondary and tertiary, wholesalers. The three respondents who did not agree completely with the hypothesis suggested that personal names and organizational positions could be thought of as being equally important, depending upon the particular whole- saler. The three companies represented ranged from medium- to small-sized pharmaceutical firms. The Spokes- man from the smallest of the three said that because his firm did not have much market power, wholesalers simply did not pay much attention to it. The other two 191 respondents said that today less emphasis was being given to personal business and trade relationships. These two firms are fairly well known as being among the more economically oriented in their industry. In general, it seems that for managers at both the manufacturer and wholesaler levels their personality and personal relationships are more important than their job description or job function. A respondent from a medium-sized pharmaceutical company revealed that the human relationship Often becomes so firm that wholesalers occasionally would visit a channel administrator for con- sultation even after he had taken another position in the same company. 21) Significance of nonbusiness activities. H21: Effective channel administrators must engage in numerous activities that are not strictly business and involve both human and economic rationales. This hypothesis was well supported by the respon- dents in their answers to Question 29 as well as by observations and comments made by subjects when respond- ing to other questions during the interview. Spokesmen from ten companies out of twelve represented indicated that channel administration managers spend time outside business hours contacting personnel of member wholesalers. These contacts include a variety of 192 social engagements such as dining and golf, as well as personal conversations and business consultations. It was explained that because the human factor is so important in their industries, channel managers must develop and main- tain good human relationships with wholesalers, and this is usually done outside normal business hours. As was noted before, one respondent said that busy managers would meet with managers of large wholesalers whenever they visited the company even if the latter had no appointment. He also emphasized that some of the wholesalers' personnel would talk almost the entire day about all their business with the manufacturer's manager. They would even discuss matters not directly related to the manufacturer. These encounters consume much of a manufacturer's manager's time. An employee of a medium-sized pharmaceutical com- pany reported that certain small local wholesalers periodi- cally visited the manufacturer's main office with their financial statements. The manufacturer does not request this. It is believed that the wholesalers do so thinking that if they visit Often, they may receive more favorable rebates as a result of establishing closer human relation- ships. Furthermore, most manufacturers seem pleased when wholesalers, recognizing the manufacturers' power, Show this kind of respect. Interviewees observed that everyone in the indus- try knows that work outside business hours is expected of 193‘ channel administrators. A few respondents from the phar- maceutical industry remarked that the managers seldom dined with their own families because of so many engage- ments with their business partners and clients. Responses to Questions 27 and 28 also revealed the importance of good human relations for channel administra- tors and underscored that not only business but also private contact is necessary. It is therefore quite understandable that managers of marketing channels must devote much of their leisure time to business associates. ****** A summary of interview results for each operational hypothesis is given in Figure 5.8. Although the detailed discussions concerning each Operational hypothesis often proved more important than the simple abbreviated support- nonsupport response, a summary is useful for indicating the overall perspective in channel administrative behavior. As Figure 5.8 shows, the 21 Operationsl hypotheses which were derived from the four hypothetical propositions were, with a few modifications, generally well supported. There are probable reasons for these favorable results, among them, the following three seem the most important: (1) The Operational hypotheses themselves were constructed after a fairly thorough background investigation of industry practices and an intensive review of the literature. (2) (3) 194 Because of the homogeneity of business customs and philosophy in Japanese firms, the experiences and practices Of one com- pany are likely to be similar to those of others. This researcher had access to many industry experts and a fairly large number of docu- ments not normally available, including private and public materials. These rendered insights and practical Operative guidelines. 195 Pseudo-harmonism Degree of Support* H1: H2: The Japanese manufacturers studied tend to eXpress the importance of human and social relationships as a basis of business management at the corporate policy level. The ultimate criterion in the administration of the marketing channels studied tends to be an economic rather than a human rationale. strongly supported fairly well supported H3: Channel administrators tend to express togetherness, coexis- tence, and codevelOpment with wholesalers in their marketing channel policy. strongly supported H4: In Spite of the harmonious setting of Japanese channel relation, channel adminis- trators are reluctant to acquire economically weak wholesalers as subsidiaries when they are requested to do SO by such wholesalers. strongly supported H5: The most important tool in attracting wholesalers is believed to be a channel administrator's product com- petence. (R & D expenditures and achievements, high product quality, good image, and so forth) rather than human relations with dealers. strongly supported The economically stronger whole- salers are given more favorable rebates and margins. strongly supported Figure 5.8.--Summary of Main Findings of Operational Hypotheses. 196 Eclecticism Degree of Support* H7: In dealing with wholesalers, weakly channel administrators avoid an supported image of being economically oriented. H8: Although channel administrators strongly and wholesalers have close human supported contacts and relationships Often extending beyond the boundary Of trade and business, these rela- tionships do not extend to family involvement. H9: Each marketing channel comprises some wholesalers with intense loyalty, willing to sacrifice their own business interests to a considerable extent for the sake of administrators' interests. fairly well sup- ported, but it tends to center on large- scaled companies H10: In providing dealer aids channel administrators regard the human factor as an important factor in channel administration in the future. fairly well supported Channel administrators tolerate some economically weak whole- salers by considering them a regular cost of doing business. weakly supported Efforts to promote economic efficiency in the marketing channel in the past decade have resulted in no substantial changes in marketing channel policy and structure. fairly well sup- ported by pharma- ceutical, but undetermined in detergent/denti- frice industry. Figure 5.8.--Continued. 197 Exceptionism Degree of Support* H13: Although channel administrators strongly supported have established a formal rebate system, the actual rate given is Often determined by discretionary managerial action. H15: The length of credit terms Of fairly well promissory notes for whole- supported salers is more dependent on the conditions and considerations of wholesalers than pre- determined fixed policy. H16: Delivery of merchandise is not fairly well sup- made on the basis of the manu- ported, but the prac- facturer's logistical planning support was rather and schedule, but, rather, on limited to today's the basis of dealer request. practice but not to tomorrow's H17: Manufacturers generously permit fairly well sup- the free return of goods by ported but wholesalers without a special tice is diminishing charge. in the dentifrice/ detergent industry H18: Although manufacturer-wholesaler strongly supported sales and dealers' contracts exist, business is not rigidly controlled by these contracts. Economic Nonfunctionality Degree of Support* H19: The human character of the per- strongly supported sonnel in charge of dealer relations is regarded as very important in dealing with wholesalers. Figure 5.8.--Continued. 198 H20: An individual's name and fairly well sup- personal characteristics are ported, but in more important than his limited Situations job function to wholesalers (i.e., large-scaled in maintaining good business wholesalers) relations between the manu- facturers and wholesalers. H21: Effective channel administra- fairly well tors must engage in numerous supported activities that are not strictly business and involve both human and economic rationales. *Note: As was noted on page 117, "strongly supported" means that 75 percent and more of the respondents agreed, "fairly well supported" means 50- 75 percent agreement, weakly supported" for 25- 50 percent agreement, and "not supported" means more than 75 percent disagreement. Figure 5.8.