Why Do Startups Fail?
By James Santagata
Principal Consultant, SiliconEdge
I came across this interesting Silicon Valley Business Journal article entitled "Why do startups fail? Here are the top 20 reasons" which summarizes a large post-mortem analysis of startup failures conducted by CB Insights
One quick takeaway to highlight:
"After reading through every single of the 101 post-mortems, we’ve learned two things. One — there is rarely one reason for a single startup's failure. And two — across all these failures, the reasons are very diverse."
Here's the top twenty reasons:
(Note: percentages don't add up to 100 because sometimes there are multiple reasons for failure)
1. Building a solution in search of a problem: Falling in love with an idea or building it out with market validation. 42 percent cited this.
2. Cash Out. No Mas: We'll assume this wasn't due to financial mismanagement or malfeasance but a natural outcome of a sane burn rate over an extended period with trailing revenues of a lean nature. 29 percent reported this.
3. Wrong team: Lacking key members or skill sets This was cited by 23 percent of the companies.
4. Beaten by the competition: About 19 percent of the companies reported this.
5. Pricing/cost issues: Reported by 18 percent in the study.
6. Poor product: This was reported by 17 percent of the companies.
7. Need/lack business model: A lack of a viable model killed 17 percent of these companies.
8. Poor marketing: Knowing how to code or build good products isn't enough. Reported by 14 percent of the companies.
9. Ignoring customers: 14 percent of the companies in the studied pointed to this.
10. Mis-timed product (releases): 13 percent of the companies in the survey reported this. A Calxeda employee told CB Insights, “We moved faster than our customers could move. We moved with tech that wasn't really ready for them... We were too early.”
11. Lost focus: 13 percent reported this.
12. Founder/investor strife: Creative tension is far different than toxic infighting. 13 percent of the companies succumbed to this.
13. Pivot gone bad: As has been said, "The pivot used to be called the f****up". 10 percent pointed to this.
14: Lack passion: The passion to stick it out, to execute. 9 percent identified this as the reason.
15: Bad location: For hiring/retaining talent, customers, investors and so on. This was cited by 9 percent.
16. No financing/investor interest: This was pointed to by 8 percent.
17. Legal challenges: Cited by 8 percent of the companies.
18. Don't use network/advisers: Again cited by 8 percent of the companies.
19. Burnout: Never a good thing, many reasons why a team can burn out. 8 percent pointed to this as the culprit.
20: Failure to pivot: As has been said earlier, "The pivot used to be called the F****up" and while that may be true it doesn't change the fact that continuing down the same messed up path is going to get your any place faster (other than bankruptcy court) and certainly no where better. 7 percent cited this.
By James Santagata
Principal Consultant, SiliconEdge
The Sun Also Rises (陽はまた昇る || Yō wa mata noboru), starring Ken Watanabe (foreigners will know him from his appearances in The Last Samurai and Inception) is a riveting drama that captures the development in Japan of the nascent and soon to be ubiquitous VHS video format.
Starting as a stealth or more accurately, an unapproved Skunk Works projects within JVC (Nihon Victor Corporation) it culminated in
the development and release of the new VHS standard to the industry.
On top of that, JVC's new format was royalty-free and competed directly against Akio Morita and his uber-powerful Sony Corporation (when you think of Akio Morita, think about Steve Jobs before Steve Jobs was even on the scene) and their Betamax.
Lots to takeways from this movie in terms of government pressure and cronyism in the form of MITI (Ministry of International Trade and Industry / 通商産業省 / Tsūshō-sangyō-shō) officials who had backed Betamax and, therefore, wanted JVC to deep-six their VHS format.
Other key takeways:
- No Box Thinking
- Technical Innovation
- Market-Focused Feedback Loops to ferret out new Use Cases
- Tenacity / Being Relentless
- True Leadership
- New Business Models (royalty-free industry standard)
In summation, this docu-drama really demonstrates Japanese business ethics, working styles, attention to detail and cultural expectations.
By James Santagata
Principal Consultant, SiliconEdge
Today I wanted to pose a very serious question regarding the coming failure of Abenomics (and it will fail, mark my words as economically there is no other alternative or outcome), Japan's continuing dearth of real, dynamic leadership and what it means for Japan's future.
Here we go: Has Japan's once rich, brave and bold Samurai spirit come to a crashing halt and been replaced by that of the Eunuch's?
I've deeply pondered this.
A Eunuch spirit and culture would suggest that, and evoke the feelings that, Japan's Samurai, Battlefield Culture has been replaced by something much softer and lacking in leadership.
I've written about this from various which you can find here:
Now some may be still questioning my prediction that Abenomics will fail. I guess the only debate I can see is how one define's failure and how bad the coming failure will be.
Abenomics is and has been economically untenable from the start, from when it was first announced.
And for those not overly familiar with Abenomics, here's a review of the so-called "3 arrows":
"The first arrow is an aggressive monetary policy. Abe appointed Haruhiko Kuroda, former president of the Asian Development Bank, as governor of the Bank of Japan in March. Kuroda has set a target of achieving 2% inflation and doubling the money supply within two years.
The second arrow is a proactive fiscal policy, consisting of a ¥10 trillion (US$100 billion) public works package.
The third arrow is a growth strategy. Structural reforms in Abe’s sights include everything from increasing women’s share of leadership positions to 30% by 2020 to joining the Trans-Pacific Partnership (TPP), a 12-country free-trade agreement that should drive trade liberalization and deregulation inside Japan.
There are several things wrong with these areas and we've discussed them before. First, even if you thought all three all needed they are in the wrong order.
The first arrow should have been the biggest, heavy hitter arrow - structural reform, but given the amount of ossified, rent-seeking incumbents in Japan coupled with near complete regulatory capture in many areas, well, that just isn't going to happen.