--Continued. CHAPTER VI SUMMARY AND CONCLUSIONS In this chapter, a brief summary of the research findings is presented. Based on the findings, the interpretation and evaluation of each of the four basic propositions are Offered. Finally, the chapter presents a discussion of some future implications of the developments. Summary_of Major Findings Overall, the four basic propositions offered as conjectural hypotheses, which were examined in terms of twenty-one Operational hypotheses, were well supported. They seem to Offer an explanation of the cultural rationale underlying the channel administrative behavior of the Japanese manufacturers studied. No strict statistical measures or validations of findings were attempted, however. The research was designed as an exploratory, preliminary study. The existence of pseudo-harmonism and eclecticism as aspects of the business philosophy in channel adminis- tration was relatively well supported. The proposition 199 200 that there is an expressed emphasis on harmonious human and social relationships and an implicit use of a cool economic rationale was well borne out in corporate manage- ment mottoes, marketing channel policy, and interviewees' Opinions and reports of practices relating to rebates and other dealer aids. The proposition concerning eclecticism, that there is an equal balance of economic and human measures in channel administration and that neither is extreme,was supported by the evidence gathered. It was also Observed that some sacrifice of economic efficiency in channel administration occurred and was considered a cost of doing business, or a necessary expense to maintain harmony in social and human relationships. Exceptionism and economic nonfunctionality were widely Observed as aspects of customary activities and trade practices in channel administration. The proposi- tion relating to exceptionisnythat managerial discretion occurs in the actual provision of rebates despite the existence of a formal rebate system, was observed to hold to an especially strong degree. Respondents reported that most firms ignore dealership and sales contracts, as information from other sources had led one to expect would be the case. Evidence of the existence of flexibility in the terms of payment periods for promissory notes, the frequency of delivery, and free goods return privileges 201 was noted. But the use of these practices seems to be diminishing gradually among larger manufacturers. Evidence was found to support the proposition regarding economic nonfunctionality. The manager's personality and human orientation were"found to be even more important than his business performance or job title or function. Many interviewees seemed to regard the channel administrator as a "human affairs person" rather than as a "purely economic decision maker." This meant that channel administrators, to be considered successful, have to participate in many activities besides purely economic and business affairs. An Interppetation and Evaluation of Findings If the four basic propositions are valid as major explanations of the cultural rationale underlying market- ing channel administrative behavior, they Should clarify to a certain extent an understanding of some of the distribution'system's complex nature. Thus, in this sec- tion, the main characteristics of channel administrative behavior are summarized, interpreted, and evaluated in the light of each of the four fundamental propositions. Despite a lack of statistical validation, the following explanations seem to contribute to an insightful and more comprehensive understanding of Japan's distribution 202 channel behavior, which to date has been described as "overly complex, mysterious, and archaic."1 Pseudo-harmony} Expressed 1rEemeinschaft ’but Implicit “Ceselschaftfl In the channel administration of those Japanese manufacturers studied, human and social relationships, such as harmony, traditional associations, loyalty, and mutual cooperation and codevelopment, are almost always emphasized and expressed. Nevertheless, a cold economic rationale is still paramount. This was evidenced by the manufacturers' ranking systems for appraising middlemen and the adoption of such criteria as sales volume and market share as fundamental determinants of rebates and margins offered to wholesalers. Perhaps the degree of gemeinschaft was much-stronger in the past than today. However, competitive and social forces have forced the cooler geselschaft system upon the industry. Severe competition among existing firms as well as the entry of foreign competitors and other compe— titive industries are economic factors that reinforce this tendency. The trend also has been promoted by a number of social forces, including the consumerism movement, social critics' complaints about high costs and prices, government 1William D. Hartley, "Cumbersome Japanese Distri- bution System Stumps U.S. Concerns," Wall Street Journal, March 2, 1973, p. l. 203. regulations and policies designed to increase the economic efficiency of the system, criticism from Western-oriented academics, and the important resource and energy restraints. As a result, companies relatively weak in negotiating power tend to place more emphasis on the human rationale, while those firms that are relatively stronger emphasize an economic rationale. Manufacturers may endorse codevelopment and coexistence with all wholesalers equally. In reality, however, it is the economically stronger and bigger whole— salers who are usually given more favorable rebates and incentives. This means, in effect, that the stronger a dealer is, the stronger he will be. This is a fairly cool expression of the economic rationale. Is this tendency or practice of channel administra- tion in concert with the beliefs and desires of the Japanese people, who are widely believed to be very oriented toward maintaining harmony? There seems to be . . . 2 some ev1dence that it 13. 2Tamotsu Sengoky and Atsuko Tohyama, Hikaku Nihonjin Ron (A Comparative study of Japanese; (Tokyo: Shagaku-Kan, 1973). In this comparative study covering eleven countries, 2,000 young people in each nation were asked to respond to the statement: "Basically, the per- son you can rely on is yourself." Some results were: Japan, 73.8 percent; United States, 68.4 percent; Great Britain, 34.3 percent; West Germany, 73.1 percent; France, 51.4 percent; and Switzerland, 44.9 percent. Among the politically stable, developed countries, the Japanese clearly ranked the highest in mistrust of others. 204 Although Japan is a group-oriented society, the individual seems to believe he must eventually stand by himself. For example, Japan has one of the highest saving rates in the world, which is partly explained by this attitude on the part of individuals.3 In an overly simplified generalization, the occidental nations are sometimes viewed as being more economically oriented,dwhile the oriental nations are seen as being more human oriented. On such a spectrum Japan presently may be midway between the so-called Far East Japan and the new Far West Japan.‘ But because of the heavy Western influence since World War II, Japan seems to be closer to the West than to its Asian neighbors. The tendency toward gemeinschaft has been viewed as resulting from changing economic and social forces. There is, however, some necessity for the shift. Human- oriented geselschaft is compatible with the Japanese seniority system, life-time employment, and group orienta- tion. But this apparently secure system is a two-edged sword, as one interviewee pointed out. A person who fails in business loses "face" or status when he loses his job. Since job mobility and opportunity are low, the individual cannot afford to make serious mistakes and risk losing his position in a lifetime organization. 3Tsunehiko Yui, "The Japanese Propensity for Saving," Japan Interpreter 8 (Winter 1974):478-83. 205 Therefore, although branch managers have wide discretion in determining rebates and margins, their rationale must be basically economic. A consensus is more easily arrived at on these grounds. Once branch managers fail in one job function, it is difficult for them to reascend the status ladder. Thus, lifetime employment seems to have inherent features which balance gemeinschaft and geselschaft and in so doing it contributes to pseudo-harmony. In the future, the economic rationale may be stressed more heavily and the cultural or human rationale deemphasized. This direction, whether Japanese channel administrators and wholesalers like it or not, will promote greater economic efficiency and less channel harmony than exists today. Eclectic or Mixed Solution with a Human Cost Japanese distribution channel administrators seem to avoid the acceptance of extreme solutions. They tend to hedge their approaches. They generally employ both economic and human rationales as a guiding basis for decisions. This highlights the acceptance of mutual cooperation and codevelopment as a most important policy in channel administration. It was interesting to note that in the interviews spokesmen of almost all firms, including companies well 206 known for their acceptance of an economic orientation or with their own sales companies, still expressed opinions emphasizing the importance of developing "togetherness" with other wholesalers in channel administration. In this regard, the most typical comment about channel policy expressed in the interview was: "We cannot consider our growth without our dealers' growth, and our dealers' growth also cannot be considered without ours." This despite policies and practices emphasizing economic rationales. The wide discretion with regard to policies in the system permits manufacturers to support those small wholesalers who cannot achieve the sales goals stated in their contracts (if the gap is not too large). This situa- tion breeds a "structure of dependence"4 of Japanese channel members and some inefficiencies. However, it also creates wholesalers' loyalty, which can be a great help to manufacturers. Thus, in the administration of distribution channel systems in Japan, two rationales, the human and the economic are expressed as being equally important. Evidence suggests that both can be considered as desired goals of channel administrative behavior. At least they seem so on the surface. The two rationales, however, 4Takeo Doi, The Anatomy of Dependence, trans— lated by John Bester (Tokyo: Kodansha International Ltd., 1974). 207 often are incompatible, and a trade-off must be made. When this becomes necessary, the alternative selected is shaped by both the specific situation and the general climate and sociocultural factors. In Japanese channel administration, the economic rationale is foremost. The findings strongly support‘ this conclusion. The more human rationale is a secondary factor when used in pursuing immediate goals of manufac- turers. The importance of the human rationale, however, cannot be ignored. Channel administrators are well aware of its significance. An economic cost is attached to the acceptance of a human rationale. Harmony, loyalty, and friendship usually are uneconomical to obtain. But it is felt that only by paying this price can economic ends be achieved more smoothly and with a minimum of conflict. The cost of the human rationale, the sacrifice of economic efficiency, has been considered to be and remains a necessary one in light of the Japanese physical and social environment (infrastructure, geographic conditions, shOpping behavior, and so forth). Japanese channel administrative behavior thus can best be viewed as a mixture of both rationales. It is a unique blend of the human and economic rationale. Manu- facturers are very benevolent in making their channel administration decisions. They remain so, however, only as long as they perceive some future potential in the 208 arrangements with wholesalers. The human rationale is not an altruistic one. For when manufacturers can no longer perceive any potential benefits to their arrange- ments with wholesalers, they cease to provide economic incentives. But Japanese manufacturers seldom refuse to trade with a company; rather, they will offer no more trade advantages, and the wholesaler then leaves volun- tarily. One channel administrator said that decisions to drop followers (wholesalers) were usually made when the president of a follower firm retired. The economically ineffective firm having been kept on because of long- standing human relations between the manufacturer and the wholesaler is now deleted from the channel. In Japanese channel administration, even when manufacturers behave tyranically, they try to temper it with benevolence to minimize social and human disorder.5 Eclecticism seems to be characteristic of channel administration in Japan. This might be expected since eclecticism is also characteristic of Japanese culture in general. Moderation, a dislike of extremism, and the unacceptability of radicalism seem to be Japanese social norms. Thus the tempered decision, the decision blending both extremes, the moderate decision seems to be the most 5Lewis Stern distinguished two types of channel administration: tyranny and benevolence. This does not seem to hold true for Japan. In Japan, channel adminis- tration is more likely to be characterized by both, benevolence and tyranny, rather than one or the other (Stern, 1965). 209. acceptable to the Japanese, who emphasize harmony. This seems to be a major distinguishing characteristic between American and Japanese approaches to channel administration. Rulelessp Rule or Exceptionism In the administration of channels by manufacturers there are no rigid rules. Of course, industrywide, busi- ness manners and customs exist. Also, at the individual firm level there are overall policies, plans, and rules. But these facts notwithstanding, business practices among Japanese industries leave very wide discretion to individual decision makers, or the rules that are stated are frequently neglected. In the industries studied in this dissertation, and in Japanese business generally, the exception is the rule. Each situation is viewed as a unique one. An excellent example of this is found in the use of the rebate system in channel administration. It is dominant in the industries studied. It is a most effec- tive tool used in the administration of channels. It affords great individual discretion. This lack of rules and availability of wide discretion are two of the reasons why the administration of Japan's channel system and the related behavior seem complex and mysterious, especially to foreigners. The absence of rules often permits selection from among a wide range of alternatives in pursuing 210 ultimate goals. While this "free-style" approach has advantages, it also has many disadvantages. One advantage is the possibility of being more adaptive to changing situations, which may be quite a significant strength in today's rapidly changing world. Another possible advan- tage, and perhaps disadvantage, is the resulting protec- tion afforded domestic industry from foreign competition. For the foreigner must have broad and direct practical experience in the Japanese business world to understand it and operate distribution channels effectively. The costs of achieving this knowledge and experience is high in time and money. Another possibility, that of joint ventures which utilize the experience and knowledge of Japanese wholesalers,is costly and even less controllable for foreign manufacturers. Thus the lack of capability in distribution channel administration is the big barrier to foreign entry into the Japanese market. When the government forced the liberal invest- ment of foreign capital upon Japanese business in 1971 in response to international economic pressures,.most Japanese companies relied on the complexity of their business system in general and distribution system in particular to protect them. Although foreign competitors wishing to enter Japanese markets had superior technology, products, capital, and marketing techniques, nevertheless, Japanese firms felt that the foreigners' ignorance of Japanese business practices and distribution methods 211 would discourage entry. Japanese manufacturers reacted by further strengthening ties with their wholesalers, as well as other competitive efforts. But as was indicated earlier, such an advantage can also turn out to be a disadvantage. For once world markets operate more fully on an economic rationale, which seems to be the general tendency, then Japanese companies will have to participate on this basis. The more Japanese companies adhere to their traditional practices, the weaker they will be in international competition, and the more they will suffer in the future. One of the disadvantages of a free-style approach to channel administration is that policy becomes more tactical and situational than strategic, and the overall thrust and company perspective is frequently lost at the individual level. The free-style approach partly explains why Japanese companies almost daily have lengthy meetings. Some manufacturers through time have established an effective range of decisions and situations over which individuals can exercise discretion, maintaining flexi- bility and adaptability within set broad guidelines. Another disadvantage of the free-style approach is the creation of overexpectation on the part of the present or potential wholesale channel member in the manufacturer member. Because there are no fixed and rigid rules, and because of the exercise of wide individual discretion, a wholesaler may well expect and to some extent depend on 212 gaining additional advantages and support through negotia- tions. However, individuals negotiating without specific policies and rules have a whole variety of alternative approaches from which to draw, both inside and outside the business sphere. Negotiators each time may expect to gain more and more rather than to return to the stated policy the next time after an exception is granted. Negotiators use the popular Japanese business practices of gift giving, invitations to resorts, and the extension of other similar favors to promote closer human relations, all of which are not strictly business related. Such human relations are so heavily emphasized that one inter— viewee noted that occasionally