So instead, the two simple arrow, although massive destructive arrows to the economy, will and have proceeded -- loosing monetary policy to drop the value of the yen and going on a Keynesian-spend what you don't have public works-waste the money spree to welcome inflation!
Folks, inflation is the last thing Japan needs and given the fact that Japan is oil dependent and import dependent for food and other materials, the last thing that should have been done was to drive down the yen.
In fact, it would have naturally fallen anyhow because of the current account balance for the new record oil imports.
I wrote about this in detail, what the smart play would have been:
Now back to the Eunch problem. What Japan needs is to develop more homegrown leaders - real leaders, women and men, of all ages and persuasions that are not afraid to lead -- they are out there, but often they are forced out of the game early or left on the sidelines because they frighten the status-quo management or the ossified corporate culture.
But by paving the way for more and more startups, these leaders can move to run and drive those businesses, which in turn put heavy pressure on the ossified incumbents -- sales, business models and so on.
It's a win-win for talent, for consumers, for the country.
But Abenomics is only a symptom of a Eunuch spirit and culture (as well as a self-serving incumbency) and leadership, nascent and seasoned will continue to be rare and often smothered out or crowded out of where it is most needed.
Will The SEC Ever Stop Breaking The Legs of Entrepreneurs & Start Protecting The Little Retail Investor?
By James Santagata
Principal Consultant, SiliconEdge
"October: This is one of the peculiarly dangerous months to speculate in stocks in. The other are July, January, September, April, November, May, March, June, December, August, and February."
- Pudd'nhead Wilson's Calendar
There is no doubt that the stock market can be a very unforgiving institution but does the SEC's tactics if not self-described mandate of breaking the legs of Entrepreneurs and rolling over little Retail Investors make it any safer?
This is highly doubtful as the SEC has arguably become a poster child for the economic concept of regulatory capture, having moved from their initial role of investment information disclosure in the 1960's to their current role of supposedly "protecting investors" since the 1990's. There is also the issue that the existence of the SEC and what I term to be their "SEC-anointed" stocks injects moral hazard into the system.
But who, prey tell (spelled as intended), is the SEC protecting?
Surely it isn't the little retail investor who has had to contend with the like of SEC-anointed fraud stocks and scammers like Enron, Global Crossing, the Steve Jobs Options Backdating Scandal and, of course, the Big Daddy himself, Bernie Madoff.
What's most amazing about Bernie Madoff's fraud is not just that he got away with it, but that the SEC had no intention of stopping him!
That may sound like an outlandish or unsubstantiated allegation until one considers the documented facts. Starting in 2000 then again in 2001, and 2005, a forensics accountant by the name of Harry M. Markopolos repeatedly notified the SEC of Bernie Madoff's fraud both verbally and in writing. Markopolos provided detailed supporting documents only to be ignored by the SEC again and again.
Here is Markopolos' complaint to the SEC regarding Madoff where he identifies 29 Red Flags:
Now it appears that the SEC is continuing their assault on both individual investors who want better returns than are available through the retail market or whom just want to invest their own money as they see fit (if they can blow their money in Vegas or on penny stocks, smokes or state sponsored lotteries why not stocks?) as well as entrepreneurs looking to raise funds for their companies.
The SEC is doing this by considering to raise the financial requirements for being designated an accredited investor. Currently, an individual accredited investor is defined as follows:
Apparently, too many Americans have now become cashed up and have too easily overcome this financial hurdle. In the last go round, the SEC changed the rules so that an individual's home was excluded but apparently that wasn't enough to keep out the amount of new individuals looking to invest wholesale (as opposed to retail).
To remedy this our "protectors", the SEC, now want to index the SEC's individual accredited investor's financial requirements to inflation.
Here is a comparison of the current requirements and what the future requirements would mean:
An individual accredited investor is now defined as someone with $1 million in net worth, minus the value of their primary residence, or with annual income of $200,000 in each of the two most recent years and with a reasonable expectation to bring in the same income level in the current year..
The inflation indexed requirements would be about $2.5 million of individual net worth while the annual income requirement would rise to $450,000.
The SEC is offering some protection no doubt, but for whom? It seems this protection is more likely to benefit fraudsters and incumbent wholesale investors than entrepreneurs looking to raise money and the little retail investor.
Exploding The Myth of Japan's Lack Of Talent By Understanding The Tip Of The Sword
By James Santagata
Principal Consultant, SiliconEdge
If it seems that we're under a constant barrage by the Western Media Myth (WMM) that (a) Japan is "failing" and that (b) this "failure" of Japan's is primarily due to Japan's "talent problem", it's because we are.
We're also told through this WMM that Japan's supposed "lack of talent" has further manifested itself in such as way as to be responsible for Japan's supposed "lack of creativity" and "lack of innovation", thus, contributing to again, the so-called "Lost Decade".
However, just when the WMM would have us give up all hope that Japan can saved, the WMM preaches that these "unique problems" that Japan faces can simply and quickly be solved by (a) increasing the number of English-speaking Japanese and (b) internationalizing the apparently "backwards" Japanese-only speaking speakers and/or (c) increasing the number of immigrants Japan accepts. Apparently, the WMM proponents believe that even a US-Open Border policy would "help" the Japanese economy if not "save" it.
To support such silly myths, memes and the previously proposed "solutions", the Western Media often holds up statistics showing Japan's lack of internationalized workers (however you define this), Japan's relatively low TOEIC and TOEFL scores compared to other Asian countries as well as the dearth of Japanese college students now studying overseas compared to the figures thrown up by countries such as India and China (for the record, the Japanese figures are low even when comparing this on a per capita basis, but this begs the question -- so what?).