a company must even transfer a local branch manager to prevent him from becoming too closely involved with the wholesalers' personnel to the detriment of fair channel relations. Another possible disadvantage of such wide discre- tion in the Japanese channel system is the creation of extremely fierce competition. Many wholesalers expect to gain more concessions from manufacturers than their compe- titors. For example, since there are no established limits on rebates and similar allowances, overly competi- tive efforts to obtain them may result. Sometimes such efforts even endanger an industry's attempts at self- regulation. In the pharmaceutical industry, for example, temp! (which means "the addition") used to be a very popular practice. If a wholesaler bought products in 213 large volume, or out of season, the seller gave "addi- tional" quantities as a kind of discount. Excessive competition sometimes resulted in the unbelievable amount of 200 percent tempu, which meant two additional items were given for each one bought. Under governmental encouragement in late 1971 the industry was prompted to self-regulate such practices. Despite industry effort, the practice still continues, but under a different guise. The custom is referred to as okiwasure and means that the manufacturer delivers more goods than were ordered and then "forgets" the error. These and other factors make Japanese business systems, especially channel administration, complex and confusing. If the overall nature of the system is under- stood, however, clarification and explanation should result. Nonfunctionality In the industries studied, many decisions concern- ing channel administration are made by tOp manufacturing executives themselves rather than by delegating authority to lower level executives. This is true partly because of the importance of channel administration for the manufac- turers selected for the study. It also occurs because of the nonfunctionality of Japanese administrative processes and procedures regarding distribution systems. 214 For example, rebates are so important that the final decision about rebate rates extended to individual wholesalers is made by the president in many companies. Similarly, because of the nature of exceptionism, as was discussed earlier, the delegation of authority becomes very difficult. For if clear rules or principles were identified and followed, then delegation would be much easier. But since so few managers have clear guidelines about how to proceed, the management of Japanese channel distribution is not as functional as it could be; The fact is that top management must perform many functions, not because they are important, but because top adminis- trators are the only ones in a position to make a final decision. The difficulty of delegating authority is further complicated by the Japanese practice of lifetime employ- ment. Because of the lack of job mobility, people are reluctant to make final decisions alone. This is especially so where there are no clearcut rules and procedures, because such decisions become too risky. An employee knows that if he commits a serious mistake he cannot recover his full status in the organization. Also, he cannot move to another organization or job easily. It follows then that his rational management behavior would be: (1) to avoid making a decision by himself (no decision); (2) to ask his superior to make the decision (resulting in no delegation of authority, or one-man authority); (3) to consult 215 relevant colleagues and get guarantees from them on the decision beforehand (ring; system); or (4) to obtain the full trust and confidence of his superior so that he can make all decisions by himself, but under the superior's blanket of responsibility (boss-follower reliance). This pattern of behavior adds yet another source of complexity to channel administration, as well as Japanese business behavior in general. Alternatives (1) and (3), no decision and reliance on the ring; system, take time and can be criticized for their slowness. Alternatives (2) and (4), one-man authority and boss- follower reliance, induce quicker decisions. Those who do not know the Japanese system may be somewhat confused by the fact that in the Japanese administration system some deicisions are reached very fast while others are very slow in coming. In addition to the four alternatives stated above, decisions sometimes will be made on the basis of past experience. If a situation arises in a channel which has occurred in the past, then the previously established pattern will be follOwed. This approach is especially helpful given the rulelessness of Japanese channel admin- istration. The more experienced men, not necessarily the oldest, in the organization hold positions of wide responsibility. They are more likely to be decisive in a variety of channel situations. They tend to rely heavily on their past experiences. 216' Another example of nonfunctionality is the differ- ence between stated job descriptions and actual job performance. At present, most Japanese manufacturers and wholesalers, on paper, have established clear, beautifully designed organization structures. This was accomplished because of the introduction of Western management technology and knowhow. Although job functions are clearly and explicitly stated, and positions are logically arrayed on organization charts, the actual functioning of opera- tions is more obscure. Japanese channel members operate according to the working unit or job title (shokuba) rather than according to the job function (shokumu). This means that in administering channels of distribution they do not rely too much on organization charts. The existence of nonfunctionality may be understood in terms of groupism or familialism, which is often cited as being so characteristic of Japanese behavior. Because of a group rather than an individual emphasis, the func- tion of each individual is not clearly specified and well established. An example frequently used to contrast Japanese and Westernfmanagement styles is the difference between a tug-of-war competition and a baseball game. Both are more or less group games, as is the corporate operation of a distribution channel. But the former deemphasizes individual merit and emphasizes the group's victory as a whole. The latter, the baseball game, appreciates both individual and group efforts. The 217 former has no hero, while the latter does. A tug-of-war, which is apparently nonfunctional on an individual basis, is more akin to the Japanese style of managing distribution channels. From the same point of view, Japanese management style is referred to as "Omikoshi management." Omikoshi are the miniature shrines carried by many participants in the Shintoism festival. There is no preplanned route and no leader. Nevertheless, the shrines always reach the appropriate destination after following a route determined by the collective judgment of the carriers. The four propositions and related selective phenomenal characteristics which are discussed above are summarized in Figure 6.1. Directions for Further Research Based on this exploratory investigation, some directions for future research are suggested. First, it is important to conduct a study using more adequate samples to obtain more detailed and precise data and information and to verify statistically the propositions and relation- ships discussed in this study. Second, the causal relationships imputed and inferred between each prOposi- tion and the phenomenal characteristics observed in this study could be explored statistically. Third, development of a mathematical model representing the distribution channels for the industries studied seems both highly 218 Propositions Selected Phenomenal Characteristics a) b) Pseudo-harmony C) The economically stronger the wholesaler is, the stronger he will be. Tendency to economic emphasis by channel members. Harmony is the traditional, strong social norm, while economic efficiency is the emerging compe- titive and social force. a) Eclect1c15m b) Manufacturers' emphasize coexis- tence and codevelOpment with wholesalers. Minimization of social and human disorder in the pursuit of the economic end. a) b) c) Exceptionism d) e) Adaptive and flexible behavior. Situational and tactical practice. Free-style approaches and over- competition through overexpecta- tions of dealers. Protection from foreign competition. Frequent, long meetings. b) Economic nonfunctionality c) d) Experience-orientation (seniority). Sometimes quick, sometimes slow decisions. Group orientation rather than individual merit. Some are busy while others are idle. Figure 6.l.--Propositions and Supporting Phenomenal Characteristics. 