As I have argued for over a decade now, these claims and even statistical comparisons by the Western Media are not only useless but downright dangerous to those that want to fully understand Japan's current situation as they ignore the real root causes of Japan's underperformance.
And note that I say "underperformance" here and not failure. As the third largest economy in the world (behind China that has ten times the population along with zero controls on economic externalities), it's pretty silly to continue to paint Japan as an economic basket case or the "sick man of Asia".
The key to all of this is to understand that Japan lacks leadership. That is what is hampering Japan.
Japan doesn't lack creativity, Japan doesn't lack innovation, Japan doesn't lack talent and Japan doesn't lack English-speakers, although Japan could improve in all of these areas.
The Western Media's arguments or framing of these issues, especially in terms of Japan's supposed lack of "English-speaking" talent becomes even sillier when we consider that it ignores what I have deemed the "tip of the spear" or "tip of the sword" strategy.
As I have stated many time before, business is warfare, the only difference being that in business there is no Geneva Convention and prisoners aren't routinely taken.
In a war, it is considered completely unwise to judge the strength of an army solely by the total number of troops. One must judge an army by its effectiveness in killing and maiming people as well as smashing, burning and breaking things. One would also be well advised to measure an army's effectiveness in terms of its ability to project power. Again, the number of troops is mostly irrelevant.
This becomes even clearer when we analyze a war dominated by air power,
In such a case you don't measure a military's effectiveness by the number of pilots deployed in theater or even the total trained (and active) pilots but rather you measure a military's effectiveness (related to these air campaigns) by the efficacy of the pilots that are deployed and the results which they attain.
For instance, even on a conventional basis, one pilot and perhaps one navigator can wreak enormous havoc on an enemy force, and yet, this one pilot and navigator are backed up by thousands of others ranging from ground crews that handle maintenance, fueling and ordnance. Air traffic controllers to mid-air refuelers (who in turn are supported by their own ground crews) and this ripples through the entire supply chain from the men and women who cut the paychecks, the cooks, the water purification teams, the truckers, the doctors and dentists to the nurses and so on.
Thousands and thousands of non-combatants are involved to support a relatively small group of pilots and this doesn't even include all of the time and effort that went into designing and producing each plane and each weapons systems, all to support one pilot and perhaps one navigator.
And yet it works because that plane and that pilot are, indeed, the tip of the spear.
You can see this as well in a US Navy Carrier Task Force when you consider how many personnel are on one aircraft carrier -- mutiple thousands. And this one carrier in turn supports a relatively small group of pilots. But it goes far beyond this, because that one aircraft carrier is in turn supported by a group of other ships - submarines, cruisers, destroyers and so on.
All of these assets and personnel are supporting this one aircraft carrier which in turn supports her air crews who are, by definition, the tip of the spear.
Unsurprisingly, businesses and economies work in the same way. This should be common sense and yet evidently the Western Media still doesn't get this nor does most of the Silicon Valley "Cheerleader Press".
In concrete terms, what does this mean for Japan?
Well, this means that in Japan not every person or employee needs to speak English or be internationalized. It's a silly notion to assume that they do. Moreover, even if each Japanese worker did have these skills there is no guarantee that the Japanese economy would stronger since there is a huge opportunity cost to skill-up in these areas which could, in fact, dampen Japanese creativity, innovation and productivity.
In any event, today I was back on site at a client (a Japanese domestic firm), running interviews for 2015 college graduates. I had eleven Japanese and several foreign student candidates lined up for today. This was in addition to the 15 Japanese candidates I had interviewed for the same client the week before.
And once again, I am and have been extremely impressed with the quality of all candidates, both Japanese and foreign candidates.
This simply adds more empirical evidence to my long made argument that Japan doesn't suffer from a lack of talent, creativity or innovation.
Japan suffers not just from a lack of but a dearth of aggressive, quality leadership which is able to effectively and profitably deploy and monetize the outstanding domestic and international talent that is already onboard or can be readily acquired.
To counter balance this lack of leadership and the resultant underperforming or ossified firms it produces, Japan must create and maintain a very healthy entrepreneurial ecosystem.
An ecosystem that can continually challenge, engage, kill and compost underperforming incumbent Japanese corporations, especially ossified incumbents, wherever they may be found.
Related Background Articles:
By James Santagata
Principal Consultant, SiliconEdge
Former Wall Street Journal technology reporter Yukari Iwatani Kane has published a new book entitled, "Haunted Empire: Apple After Steve Jobs" and I'm here to posit, that without even having cracked open one page of this book she is spot on, at least with regard to her provocative title.
"But wait, what? How could she be right?"
"How could that title be right?"
"How can you, James, be such a pompous ass to think you know anything about Apple let alone judge Kane's book by its cover?"
"Doesn't Apple create magical products? It's true that Steve Jobs has passed on but the same great staff, the same great workers remain!"
And all of that is true.
However, to understand why the title of the book is right and why I'm right we need to honestly and objectively understand who Steve Jobs was and what made him so successful and Apple so successful under his leadership.
And leadership is an operative word here.
At the same time, we need to understand that competition doesn't operate in a vacuum so we must ask, "What made Apple's and Steve Jobs' competitors so timid? Why didn't they respond and counterstrike? Better yet, why didn't they create the iPhone type phone, the smartphone first?!"
And the answer is simply it goes back to the structure and dynamics of office politics and power within a company. The real shock should not be that Apple, with zero experience within the mobile phone industry, built and released the blockbuster iPhone but that none of the incumbent handset makers did!
Where was Nokia and their smart phone? In fact, where were the rest of the handset makers?
And that is the real shock. Not that Apple made a smartphone but that the 800-pound Gorillas gave them an opening and then didn't pounce and kill or even defend their territory.
However, if you've taken one of our related coaching or training sessions (How To Beat Silicon Valley's (and other) Fast-moving Startups At Their Own Game) or just intuitively understand Office Politics and Power (aka Organizational Politics & Power - OPP) this not only comes as no surprise but rather it both predicted and expected. And once you understand Office Politics and Power, you can quickly see and understand why and how Apple under Steve Jobs beat Sony to the next iteration of the Sony Walkman which became known as the Apple iPod.
It helps one also understand why and how Larry Ellison discussed the Net PC (in the mid-1990's) but Apple built it (the iMac), and why Apple could add some basic design features and colors to it to make a hit while intra-company rent-seeking behavior at the competition prevented them from responding or competing let alone getting that to market first.
OPP also explains why and how Jobs could do the same with Pixar while a former Disney employee, John Lasseter, who suggested as much years before Jobs ever thought about animation or rendering farms was let go (or summarily fired depending on the source one references) from Disney, only to have it all come full circle again with Disney acquiring Pixar.
And, of course, it explains some of the biggest daddy ball drops in history such as Xerox PARC and their full blown PC and related projects (which later became reflected in industry leaders like Apple, Adobe, SGI and 3Com) and Kodak with their digital camera years before the competition had one...that all went to waste...
I've talked about that in detail here, about the Myths About Steve Jobs and how is personality and ethos, while celebrated within Silicon Valley (and beyond) is actually completely anathema to traditional Valley ethos.
Reference: Steve Jobs: The Man Who Broke Every Myth & Meme In Silicon Valley & Become A Legend
The problem then, is that a company (any company, including a post-Steve Jobs Apple) needs a strong leader who is unafraid to break eggs to make omelettes and unafraid to slaughter sacred cows for burgers or even just for fun. They also need a leader who is not just unafraid but actually enjoys and even thrills in steamrolling the competition and taking the troops straight up the middle as Alexander the Great did to Darius during one the Macedonian-Persian wars.
As a further piece of evidence, one only needs to consider that the Akio Morita, the founder of Sony, was Steve Jobs while Steve Jobs was still in diapers. Moreover, Akio Morita was extremely aggressive, even actively counterattacking industry special interests who tried to have the courts block the Sony Betamax recorder. Morita was successful in defending this and in ultimately escalating this to the US Supreme Court with Sony (and consumers) coming out as the victor.
Tim Cook being the nice great guy and "steady, paint by number operator" he is (certainly he's the first guy that I would hire or consult with to determine what color doilies to lay out for my dinner party), shares none of those characteristics with either Steve Jobs or Akio Morita.
So now lets move on to more questions regarding Job's selection of Cook as his successor.
Can Struggling Japanese Companies Actually Beat The Snot out of Fast-moving Silicon Valley Firms? Yep. And Here's How
By James Santagata
Principal Consultant, SiliconEdge
Over the last twenty years, and accelerating in the last 7 years, not only Japan but the entire world has begun to question Japan's ability to innovate and create as companies such as Apple and Samsung rule Japan's former stomping grounds and gleefully gorge themselves on Japanese companies' bento boxes on a daily basis.
Meanwhile, once mighty and innovative Japanese firms like Sony and Panasonic bleed red and constantly try to slough off workers while peddling a staid if uninspiring set of "me-too" and "also-ran" product lines.
How far has Sony fallen? Well, it's gotten to be so bad that if Sony founder, Akio Morita, were to magically re-appear today and venture over to the front entrance of Sony Japan, he wouldn't recognize the place. Worse, if he then decided to apply for a position, not only wouldn't they hire him, they'd most likely call security and have him escorted off the premises.
But all is not lost.
In our No Box Thinking™ (Volume 3), entitled "How Struggling Japanese Companies Can Beat Silicon Valley's Fast-moving Startups At Their Own Game" we go through exactly what has happened, what has changed and how, in a short time and by using some talent management adjustments, Japanese firms can again perform at our above that of their competitors.
Dear Silicon Valley: It's A Post-Technology Startup World (And Very Few Seem To Know It)
By James Santagata
Principal Consultant, SiliconEdge
One of the frequent topics I like to discuss besides the myth and meme that "Necessity Is the Mother of All Invention" is the fact many of Silicon Valley's most vaunted startups are all post-tech businesses.
Yes, you read that right. Post-tech.
They surely use technology in their day-to-day operations just as UPS does, the Hilton hotel chain or even Walmart. However, many of these startups may actually use even less tech than these brick and mortar firms. Examples of such startups and ventures that are post tech include Airbnb, Uber and Zappos which is analogous to an online Nordstrom in terms of the excellent customer service experience they provide. Further, the technology required to run these companies is often available right of the shelf for a pittance (relatively speaking). There are plenty of other non-Valley, post-tech companies such as Groupon, Gilt Groupe and Dollar Shave Club to name just a few.
What does all this mean?
As we've discussed many times before, this means that what many of these startups are facing (or will face) as their primary challenge is primarily human in nature not technical.
Specifically, the markets that post-tech startups will want to or tend to target are those which are massively inefficient (thus, having huge profit potential while populated with tepid or ossified competitors) due to the use of regulatory capture by rent-seeking incumbents.
Over the last 18 to 20 years (and especially during the last 7 years) the skills and knowledge needed to quickly and cost effectively build, mass produce and even consume these technologies and tools have now become almost completely common place. Consider that the amount of computing power (and bandwidth) we have in our smart phones to a person 10 years ago as is the ability to buy right off the shelf most of the things we need to create just about any product or business.
We're no longer concerned with the theory behind building a router or the design and development of packet switched (versus a circuit based networks). Even IPTV is no longer a hazy dream but a daily reality.
I could go on and on, but I won't so as not to bore you.