219 desirable and feasible. It would permit the simulation of channel behavior resulting from various policies and strategies. It could result in the design of more econo- mically effective and culturally compatible marketing channel systems. In addition, contemporary environmental forces such as resource constraints, the energy crisis, the consumer movement, and the multinationalization of business will become areas of increasing concern. These factors are worthy of investigation. Obviously, these forces will continue to affect the Japanese business world. Therefore, it would seem desirable to investigate and monitor the impact of these forces on Japanese marketing channel systems. Concludinngemarks: Some Future Implications Pseudo-harmonism and eclecticism as part of the prevailing business philosophy among Japanese manufac- turers' channel administrators seem to be concepts in transition. There is a move away from the traditional, warmer, gemeinschaft business system to the modern, geselschaft economy. This tendency toward an economic orientation may be a healthy sign. Today's industries need stronger economic measures in dealing with the pressures of various environmental forces such as consumerism, rising costs, inflation, the energy crisis, and so forth. When human associations 220 inherent in Japan's business world are understood, however, the fact that the shift to an economic emphasis will be slow and gradual seems more comprehensible. Too much criticism should not be made of the slow rate of change. What is important is that changes are occurring. Needless to say, in reality, both economic and cultural factors must be blended. The actual proportions of the human-economic mix of factors in channel adminis- tration will be determined by an industry's or a society's needs, wants, and traditions. Moreover, the values of each individual channel administrator influence his atti- tude toward the system. For example, those who love the more traditional, humanistic channel administration may regret that warmth, or the human factor, in business gradually is diminishing. Those who believe that business is strictly an economic matter, and nothing more, may consider an economic tendency fairly healthy and may be concerned at present because uneconomic human considera- tions still prevail. Between these two extremes, the realistic channel administrator who understands Japanese cultural tradition and uniqueness as well as the keen economic competition so characteristic of the present international age, would feel that a moderate rate of change toward the economic emphasis is appropriate. Most likely, this tendency will be strengthened in Japan and will become more dominant as the human orientation is deemphasized. 221 While an economic emphasis seems to be more common at a philosophical level, it is not spreading rapidly in actual practice. Thus, while exceptionism and economic nonfunctionality in Japanese channel administration may eventually receive less emphasis, they are still important in a pragmatic way. As the interviews revealed, some traditional business customs with a costly human aspect, such as rebates, deferred payment, and liberal return privileges, are only slowly decreasing because of several environmental pressures as well as government regulations. The reduction of exceptionism and nonfunctionality, although slight, may be healthy. As was discussed earlier, exceptionism and economic nonfunctionality have both advantages and disadvantages. Their apparent advantage is that they permit great adapta- bility to changing business situations. The ability to change is partially responsible for Japan's present accom- plishments in business and industry. Their disadvantage is the high cost associated with not having rules and a functional base, emphasizing the human factor in doing business, with such cuStoms as gift giving, special rebates, and entertaining. Eventually, the problem will become one of how much business and society are willing to pay for some of the advantages of flexibility. To the manufacturers who have the power to control improvements in the channel system, the costs of the flexible, human orientation can be viewed as offering 222 some returns. Flexibility and adaptability create stronger wholesaler loyalty and, through wholesalers' excessive expectations, stronger control by manufacturers of whole- salers. Needless to say, most weaker manufacturers suffer more from such increased costs because their power is not increased in proportion to the additional costs. As far as wholesalers are concerned, some benefit in specific instances and others do not. It would be difficult to determine whether or not human-oriented practices are beneficial to the nation or society as a whole. The answer depends on a total assess- ment of the gains and losses of channel members and the impact on society. No evidence currently exists and no research efforts have been made to estimate which is greater, benefits or losses. Judging from the current government and industry attempts designed to correct present practices, backed by the evidence of government hearings and reports and the self-regulatory efforts of industry, one might infer that the majority may not neces- sarily be benefiting from these practices. If this is the case, then perhaps some additional, stronger industry self-regulation or government regulation may be required. These efforts should come from industry groups or the government because the pressure of keen competition often makes it impossible for individual firms to correct the situation. 223 Although no one knows the degree of or balance between economic and cultural emphases that is most desirable, it seems safe to say that exceptionism and economic nonfunctionality gradually will diminish in the future because of the impact of environmental forces. Human practices will still be regarded by business parti- cipants, both channel administrators and follower members, as an indispensable and unavoidable aspect of doing busi- ness in Japan. The future business environment, however, will probably not permit such human considerations to be given full play. Today's market situation seems to point in that direction: "The stronger will become even stronger." If an economic emphasis is seen as tomorrow's necessity, Japan's culturally unique practices may have to be altered substantially. Realistic rules that enforce some business activities and practices may require a much stronger emphasis. A philosophy which encompasses the entire group of channel members also may be necessary to a much greater degree in order for Japanese channel administration to pursue economic progress for the whole group while maintaining strong ties with members. A shift to a functionally based rebate system and an appropriate division of work among dealers recently has occurred and may become increasingly popular. Continuous efforts to persuade, educate, and innovate by manufacturers could be furthered through the effective operation of the kai in order to create more efficient and stronger channel members. BIBLIOGRAPHY BIBLIOGRAPHY Books Abegglen, James C. 1968. World Business no Keiei Sen aku (Management strategy of world business). To yo: Sangyo Noritsu Tanki Daigaku. . 1970a. Nihon Keiei no Tankyu (Explorations into Japanese management). Tokyo: T6y6 Keizai ShinpO-sha. . 1970b. Perspectives: Business Strategies for Japan. Tokyo: Sophia University. Adams, T. F. M. and Noritake Kobayashi. 1969. The World of Japanese Business. Tokyo: Kodansha Inter- national Ltd. Alderson, Wroe. 1957. Marketing Behavior and Executive Action. Homewood, Ill.: Irwin. Anderson, R. Clifton, and William P. Dommermuth, eds. 1972. Distribution Systems: Firms, Functions and Efficiencies. New York: Appleton-century-Crofts. Ballon, Robert J., ed. 1971a. Japan's Market and Foreign Business. Tokyo: Sophia University. . 1971b. Top Executives and Company Presidents in Japan--l. Function and Personality. Bulletin No. 27. Tokyo: Sophia University. Ben-Dasan, Isaiah. 1972. The Japanese and the Jews. Translated from the Japanese by Richard L. Gage. New York: Weatherhill. Bartels, Robert, ed. 1968. Comparative Marketing:. Whole- saling in Fifteen Countries. Homewood, Ill.: Irwin. 224 225 Boone, Louis E. and James C. Johnson, eds. 1973. Market- ing Channels. Morristown, N.J.: General Learning Corporation. Brzezinski, Zbigniew. 1972. The Fragile Blossom: Crisis and Change in Japan. New York: Harper Torchbooks. Bucklin, Louis P. 1966. A Theory of Distribution Channel Structure. IBER Special Publications. Berkeley: University of California Press. . 1972. Competition and Evolution in the Dis- tributive Trades. EngIewood Cliffs, N.J.: Prentice-Hall, Inc. Clewett, Richard M., ed. 1954. Marketing Channels for Manufactured Products. Homewood, I11.: Irwin. Economist, The. 1963. Consider Japan. London: Gerald Duckworth and Co., Ltd. Dean, Vera Micheles. 1966. The Nature of the Non-Western World. Rev. ed. Especially chapter 6} 1'Japan: ASian Westernism." Pp. 149-75. New York: Mentor Books. DeMente, Boyd and Fred Thomas Perry. 1968. The Japanese as Consumers: Asia's First Great Mass Market. New York: Walker/Weatherhill. Doi, Takeo. 1974. The Anatomy of Dependence. Translated by John Bester. Tokyo: Kodansha International Ltd. Doing Business in and with Japan. 1969. Chicago: Ameri- can Management Association, Inc. Dore, R. P. 1971. City Life in Japan: A Study of a Tokyo Ward. 3rd ed. Berkeley: University of California Press. Ejiri, Hiroshi. 1973. Ryutsfi Channel no Shihai (Control of distribution channel). Tokyo: Nihon JitsugyB Shuppan Sha. Fisk, George. 1971. New Essays in Marketing Theory. Boston: Allyn and Bacon. Fujieda, Takashi, ed. 1974. Ribeito Seisaku no Kakushin (Innovation in rebate policy). Tokyo: Japan Productivity Center. 226 Fukami, Giichi, ed. 1966. Marketing K625 No. 3:‘ Ryfitsfi Monda (Marketing series no. 3; distribution problem). Tokyo: Yfihikaku. Furo, Tsutomu. 1968. Marketing Channel K5d6 Ron (A study of marketing channel behavior?) Tokyo: Chikura ShobB. Glazer, Herbert. 1968. The International Business in Japen: The Japanese Image. Tokyo: Sophia University. Graves, Desmond, ed. 1973. Manggement Research: A Cross- cultural Perspective. San Francisco: Jossey-Bass/ Elsevier. Guillain, Robert. 1970. The Japanese Challenge. Trans- lated from the French by Patrick O'Brian. New York: J. B. Lippincott Company. Hayashi, Chikio, ed. 1973. Hikaku Nihonjin Ron (A study of comparative Japanese). Tokyo: Chuko Shinsho. Hazama, Hiroshi. 1973. Nihon—tebi Keiei (Japanese mana- gement). 3rd ed. Tokyo: Nihon Keizai Shinbun Sha. Hedberg, Hakan H. 1969. The Japanese Challenge (trans- lated into Japanese as Nippon no Chosen). Tokyo: Mainichi Shinbun-Sha. Hollander, Stanley C. 1959. Explorations in Retailing. East Lansing: Division of Research, Michigan State University. Kaplan, David and Robert A. Manners. 1972. Culture Theory. Englewood Cliffs, N.J.: Prentice-Hall, Inc. Kennedy, Malcolm. 1964. A Short History_of Jgpan. New York: Mentor Books. Kobayoshi, Yoshihiro. 1971. Kanri Kakaku (Administered pricing). Tokyo: Daiamondo Sha. Kokubu, Michio, ed. 1974. Oroshi-gyB no Keiei-Senryaku III; Management eno Chosen (Management strategy of—wholesalers III; challenge to management). Tokyo: DObunkan. Jansen, Marius B., ed. 1965. Changing Japanese Attitudes Toward Modernization. Princeton: Princeton University Press. 227 Kataoka, Ichiro. 1967. Ryfitsfi Keizai no Kihon Mondai (Essential themes in distribution economics). Especially supplementary chapter 2, "Ryutsu Keiro Seisaku no Mondaiten (Problems in distribution channel policy)." Tokyo: Ochanomizu-shobfi Company. Lewis, Edwin H. 1968. Marketing Channels: Structure and Strategy. New York: McGrawuHiII. Livinston, Jon; Joe Moore; and Felicia Oldfather, eds. 1973. Postwar Japan: 1945 to the Present. New York: Pantheon Books. Lockwood, William W., ed. 1965. The State and Economic Enterprise in Japan. Princeton: Princeton Univer- sity Press. Mainichi Newspapers. 1973. Japan'agd the Japanese. Tokyo: Japan Publications, Inc. Miyagawa, Toichi. 1974. Tonya no Yukue (Future of whole- salers). Tokyo: Nihon Jitsugyo Shuppan Sha. Miyashita, Masahusa. 1970. Ryfitsfi no Shin-Senryaku (New strategy for distribution). Tokyo: Nihon Kogyo Shinbunsha. Miyashita, Masahusa and Setsuro Saito. 1972. Tonya wa Kakumei Suru (Revolutionizing wholesalers). Tokyo: Nihonjitsugyo Sha. Momose, Shigeo. 1971. Kigy5 Shfidan no Nihontebe K025 (Japanese structure of'corporate groupings). Tokyo: Hakuto Shob6. Morishita, Fujiya. 1974. Gendai no Ryutsfi Kik5 (Today's distribution system). Tokyo: SekaiShiSO Sha. Moore, Charles A., ed. 1967. The Japanese Mind: Essen- tials of Japanese Philosophy and Culture. Honolulu: East-West Center Press. Nakane, Chie. 1967. Tate-shakai no Ningen Kandei (Human relations in a vertiCal societyT. TOkyo: Kodansha-Gendaishin-sho. . 1970. Japanese Society. Berkeley: Univer- sity of California Press. . 1972. Teki5 no Joken (Condition for adapta- tion). Tokyo: Kodansha Gendaishinsho. 228 Nakamura, Takashi and Yoshihiro Tajima, eds. 1969. Ryutsfi to Chaneru K6d6 (Distribution and channel behavior). Tokyo: Japan Productivity Center. Nikkei Ryutsu Shinbun, ed. 1973. Ryfitsfi no Jashiki (Common sense in distribution). Tokyo: Nippon Keizai Shinbun-Sha. Palamountain, Joseph. 1955. The Politics of Distribu- tion. Cambridge, Mass.: HarvardfiUniVersity Press. Saito, Setsuyo and Shinya Nakada. 1971. Gydshu-betsu Ryutsu Channel (Distribution channel by industry). Tokyo: Nihon K6gy5 Shinbun Sha. Selltiz, Claire; Marie Jahoda; Morton Deutsch; and Stuart W. Cook. 1959. Research Methods in Social Rela- tions. Rev. ed. New York: Holt-Dryden. Sengoku, Tamotsu and Atsuko Tohyma. 1973. Hikaku Nihonjin Ron (A comparative study of Japanese). Tokyo: Shagaku-kan. Shiizuka, Takeshi. 1973. Nihon no Sen-i Ryutsu (Distri- bution of fiber in Japan). Tokyo: Nihon Jitsugyo Shuppan Sha. Stone, P. B. 1969. Japan Surges Ahead: Japan's Economic Rebirth. London: Weidenfeld and Nicolson. Tajima, Yoshihiro. 1971. How Goods Are DisEributed in Japan. Translated by Jack Seward. Tokyo: An Orient International Business Book. . 1973. Ryutsu Senryaku Kakumei (A revolution in distribution strategy). Tokyo: Nihon Jitsugyo Shuppan Sha. , ed. 1974. Oroshi-gyo no Keiei Senryaku (II), Kankyo eno Chosen (Management strategy of whole- salers II; challenge to environment). Tokyo: D5bunkan. Takada, Hajime, and Taku Hosoi, eds. 1974. Nihon-teki Keiei no Tokushitsu (Characteristics of Japanese management). Tokyo: Daiamondo Sha. Umesao, Tadao and Michitaro Tada. eds. 1972a. Nihonbunka no K026 (Structure of Japanese culture). Tokyo: Kodansha Gendaishinsho. 229 . 1972b. Nihonbunka to Sekai (Japanese culture and the world). Tokyo: Kodansha Gendaishinsho. Yanagisawa, Takashi; Setsuro Saito; and Shinya Nakada. 1974. Shin-Channel Kaihatsu Senryaku (The strategy for newVEhannel development). Tokyo: Nihon Kogyo Shinbun-Sha. Yoshino, Michael Y. 1968. Japan's Managerial System: Tradition and Innovation. Cambridge, Mass.: The MIT Press. . 1971. The Japanese Marketing System: Ada ta- tions and Innovations. Cambridge, Mass.: The MIT Press. Articles and Papers Alderson, Wroe. 1963. "Planning in Japan." Growth and Profit Planner 1 (November):l-4. "Amai—Senso- Rijun Toriau Kashi-gyokai" (Sweet war -struggles for profits in the confectionary industry). 1974. Nikkei Ryutsu Shinbun, 24 April. Arakawa, Yukichi. 1964. "'Ryutsu Kakumei' to Reisai- kourisho" (Distribution revolution and petty retailers). Kokumin Kinyu Koko (April):l-32. Ballon, Robert J. 1971. "Our Marketing Man in Japan." In Japan's Market and Foreign Business, edited by Robert J. Ballon. Tokyo: Sophia University. Barrett, M. E. and Judith Ann Gehrke. 1974. "Significant Differences between Japanese and American Business." MSU Business Tgpics (Winter):4l-49. Berg, Thomas L. 1962. "Designing the Distribution System." In Social Responsibilities of Marketing, edited by W. D. Stevens. Chicago: American Marketing Association, pp. 481-90. Boyle, John H. 1971. "The Idioms of Contemporary Japan II: Kasaihi.” The Japan Interpreter, 7 (Spring): 192-93. Brochier, Hubert. 1973. "Permanent Employment." In Postwar Japan: 1945 to the Present, edited by Jon Livingston, Joe Moore and Felicia Oldfather. New York: Pantheon Books, pp. 459—61. 230 Butterfield, Fox. 1974. "Economic Woes Imperil Lifetime Jobs in Japan." New York Times, 24 October. "Changing Pattern of Japan's Business Distribution System." 1970. Journal of the American Chamber of Commerce in Japan. 5 February. "Chfio Oroshiuri Shij6: Seisen Shokuhin Ryfltsfi no Kaname" (Central wholesaling market: A center of fresh foods distribution). 1974. Nihon Keizai Shinbun, 12 June. Cole, Robert E. 1973. "Seniority System." In Postwar Japan: 1945 to the Present, edited by Jon Livingston, Joe Moore and Felicia Oldfather. New York: Pantheon Books, pp. 452—59. Davidson, William R. 1961. "Channels of Distribution-- One Aspect of Marketing Strategy." Business Horizons, Special Issue--First International Seminar ga_Marketing Management. February. "Death in the Family." 1974. Newsweek. 28 October, pp. 40-41. DeBettignies, H. C. 1973. "Japanese Organizational Behavior: A Psychocultural Approach." In Mana- gement Research: A Cross-Cultural Perspective, edited”by Desmond—Graves. San Francisco: Jossey- Bass/Elsevier, pp. 75-93. Drucker, Peter F. 1971. "What We Can Learn from Japanese Management.” Harvard Business Review, 49 number 2 (March/April). "The Distribution System.” 1969. In Marketing Activities in Japan. Tokyo: Dentsu, pp.130-33. Dowd, Laurence P. 1959. "Wholesale Marketing in Japan." Journal of Marketing (January):257-62. Elgass, George A. and Laurence P. Dowd. 1963. "Whole- saling in Japan." In Comparative Marketing: Wholesaling in Fifteen Countries, edited by Robert Bartels. Homewood, Ill: Irwin, pp. 156-68. England, G. W. 1973. "Personal Value Systems and Expected Behavior of Managers-~A Comparative Study in Japan, Korea and the United States.” In Management Research: A Cross-cultural Perspective, edited by Desmond Graves. San FranciECO, Ca1if.: Jossey Bass/Elsevier, pp. 25-48. 231 Paris, Charles W. 1969. "Marketing in Japan." In Doing Business in and with Japan. Chicago: American Management Association, Inc., pp. 38-54. Fortmiller, Frederick. 1969. "Joint-Venture Possibilities and Problems." In Doing Business in and with Japan. Chicago: American Management Association, Inc., pp. 55-74. Fuji Bank Ltd. 1970. "The Japanese Consumer." Journal of the American Chamber of Commerce in Japan (May):53-38. Fujieda, Takashi. 1970. "Ribeito Seisaku no Korekarano H6k6" (Future direction of rebate policy). In Ribeito Seisaku no Kakashin, edited by Takashi Fujieda. Tokyo: ijapan Productivity Center, pp. 2-10. Fujioka, Mikiyasu. 1973. "The Japanese and Land: An Archaic Mentality.” Japan Interpreter 3 (Autumn): 323-33. Glazer, Herbert. 1971. "Japanese Buying Versus American Buying." In Japan's Market Foreign Business, edited by Robert J. Ballon.