Beyond core technology, the Valley has now grown and matured in regards to the knowledge, processes, skills and resources needed to not only build a product but to launch a company and to make it successful (although, often times, the Valley still struggles greatly with market-based productization and ultimately the monetization off the product. These two sticking points, therefore, provide huge opportunities for the next generation of entrepreneurs to focus on).
For me, I'm glad I lived in the Valley and still do business there. It was a very huge turning point and chapter in my life, however, for many reasons, not everyone can get there, at least now.
Yet they worry and fret. Don't.
My advice, is don't worry or fret, do the best you can, with what you have, where you are. If the Valley is in your future you'll be there. And beyond that, there is a downside to the Valley -- too many posers, Drive-by entrepreneurs, Lottery Ticket Louts and so forth attending events and conferences rather than staying home or at the office building product or businesses. Better yet, spending the time getting in front of customers. The point is the Valley is a huge echo-chamber where luck and one-trick ponies are seen as "systems", "processes" and "truths" and where almost no one I have met can separate talent from systems, brand and product.
That's the downside. A major downside.
The upside is that even if you aren't in the Valley, you can still read and see what's going on, in real time, without being pulled into the Valley echo-chamber and backslapping "ataboys" that are often made with good intentions but damage companies and entrepreneurs in the long run.
The glorious fact, and I do say glorious, is that now with all of the knowledge, mentors, books, forms, templates and so on I question this "race to setup in the Valley" Further, we should consider and clearly understand that most of the "tech pain" and "tech risk" has been taken entirely out of the startup equation.
To summarize, in effect, so many of these startups are post-tech. They surely use tech in their daily business or operations just like KFC, Burger King and UPS does but they aren't tech firms. This doesn't make them better or worse than any startup. But it does mean they should acknowledge this new reality as should every startups, potential entrepreneur as well as incumbent.
By James Santagata
Principal Consultant, SiliconEdge
As previously discussed, we focus on both the human and the strategic elements of personal and business success.
We'll dig down deep and explore and unpack the official narratives as well as the myths and memes as to why particular companies, products, people and technologies have succeeded or "failed" and we'll often end up with far different conclusions than are commonly published or discussed within the business and tech communities.
We'll also draw heavily upon some of the following subject matter to help make our points:
1. Evolutionary Psychology
2. Cognitive Science
3. Influence and Persuasion
4. Military History, Tactics and Strategy
5. Economics (primarily regulatory capture by rent-seeking incumbents)
6. Linguistics & Languages
7. Foreign Cultures
8. Seduction and Dating
And a whole lot more... stay tuned!
By James Santagata
Principal Consultant, SiliconEdge
Over the years there's been much discussion in both the business press and the general press regarding the state of Japan's economy with many, including technology, economic and Japan-focused pundits, having concluded that Japan has become nothing short of a complete and utter "economic basket case".
Far worse, it's said that in the very near future Japan risks becoming completely irrelevant if it doesn't immediately act according to a particular set of "politically-correct prescriptions" which we'll discuss in more detail later. We are told that the situation Japan faces is dire even though Japan still retains the world's third largest GDP and was only just recently eclipsed by China -- The same China which has ten times the population as well as a supposedly long, advanced and storied civilization according to the pundits.
And yet, through all this doom and gloom, here we find little, lowly, Japan smack dab in the number three slot.
I. What Exactly Do The Pundits & Japan Watchers Say Is Wrong With Japan?
Specifically, technology and economic pundits as well as Japan watchers have come to the conclusion that Japan is ailed by the following:
1. Lack of innovation.
2. Lack of creativity.
3. Lack of Business-level English speakers (determined as a percentage of the adult working population).
4. Lack of inflation (we are told that Japan is in a devastating deflationary spiral).
5. Lack of diversity.
6. Lack of immigrants.
7. Lack of a globalized workforce (besides sufficient English skills it's said that the Japan workforce lacks a variety of soft & hard skills).
8. Lack of startups.
9. Lack of entrepreneurs.
10. Lack of babies / A falling fertility rate.
Whether one agrees with these pundits and the press or not, the very frequency and pervasiveness of such articles, comments, and themes clearly show how far Japan has fallen from its once rapid and presumed continuous economic ascendancy in the the mid-1960's. This kicked off with the 1964 Tokyo Summer Olympics and along with the debut of the Shinkansen / Bullet train service heralded Japan's post-war "Coming Out Party" and continued through the 1980's with a great many believing that eventual world economic dominance by Japan was a given. It may be hard to imagine now, but this was a time when Japan's economic dominance bloodied even American stalwarts such as Intel and General Motors and eventually had them hanging onto the ropes screaming "no mas! no mas!".
At the pinnacle of its economic power and influence, Japanese products evoked in consumers a promise of high-quality, innovativeness, and a fine attention to detail, all to be had by middle class consumers for a very reasonable price. At the same time, Japan's economic power and influence provoked sleepless nights if not abject horror in many American business managers who dreaded the prospect of facing this highly aggressive and unyielding competitive foe on the unforgiving battle field of business.
And let's be very clear about this fact: American business management feared Japan businesses and industry and for a very good reason. The Japanese economy and its assortment of high-performing companies were literally on fire and stomping out American, European competitors left and right.
From automobiles to semiconductors to video games to industrial test & measurement equipment to video consoles. Japanese products were often very innovative and almost always fantastic. And by no means were they all "copycat" or "fast follower" products (see: First Mover or Fast Follower? Harvard Business Review, June 14, 2012).
Consider Sony Trinitron tubes, Sony Walkmans (the inspiration for Apple's iPod), Toshiba's pioneering flash memory, Maganvox's Odyssey home video console (which was released a full 3-years before Atari's best-selling Pong) and, of course, the Sony Betamax video recorder as well as JVC's VHS players and VHS standard (which would set you back $4,600 while each blank tape ran for $72 based on inflation-adjusted dollars) which was adopted and also produced by Japanese electronics powerhouse Matsushita (now Panasonic).