“'Tokyo: *Sophia University, pp. 51-85. Goldstucker, Jac L. 1968. "The Influence of Culture on Channels of Distribution." In Marketin and the New Science of Planning, edited by R. L. King. Chicago: Proceedings of the American Marketing Association, pp. 468-73. Grasshoff, Sven U. 1969. "Total Remuneration: The Compen- sation and Benefit Plan in Japan." In Doin Business in and with Japan. Chicago: American Management Association, InC.p PP. 94'105. Hackley, Roy C., Jr. 1969. "The Japanese Business Environment." In Doing Business in and with Japan. Chicago: AmeriCan Management Association, Inc., pp. 7-16. Hazama, Hiroshi. 1974. "What Makes the Japanese so Diligent?" Intellectual Digest (February):20-21. Hartley, William D. 1973. "Cumbersome Japanese Distribu- tion System Stumps U.S. Concerns." Wall Street Journal, 2 March 1972, pp. 1-12. 232 Henley, Donald S. 1973. "Multinational Marketing: Present Position and Future Challenges." In International Business--l973, edited by D. S. HenleyI East Lansing: DivISion of Research, Michigan State University, pp. 337-54. Hollander, Stanley C. 1972. "The International Retailers." In Relevance in Marketing: Problems, Research, Action, edited by Fred C. Allvine. Chicago: American Marketing Association, pp. 271-74. Honda, Masu-ichi. 1968. "Managing Personnel in Japanese Industry." Personnel Journal (March):l9l-97, 203. Hosoi, Taku. 1974. "Keiei Kazokushugi" (Management familialism). In Nihonteki Neiei no Tokushitsu, edited by Hajime Takada and Taku Hosoi. Takyo: Daiamondo Sha, pp. 3-24. Horie, Yasuzo. 1966. "The Role of the ie in the Economic Modernization of Japan." Kyoto University Economic Review (April):l-l6. Imai, Masaaki. 1969. "The Japanese Employment Structure." In Doinngusiness in and with Japan. Chicago: American Management Association, Inc., pp. 75-93. Ingoldsby, F. H. 1971. "Industrial Products and Giri." In Japan's Market and Foreign Business, edited by Robert J. Ballon. Tokyo: SOphia University, pp. 197-215. Ito, Chasei. 1971. "The Corporate Image." In Japan's Market and Foreign Business, edited by Robert J. Ballon. Tokyo: Sophia UniVersity, pp. 97-106. Itoh, Nagamasa. 1971. "Shudan-shugi eno Shiren" (Challenge to groupism). Nihon Keizai Shinbun, 12 January, p. 21. Japan Economic Journal. 1974a. "Advance of Overseas Companies Has Been Benefit to Interests of both Sides." 3 September, p. 20. . 1974b. "Aggressive Efforts Are Being Made to Create Direct, Individual Sales System." 25 June, p. 24. . 1974c. "Foreign Capital is Setting up Bases for Advance." 28 May, p. 20. 233 . l974d. "Many Are Incorporating Traditional Practices as to Wages and Seniority." 18 June, p. 20. "The Japanese Market and Japan-American Trade Relations." 1970. Journal of the American Chamber of Commerce in Japan (November):19-23. Kanai, Sumio. 1970. "Nihon ni Okeru Ribeito Mondai no Tenb5" (PerSpectives of rebate problems in Japan). In Ribeito Seisaku no Kakushin, edited by Takashi Fujieda. Tokyo: Japan Productivity Center, pp. 12-35. Kato, Shfiichi. 1970. "Modern Japanese Civilization in History." Japan Interpreter (Spring):29-44. "Kawatte Kita Nihonjin" (Changed Japanese). 1974. Nihon Keizai Shinbun, 3 May, p. 6. Koschmann, Jo Victor. 1974. "The Idioms of Contemporary Japan VIII: Tatemae to Honne." Japan Interpreter 9 (Spring):98-104. Kimura, Keiten. 1974. "Ryutsu no Gemeinshaft to Gesel- shaft." Tokyo: Marketing News (April):9-13. Krisher, Berhard. 1973. "How the Japanese Cope." Newsweek, 17 December, p. 49. Kubomura, Ryfisuke. 1967. "Kouri Seisansei to Kibo- kakusa" (Retail productivity and scale difference). Ekonomia (Yokohama Kokuritsu University) (September): 1-23. . 1970. "Ryutsukiko no Henkaku to Channel Seisaku" (Revolution of distribution system and channel policy). Marketing to Kokoku (March): 14-19 0 Lambert, Eugene W., Jr. 1966. "Financial Considerations in Choosing a Marketing Channel." MSU Business Topics 14 (Winter):l7-26. IDR Letter: A Special Symposium on Distribution Policy. ’1974. Tokyo: Ryutsu Mondai Kenkyu-kyokai. Lipson, Harry A. 1973. "The Search for a New Marketing Management Model: The British and European Experience." Paper presented to the Southern Marketing Association, Houston, Texas, 10 November. 234 Little, Robert W. 1970. "The Marketing Channel: Who Should Lead this Etra-corporate Organization?" Journal of Marketing 34 (January):31-33. Mallen, Bruce. 1964. "Conflict and C00peration in Marketing Channels." In Progress in Marketing, edited by L. George Smith. Chicago: American Marketing Association. Martin, Neil A. 1973. "Japan: The Ichiban Complex." American Airliner (November):24-28. Matsushita, Mitsuo, and Eugene H. Lee. 1971. "Antimonopoly Regulation of Marketing." In Japan's Market and Foreign Business, edited by Ro ert J. Ballon. Tokyo: Sophia University, pp. 159-81. McCammon, Bert C., Jr. 1965. "The Emergence and Growth of Contractually Integrated Channels in the Ameri- can Economy." In Marketing and Economic Develop- ment, edited by P. D. Bennett. Chicago: Pro- ceedings of the American Marketing Association, pp. 468-73. McVey, Philip P. 1960. "Are Channels of Distribution What the Textbooks Say?" In Journal of Marketing (January):61-65. McDowell, Edwin. 1974. "A Formula for Success in Japan." Wall Street Journal, 9 January, p. 10. Minami, Hiroshi. 1972. "Nihonjin-ron Kara Mita 'Nihonjin'" (Japanese reviewed by studies on Japanese). Bungei Shunjfi (August):342-52. Miyagawa, Toichi. 1974. "Ribeito Kozo, Kakaku Taikei no Kansoka" (Toward a simplified rebate structure and price system). In Management e no Chosen, edited by Michio Kokubu. Tokyo: DSbunkan, pp. 227-46. Miyashita, Masafumi. 1968. "Distribution Channels of Daily Consumer Goods." Industrial Japan (July): 36-39. "Morinaga Seika: Tonya-rebate wo Ipponka" (Morinagan Confectionary Company: Functionalizing wholesaler's rebate). 1974. Nikkei Sangyo Shinbun, 5 April. ”Nihon no Business-fudo to Marketing" (Japanese business climate and marketing). 1970. Discussion by Shoji Murata, J. T. Marley, J. R. Roel, and W. E. Yamaguchi. Marketing News (January):22-40. 235 Oriental Economist. 1970. "Reform of the Distribution System in Japan." Journal of the American Chamber of Commerce in Japan (5 February):51-562 Perlmutter, Howard V. 1969. "The Tortuous Evolution of the Multinational Corporation." Columbia Journal of World Business 1 (January-February):9-18. Perry, Fred T. 1971. "Marketing Pattern no Hikaku" (Comparison of marketing patterns). Marketipg News (July):45-49. Ridgeway, Valentine P. 1959. "Administration of Manufac- turer-Dealer Systems." In Explorations in Retailing, edited by Stanley C. Hollander. East Lansing: Division of Research, Michigan State University. Ridgeway, Valentine F. 1968. "The Administration of Manufacturer-Dealer System." Unpubl. Ph.D. diss., Cornell University. Sadamura, Reishi. 1966. "Maker no Hanbaikeiro Senryaku" (Manufacturer's distribution channel strategy). In Marketing K52a no. 3, Ryfitsfi Mondai, edited by Giichi Fukamif' Tokyo: Yuhikaku, pp. 24-37. Schmuckli, Jack J. and Yoshihiro Tajima. 1973/74. "Discussion: Archaic Distribution System Has Its Use." Dentsu's Japan Marketing/Advertising (Dentsu Advertising Ltd.) 1 (July):101-104. Sekiya, K626. 1974. "Nenko-gata Chingin, Shashin-sei" (Seniority wage and advancement). In Nihonteki Keiei no Tokushitsu, edited by Jahime Takada and Taku Hosoi. Tokyo: Daiamondo Sha, pp. 58-91. Sethi, S. Prakash. 1973. "Drawbacks of Japanese Manage- ment." Business Week (24 November):12-l4. Stern, Louis W. 1965. "Channel Control and Interorgani- zation Management." In Marketing and Economic Development, edited by P. D. Bennett. Chicago: Proceedings of the American Marketing Association, pp. 655-65. Sturdivant, Frederick D. 1967. "Determinants of Vertical Integration in Channel Systems." In ScienceL Technolggy and Marketing, edited by R. L. King. Chicago: Proceedings of the American Marketing Association. '236 Taira, Koji. 1973. "Non-Permanent Employment." In Postwar Japan: 1945 to the Present, edited by Jon Livingston, Joe Moore and Feiicia Oldfather. New York: Pantheon Books, pp. 461-67. Tajima, Yoshihiro. 1965. "Marketing ni Okeru Gensokushugi to Reigaishugi" (Rule and no-rule orientations in marketing). Management (November):4l-48. . 1966. "Ryfitsfi Kik6 to Ryfitsfi Mondai" (Distri- bution system and distribution problems). In Marketiag_Koza no. 3, Ryfitsu Mondai, edited by CiiChi Fukami. Tokyo: Yuhikaku, pp. 4-23. Takada, Hajime. 1974. "Shushin Koyo-sei" (Lifetime employment). In Nihonteki Keiei no Tokushitsu, edited by Hajime Takada and Taku Hosoi. iTokyo: Daiamondo Sha, pp. 25-57. Thorelli, H. B. 1973. "International Marketing: An Ecological View." In International Marketing Strategy, edited by H. B{_Thorelli. fiarmondsworth, Eng.: Penguin Modern Management Readings, pp. 23-39. Tsuda, Masumi. 1965. "Japanese Wage Structure and Its Significance for International Comparisons." British Journal of Industrial Relations 3 (July): 193-95. "On Understanding the Japanese Market." 1973/74. Dentsu's Japan Marketing/Advertising (Dentsu AdvertiSing Ltd.) 1 (July):105-109. "U.S. Study Team Finds Japanese Tops in Boss-Employee Relations." 1974. Insider (10 November):2. VanZandt, Howard F. 1970. "Japanese Culture and the Business Boom." Foreign Affairs (January):344-57. Watt, Andrew and Mihoko Aihara. 1971. "Seaweed or Bread for Breakfast?" In Japan's Market andggreign Business, edited by Robert J. Ballon. Tokyo: Sophia University, pp. 127-37. Weigand, Robert E. 1970. "Aspects of Retail Pricing in Japan." MSU Business Tppics 18 (Winter):23-30. "When in Japan, Put a Japanese at the Top.“ 1972. Business Week (18 November):41-46. "World Enough?" 1972. Forbes (April):49. 237 Yui, Tsunehiko. 1974. "The Japanese PrOpensity for Saving." Japan Ipterprete£_8 (Winter):478-83. Government Documents and Institptional Research Busshibetsu Ryutsu Jittai (l): KeshB-hin, KeshB-sekken no Ryutsfi (Current states Of diStribution cate- gorized by product group (1): Distribution of cosmetics and toiletry soap). 1971. Tokyo: Ryutsu Sangyo-sho KigyO-Kyoku. Dentsu. 1969. Marketing Activities in Japan. Tokyo: Dentsu Advertising Ltd. Growth Opportunities in World Markets for Health ProductaL Country Report No. 82: Japan. 1971. StanfOrd: Stanford Research Institute. Hanbai Report No. 206: Channel Promotion no Gutaiteki Tehkai:ho (Howito develop actual‘in-channeI* promotion). 1966. Tokyo: Hanbai Jitsumu Kyokai. Iyakuhin no Nagare: Sono Torihiki-Kanko no Jittai ni Furete (Flow of pharmaceutical products: Trade_ practices). 1971. Tokyo: Ryfitsfi Mondai Kenkyu Kyokai. Japan's Trade and Industrial Strategies. 1972. Tokyo: Japan ExternaiiTrade Organization. JETRO. Marketing Series 1. Japan as an Export Market. Japan External Trade Organization. . Marketing Series 4. Planning for Distribution in Japan. Tokyo: Japan ExternaI'Trade Organization. __. Marketing Series 5. Retailing in the_gapanese Consumer Market. Tokyo: Japan External Trade Organization. . Marketing Series 6. The Japanese Consumer. Tokyo: Japan External Trade Organization. . Marketing Series 7. Sales Promotion in the Japanese Market. Tokyo: Japan External Trade Organization. . Marketing Series 8. Doing Business in Japan. Tokyo: Japan External Trade Organization. 238 Kanri Kakaku_(l) (Administered pricing). 1970. Tokyo: KBSei Torihiki Iinkai Jimukyoku (The Office of Trade Commission in Japan). Kanri Kakaku (2) (Administered pricing). 1972. Kosei Torihiki Iinkai Jimukyoku (The Office of Trade Commission in Japan). Kaplan, Eugene J. Japan: The Government-Business Relationship--A Guide for the American Business- maa. 1972. Washington, D.C.: U.S.ifiepartment of Commerce, Bureau of International Commerce. Keizai Shingikai, Ryutsu Kenkyu Iinkai (The Economic Council, Distribution Study Committee). 1972. Korekara noRyfitsfi (Distribution in the Future). Tokyo: Nihon Keizai Shinbun-Sha. Kesho-hin no Ryutsu (Distribution of cosmetics). 1971. Ryfitsfi Mondai Kenkyfi Kyokai. KeshB-hin, Toiletary no Ryfitsfi Sengo-shi (Postwar history of distribution in cosmetics and toiletries). 1972. Tokyo: Lion Dentifrice CO., Ltd. KeshB Sekken no Ryutsu (Distribution of toiletry soap). 1970. Tokyo: Ryutsu Monday Kenkyu Kyokai. Korekara no Ryfitsfi (Future distribution). 1972. A Report by Keizai Shingi-kai, Ryutfi Kenkyu Iinkai (Council of Economic Conference, Committee of Distribution Study). Nihon Keizai Shinbun-Sha. MBS Report No. 3: Hanbai-ten no Soshiki Keiretsuka no GenTB (Current states of manufacturersT organiza- tion of sales dealers). 1970. Tokyo: Marketing Kondankai. MBS Repo;t No. 4: Hanbaiten Kyoiku to Shid5 (Education and guidance of dealers). 1970. Tokyo: Marketing Kondan-kai. MCON Report No. 31: Hanbaiten no Ranku-betsu Kanri-ho no KESatsu (A consideration of_ranking-based adminis- tration of dealers). 1971. Tokyo: Marketing Kondanskai. Outline pf Japanese Distribution Structures. 1973. Tokyo: Distribution Economics Institute of Japan. Ryutsu Chosa Report No. 16: Detergent and Dentifrice. 1972. Tokyo: NikkeiiKokoku Kenkyu-jo and The Nihon Keizai Shinbun-Sha. ' 239 Byfits su Ch6sa Report No. 21: Pharmaceutical Product. 1973. Tokyo: NikkeiiK6koku Kenkyfiijo and—THE_NiHon Keiza: Shinbun-Sha. Ryfitsfi Keiretsu-ka (VerticallyfiUnked.distribution system). 1974. Tokyo: K55ei Torihiki Iinkai Jimukyoku. Ryutsu Kik6 Ni okeru Kouri-gy6 no Genj6 to Sh6rai no Tenb6 (Current states and future perSpectives of retailers in distribution system). 1970. Tokyo: Japan Marketing Association. Ryfitsfi Kindaika no Tenb6 to Kadai (Perspectives and Ehallenge for distribution modernization). 1968. Tokyo: Tsfish6 Sangyo-sh6, Kigy6-kyoku (MITI, The Office Business). Saihan Seido (Resale price maintenance system). 1971. Tokyo: Kosei Torihiki Iinkai Jimukyoku. Shiseido Handbook. 1969. Market Research Section, Department of Marketing. Tokyo: Shiseido Co., Ltd. Tagenka Suru Ryutsu Sangy6 Shisutemu (Diversifying distri- bution industry system). 1970. Tokyo: Ryutsu Sangy6 Kenkyu-jo. Torihiki J6ken no Tekiseika (Toward a justification of Erase conditions). 1973. Tokyo: Tsfisansy6 Kigy6-kyoku (MITI, The Bureau of Business). Wagakuni no Sh6gy6 (Commerce in Japan, 1968). 1970. Tokyo: The Ministry of International Trade and Industry. 70-nendai Ni Okeru Ryfitsfi (Distribution in the 19705). 1971. Tokyo: Tsfish6 Sangy6 Sho, Kigyo Kyoku (MITI, The Bureau of Business, October). APPENDICES APPENDIX 1 CLASSIFICATION OF LITERATURE REVIEWED CLASSIFICATION OF LITERATURE REVIEWED (l) Japan's Distribution Channel Structure Books Adams and Kobayashi, 1969; Fukami, 1966; Kobayoshi, 1971; Kataoka, 1967; Miyagawa, 1974; Nakamura and Tajima, 1969; Nikkei, 1973; Saito and Nakada, 1971; Shiizuka, 1973; Tajima, 1971; Yoshino, 1971. Articles and Papers Arakawa, 1964; "Changing Pattern of Japan's Business Distribution System," 1970; "Ch66 Oroshiuri Shij6: Seisen Shokuhin Ryfitsfi no Kaname" (Central wholesaling market: A center of fresh foods distribution), 1974; "The Distri- bution System," 1969; Dowd, 1959; Elgass and Dowd, 1963; Faris, 1969; Hartley, 1973; Kubomura, 1967; Miyashita, 1968; Oriental Economist, 1970; Tajima, 1966; "On Under- standing the Japanese Market," 1973/74; Weigand, 1970. Government Documents and Institutional Research Busshibetsu Ryfitsfi Jittai (1): Kesh6-hin, Kesh6-sekken no Ryfitsfi (Current states of distribution categorizediby product group (1): Distribution of cosmetics and toiletry soap), 1971; 70-nindai Ni Okeru Ryutsu (Distribution in the 19703), 1971; Growth Opportunities in World Markets for Health Products, Country_Report No. 82: Japan, 1971; _yakfihin no Nagare: Sono Troihiki- Kanko no Jittai ni Furete (Flow of’pharmaceutical products: Its trade practices), 1971; JETRO, Marketing Series 4, Planning for Distribution in Japan; JETRO, Marketing Series 5, Retailing in the Japanese Consumer Market; Keizai Shingikaingyutsu Kenkyu Iinkai (The Economic Council, Distribution Study Committee), 1972; Kesh6-hin, Toiletiy no Ryfitsfi Sengo-shi (Postwar history of distribution in cosmetics and toiletries), 1972; Kesh6 Sekken no Ryfitsfi (Distribution of toiletry soap). 1970; Korekara no Ryfitsfi (Future distribution), 1972; Outline of Japanese Distribution Structures, 1973; Ryutsu Kindaika no Tenbo to Kadai (Perspectives and challenge for distribution modernization), 1968; Shiseido Handbook, 1969; Tagenka Suru Ryutsu Sangy6 Shisutemu (D1ver3ifying distribu- tion industry system), '1970. 240 241 (2) Japan's Distribution Channel'Behayior Books Abegglen, 1970a; Abegglen, 1970b; Adams and Kobayashi, 1969; Ballon, 1971a; Doing Business in and with Ja an, 1969; Ejiri, 1973; Fujieda, 1974; Fukami,’I966? Glazer, 1968; Kobayoshi, 1971; Kokubu, 1974; Kataoka, 1967; Miyashita, 1970; Miyagawa, 1974; Miyashita and Saito, 1972; Nakamura and Tajima, 1969; Nikkei, 1973; Shiizuka, 1973; Tajima, 1971, 1973, and 1974; Takada and Hosoi, 1974; Yanagisawa, Saito, and Nakada, 1974; and Yoshino, 1971. Articles and Papers ”Amai Senso-Rijum Toriau Kashi-gyokai" (Sweet war-struggles for profits in the confectionary industry), 1974; Ballon, 1971; Boyle, 1971; Faris, 1969; Fujieda, 1970; Hackley, 1969; Hartley, 1973; Kanai, 1970; Kimura, 1974; Matsushita and Lee, 1971; Miyagawa, 1974; "Morinaga Seika: Tonya- rebate wo Ipponka" (Morinagan Confectionary Company: Functionalizing wholesaler's rebate), 1974; "Nihon no Business-fudo to Marketing" (Japanese business climate and marketing, 1970; Sadamura, 1966; Schmuckli and Tajima, 1973/74; Tajima, 1965; Weigand, 1970: Government Documents and Institutional Research Busshibetsu Ryfitsfi Jittai(1): Kesh6-him, KeshO-sekken no EifitquCurrent states of distribution categorizedby product group (1): Distribution of cosmetics and toiletry soap), 1971; 70-nendai Ni Okeru RyUtsfi (Distribution in the 19708), 1971; Growth Opportunities in World Markets for Health Products, Country Report No. 82: Japan, 1971; iyakuhin no Nagare: Sono Torihiki-Kanko no Jittai’ni Furete (Flow of pharmaceutical products: Its trade pract1ces), 1971; JETRO, Marketing Series 4, gianning for Distribution in Japan; JETRO, Marketing Series 5, Retailiag in the Japanese Consumer Maiket; Keizai and Iinkai, 1972; Kesh6:hin, Toiletary no Ryfitsfi Sengo-shi (Postwar histo of distribution in cosmetiEs and toiletries), 1972; Kesho Sekken no Ryfitsfi (Distribution of toiletry soap), 1970; Korekara no Rygtsu (Future distribution), 1972; Outline of Japanese Distribution Structures, 1973; Ryfitsfi Ch6sa Report No. 16: Detergent and Dentifrice, 1972; R fitsu Ch6sa Report No. 21: Pharmaceutical Product, 197%; R Utsfi Kik6 Ni oderu Kouri-gy5 no Gean to Sh6rai no Tenbo (Current states and future Perspectives