The Japanese, coming from a small island nation roughly the size of Montana but with even less usable land and all but devoid of natural resources save for her people, were literally knocking the stuffing out of American industrial giants and America as a whole. Even more shocking was that this little resource devoid island nation was clobbering Superpower America which was overflowing with natural resources as well as having a population 2 times larger than Japan's!
The economic bloodshed was bad.
How bad was it? Let's just say that it got so bad that US businesses scrambled to lobby and plead for the US Congress to get involved, not only in terms of Japanese "voluntary" trade restraints but also in the development of SEMATECH (see also: Lessons From Sematech, MIT Technology Review, July 25, 2011). This political pressure later escalated with the goal of forcing Japanese firms to open manufacturing facilities stateside. (see: Transplant Car Makers Redefine The Industry, New York Times, June 23, 1992).
And yet, with the bursting of the Japanese economic bubble in the early 1990's, Japan is now often seen if not actively portrayed as a failing economy which is devoid of strength and slowly deflating over the last two decade -- the so-called "Lost Decade". At the same time, Japan is portrayed asemploying an army of graying, boring, robots and worker bee drones who themselves are devoid of even an ounce of creativity. If that weren't bad enough, we're now told that Japan's rapidly aging population along with the declining birthrate are about to take Japan underwater, once and for all.
The US and Western press no longer asks "Can the US and other developed nations compete with Japan?".
It's now, "Can Japan even compete globally?". And this rhetorical question is often posed with an air or sense of deep schadenfreude while at other times it's posed with nervous hand-wringing from Japonphiles as well as the Japanese themselves
We've repeatedly been told this narrative so many times that the answer to the question "Can Japan compete globally?" is already a foregone conclusion: Of course Japan can't compete globally we reflexively answer.
The adherence to this false but official narrative is so strong that everyone appear to be too busy witnessing "a failing Japan" to even contemplate a Japan that can compete. These forgone conclusions have now fully morphed into a set of very powerful myths, memes and misunderstandings.
This in turn raises two other questions:
Having read numerous articles such as this coming from both the technology and economic press, it seems that very, very few articles have approached this topic with a ground-level, brass-tacks understanding of what really goes on in Japan, socially, culturally and economically. Moreover, even fewer seem to have approached this with a positive worldview (versus the normative proposition) to ascertain what's really going on and what, if anything needs to be fixed or improved let alone how to do it. And by "how", I mean a real "how" not some socially-engineered pipe dream.
We've previously analyzed and destroyed a few of these memes, including that "Japan's troubles have do to with a lack of creativity and innovation on the part of Japanese" as well as the nagging question as to whether or not Japan can even compete globally. We've also touched upon and heavily damaged the "diversity is necessary for success" myth as well as the mythical "immigration is the solution to Japan's problems" narrative.
II. Debunked Myths & Memes About Japan
Not withstanding the reality of where Japan is today and what ails her, these previously discussed myths and memes have become so well accepted as "fact", that many Japan, economic and technology industry "analysts" and "pundits" simply rehash or cut 'n paste these old, tired and dangerously incorrect myths, memes and misunderstandings without ever stopping to think and consider how obviously and completely wrong and broken they really are.
III. What Japan Does And Doesn't Face
1. Japan does not lack of innovation.
2. Japan does not lack of creativity.
Japan and the Japanese people are extremely innovative and creative as we've discussed previously. It's not that Japan and the Japanese lack these attributes but rather that what Japan does lack (i.e., strong leaders with ability to productize and monetize creativity and innovativity) is being mistaken for a supposed lack of innovativity and creativity.
If you are now competing with Japan or if it's likely that you may compete with Japan one day, swallowing such a broken narrative is perhaps as dangerous as mistaking some range bum's politeness for weakness as illustrated in this Clint Eastwood classic:
What Specifically Is Japan Lacking:
a. The ability to productize its innovations & creativity.
b. The ability to monetize its innovations & creativity which it has productized.
c. Real leaders that will drive a. + b forward and into a long-term, sustainably profitable reality.
3. Japan does not lack of business-level speakers:
While you can possibly never have too many fluent speakers of any language, especially when it concerns a global business, scientific and cultural language like English (this is because English language ability provides the greatest marginal utility of all second languages in almost every case) it's still a fallacy to assume that you need to have everyone of your citizens possessing English fluency.
It's no different than running a military operation and employing the concept of the "tip of the sword" or "tip of the spear". You may use pilots to drop ordnance from the air but not everyone in the military and not everyone even in your branch of the service or unit needs to be a trained pilot.
Of course not. That would be ludicrous.
They don't even all need to know about airplanes. Some, like flight mechanics, may need to know more about aircraft than others, but do you really think that the cooks, supply line drivers, doctors or chaplains do? Of course not. How silly would that be and what a waste of resources it would be as well.
As an added benefit, by maintaining a relatively limited pool of strong globally-minded and fluent English-speakers while having the main population relatively "weak" in these skills, you've just created a fantastic, practically impenetrable barrier to entry to foreign competition. Yet, simultaneously by deploying your own "tip of the sword", you can approach, enter and take foreign markets as desired.
4. Japan is not in a devastating deflationary spiral
We are told that Japan needs more inflation - that inflation is your friend. But since when has inflation become a "good thing"? Certainly not for producers and especially not for consumers and savers.
Further, how can it be stated that Japan is in a deflationary cycle when it's clear that Japan is simply recovering from an inflationary bubble? Things are continuing to deflate because equilibrium hasn't been reached yet, therefore setting the baseline of this analysis from the top of the bubble is as idiotic as having your pediatrician worry about your child's temperature because the baseline of their temperature reading was taken at 103F when the child was exhibiting a high-grade fever. Now imagine that the child's fever has broken and their temperature is spiraling down to 98.6F, the "normal basal temperature". Is this something to worry about or is that simply the return of the child's temperature to the basal temperature and something to celebrate?
5. Japan doesn't have a diversity problem
Diversity as well as the benefits, value and costs of diversity (few rarely acknowledge let alone consider the costs of diversity) critically depend on you one defines it. If by "diversity" one simply means a quota of different races, ethnicities or the possession of a different set of reproductive organs, then no, diversity by itself has absolutely zero value.
If by diversity one means possessing, sharing and exhibiting different viewpoints and abilities all within a particular or specific band whereby the various individuals can still work cohesively as a team and support each others, then most certainly diversity has measurable value if not immense value.
In practice, true diversity would be having two Japanese come from completely different backgrounds, even if they are both men or both women, as compared to having one Japanese male hailing from Kyoto University and the other from Tokyo University both of whom studied the same subject matter.
At the other extreme, coupling an Israeli scientist who is an expert in materials science with an illiterate Sudanese goat herder probably won't add any value either. This would especially be the case, if the two parties involved don't speak the same language or have any means to communicate in a mutually intelligible language or system. This gap and mismatch would perhaps be even more apparent if their objective was to discuss the advanced development of carbon nano-tubes.
I'm well-aware and understand that this is heartbreaking if not earth shattering for the pro-diversity-at-any-cost social-engineers out there, but the fact remains, Japan is one of the most homogeneous countries in the world and uet it's a smashing success as is Korea. And Korea is arguably more homogeneous than Japan!
Meanwhile, other highly diverse societies have eaten themselves for lunch such as the former Yugoslavia while an analysis of other diverse societies often suggests that a very small percent of the population is doing the heavy lifting (this is often captured and reflected in large income disparities assuming that government regulations and interventions haven't distorted the market by fouling pricing signals, blocking competition or picking winners and losers).
And as repulsive as Jim Crow-era laws and apartheid is and was, during this reprehensibly time and with an extremely non-diverse workforce, the US arguably reached the pinnacle of its vaunted space program which culminated in several lunar landings. Since then the US hasn't revisited the moon nor made any substantial man-driven landings to Mars (that is put a human on Mars).
This then begs the question. "Where exactly is the "diversity dividend" we've been promised?
6. Japanese doesn't lack immigrants because it doesn't need wholesale immigration
What makes Japan work is its strongly-coupled and cohesive society. This doesn't rule out immigrants as immigrants can, would, could and do help Japan but it must recognize that immigrants will only help Japan or any nation when there is a policy based on the merit and value the immigrant brings or is expected to bring to the host name (as expressed by "life time value") versus the societal carrying costs over the immigrant's lifespan.
Japan would be well advised to avoid what has happened to not only the US but also Europe where never ending flows of immigrants,
in particular low skilled and/or non-assimilating immigrants are bringing negative externalities as a whole. Obviously, there are very productive and bright immigrants which should be welcomed, but we must ask if family chain immigration should be allowed and to what extent should anyone be welcomed without regard to their financial and societal contribution as well as financial and social impact to the host nation?
For those that consider this cruel and cynical, let me ask you this:
If not, your answers are "no", then it it would seriously behoove you to consider why you harbor such a double-standard regarding national immigration since it is just a larger version of the family structure.
This issue will be even more critical as we continue racing toward Peak Jobs (see: "Not Peak Oil But Peak Jobs") and certain societies are beginning to strain with overpopulation and large, unemployed or even underemployed layers of society.
The solution is to understand that a small, highly-educated, cohesive and tightly-knit society is the society that is well positioned for the 21st century. Japan and Korea are obvious choices that come to mind.
If you doubt this, simply consider the reaction of two very different societies and cultures to natural disasters that have befallen them. Namely, consider Japan's Tohoku earthquake and New Orlean's Hurricane Katrina where even the local police were caught on camera looting!
7. A Globalized workforce is not a panacea but can be very important (this includes business-level English skills)
Although Japan does have some very capable workers, this is a critical issue that they face in some situations. However, while the English language component is important, even more so is critical thinking, overseas sales ability and psychological aggressiveness-- this is true even if these skills are taught in Japanese and the Japanese students are monolingual (Japanese only speakers).
8. Startups & entrepreneurs is critical for Japan's economy
This is a problem which is mainly due to various cultural and social conventions along with a strict, domestic regulatory environment (more about this later).
9. Lack of babies / falling fertility rate is a pro or con
This can be good or bad. By focusing on factory automation (FA), autonomous systems and robotics, Japan can overcome any such problem. If Japan's decides they need more flesh and blood I would suggest that rather than "import immigrants" they should do what countries like China, India, Indonesia and Mexico do so prolifically -- make their own babies the fun and natural way. There are a number of things that the Japanese government can do, policy-wise to encourage this which we'll discuss later.
IV. The Real Problems & Solutions
There are a number of solutions to the problems that Japan faces, but most of the solutions necessary to remedy these issues will go against what Japan's domestic incumbents and power structure want and what have installed in Japan for their own benefit. We see this in the so-called Abenomics where Prime Minister Abe's economic policies, the so-called Three Arrows are potentially disastrous for Japan. Prime Minister Abe was presented with a fantastic opportunity to remake Japan and have her again challenge the world, instead he chickened out, putting a rope around Japan's neck while making her stand on a wobbly chair amidst a chaotic, soapy floor...we all know how this will turnout.
Prime Minister Abe listened to Japanese businesses who wanted the easy way out (devaluing yen) rather than having to compete globally as this would have required many of these companies to fully restructuring their businesses. In response, Abe pushed forward with a plan to drive down the yen by easing monetary policy (i.e., printing money or creating digital credits as they do today) and hoping to stoke inflation (as though that were a good thing). After those two "arrows" were in place, he had hoped to push through some critical economic reforms.
This was very, very poorly played.
By weakening the yen, at the very same time that Japan was experiencing record fuel imports (due to the shut down of the country's nuclear reactors), all that was accomplished was a short-term shifting of non-sustainable profits to the exporters while shifting
the cost of the increased imports (vis-a-vis the weaker yen) onto consumers. Lastly, I can guarantee you that the very structural changes which Japan needs the most won't be proposed and even if they are proposed, they will either be stomped out or be so thoroughly neutered as to be ineffective.
V What Would Have Been The Smart Play & What Really Ails Japan?
The smart play would have been to keep the yen strong -- let it stay there -- then, simply work to encourage Japanese firms to engage in heavy non-yen foreign-based M&A. This would driven down the yen (which is what exporters want) but Japanese firms would have been holding foreign-based non-yen denominated assets and since the Japanese need to improve their global operations, much of that strong yen could have been used to purchase the critical training and know-how needed, again trading a strong yen for non-yen denominated training and knowledge.
By combining this overseas asset purchase spree with the increased energy imports, the yen would have still been devalued (albeit more slowly), however, Japan would be holding foreign assets and exporters would quickly understand from the fierce discipline meted out by the market, that they needed to improve their operational effectiveness and efficiency and not simply rely on a "cheap yen".
The next step would be to understand that Japan's current business environment is full of deadwood and heavy overgrowth. This deadwood and undergrowth needs to be cleared out and the way to do that is make the Japanese economy at a minimum neutral to if not lovingly-biased towards startups. Once in place, an army of these startups would begin to nip at the incumbents' heels prodding even the most obtuse or ossified of firms to retool and restructure. Eventually those firms that couldn't compete or refused to compete (and yes, there are some very stubbornly obtuse and ossified firms in Japan) would be killed, eaten and composted with their ashes and assets, talent and IP being quickly recycled and allowed to blow with the winds across the Japan business community.
It would also ensure that Japanese successes (and failures) are kept in Japan. Currently, due to the lack of a vibrant startup ecosystem, when big ossified Japanese firms stumble and fall or implode, it is the foreign firms that benefit and end up eating the Japanese firms bento box. For example, Apple benefited (iPod, iTunes) from Sony's stumbles as did Samsung from both Panasonic's and Sony's travails (actually it could be said that these firms, Panasonic and Sony, fell flat on their collective faces).
Don't fool yourself into believing that this concept I'm proposing is somehow unique -- it isn't. It's a plain vanilla, common sense concept and this is actually what the US in general and Silicon Valley in particular does so well.
Compete, kill, eat, compost, spread the ashes and recycle....
In US tech regions in general, and in Silicon Valley in particular, there is fierce intra-industry competition where firms are wiped out and crushed on a daily basis until a victor stands tall and dominates the industry. Only to have it happen again as this new victor is mercilessly pummeled and cut down. The names may change, but the winners are almost always American.
Well, how about computers and the computer industry?
ENIAC, UNIVAC, Wang, DEC, IBM, Eagle Computers, Kaypro, Osborne, Compaq, Tandem, Dell, HP and so on.
See any patterns?
Do the same for chips, for databases and so on.
In fact, just about the only area in the US where you won't find this fierce intra-industry competitiveness is where the US government has intervened and distorted the market (e.g, labor, regulations, pricing, etc.). This primarily occurs when rent-seeking incumbents engage in the regulatory capture of markets.
This is why the US auto industry was wrecked -- regulatory capture and regulations hobbled and harmed it, until foreign competition like the Japanese and Germans crushed the US domestics. Were it not for the US governments over regulation of the automotive industry, we would have seen many automotive startups begin to form and then compete with and eventually force the obtuse and ossified US automotive giants to change, piston by piston, engine block by engine block. crankshaft by crankshaft..
Those firms that refused to change or couldn't change would be slaughtered and then composted.
And this is exactly what Japan faces as its number one problem.
The endemic regulatory capture in Japan needs to be eliminated. Beyond that, entrepreneurs face serious hurdles with capital accumulation and company formation along with facing very serious (although it's getting better) social, financial and career risks.
From this there are even further knock-on effects whereby mid-hires or hires from direct competitors only happen rarely in Japan and often when these types of hiring occur it's driven by the Gaishikei, the so-called foreign-capital firms (think: Microsoft, Oracle, Altera, Coach, Starbucks, McDonalds, etc.). This refusal to hire mid-career talent effectively prevents individual risk taking as well as precludes intra-industry and cross-industry cross-pollination.
All of this greatly dampens an entrepreneur's appetite for risk. Interestingly enough, though, Korean and Chinese firms have begun to hire mid-hires as well as very talented "early-retired" or "moth-balled" Japanese executive and engineers.
A vibrant, healthy and properly functioning labor market will exhibit strong labor mobility - for the most part Japan doesn't have labor mobility although it has made huge changes in the last 19 years and even more so in the last 4 years -- but it still has a long way to go.
By making these structural changes, primarily with adjustments to various regulations and some tax reforms to favor capital accumulation and company formation, Japan could rocket upwards by unleashing her creative, innovative people and giving them the opportunity not only to productize but more importantly to monetize their efforts.
This would most likely mean that many of the big Japanese brands that we know today would wither away (assuming they refuse to or can't modernize and compete) but this is no different than what we've seen happen in the US' relatively more vibrant economy.
As it stands now, Japan's obtuse and ossified incumbents are more than happy to go down with the ship and they apparently have no qualms about taking the entire workforce and nation with them.
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