GLOBALISATION CHAPTER 1 51 a. Consider Boeing’s decision to outsource much of the production of the Dreamliner 787. What benefts does this strategy offer? What are the drawbacks? Discuss. b. How has globalisation made Boeing’s approach to the production of the Dreamliner possible? 10. CASE ANALYSIS Read the following Closing Case and answer the questions that follow. Elm Inc.: The globalisation of a rural company Professor Makoto Kanda, Meiji Gakuin University Small to medium-sized enterprises (SMEs) are not smaller versions of multinational corporations (MNCs)—they face limitations in resources and manpower. Therefore, even under ideal conditions, SMEs can fnd it challenging to globalise. However, this can be further confounded if the frm is located in a rural area where there is little industrial infrastructure. Elm Inc. (Elm) is one such SME located in the rural heartland of Kagoshima prefecture, Japan, that has overcome the limitations of its size and location to achieve global success. The company was founded in 1977 as Yaoki Electronics Inc. by engineering graduate Terumasa Miyahara, the younger of two brothers. He commenced the business after completing his studies in Osaka and returning to his rural hometown. The business had humble beginnings, starting with custom-made electronic appliances for Kagoshima Matsushita Electronics (KME, now Panasonic Semiconductor Solutions) to assist with streamlining KME’s factory automation. This contract with KME laid a solid foundation for the business. Terumasa not only gained a steady income and an opportunity to enhance his technical and operational knowledge; importantly, he gained the entrepreneurial acumen to operate a business successfully. In 1980, his elder brother Takakazu joined the business and together the two brothers founded Elm Inc. The name encompasses the words ‘electronics management’, ‘machine’, and mu (‘dream’ in Japanese), which defnes the domain and vision of the company. ‘I believe that division of labour between us is one of the secrets … to our success. My brother creates business ideas and I implement them. He is very good at fnding promising business’ says Terumasa. In the early years the brothers were very hands-on with their business—responsible for developing new products as the lead engineers within the company. However, over time they relinquished their engineering roles to focus on managing the frm—the elder brother is the president and the younger brother is the vice-president of the company. By 2015 they had 51 employees and a sales volume of 1.8 billion yen per annum. The founders’ vision for Elm is to be an innovative R&Doriented company that focuses on product development and original equipment manufacturing (OEM) for other companies. The frst product developed by the company in 1982 was a high-resolution receiving system for the Japanese weather satellite Himawari, for use by universities and research laboratories. The receivers were marketed by two large frms, Seiko Epson and Maspro Denkoh, via sales agreements. Other products developed by the company included semiconductor inspection equipment for KME. In 1987 it developed and automated a colour video checker that inspects 60 objects per second with a spectrum of 500 colours. In 1989 a joint ofce with Arikawa Kikoh was opened to market mechatronics products for factories by combining Arikawa’s mechanics and Elm’s electronics technologies. Elm achieved success by following this niche strategy and enjoyed steady growth for nearly a decade. Unfortunately, by the end of the 1980s Japan faced an economic downturn and demand for Elm’s products suffered. The economic downturn and the lack of demand for its products necessitated a change in strategy. The company required a market and clientele with a steady demand. Kagoshima prefecture is famous for its agriculture products. However, servicing the agriculture market in Japan is a challenge, since markets are too small to realise economies of scale. Undoubtedly there is a strong need for mechanisation and labour-saving equipment within this sector. Although it is not attractive for big companies to enter, the industry is perfect for a small company like Elm. In addition, there was a strong desire by the founders of Elm to make a positive contribution to their home prefecture’s (Kagoshima) farming sector. continued >PART 1 GLOBALISATION 52 The frst opportunity came in 1990, when they were tasked with mechanising the weighing and wrapping of kumquats, a popular local fruit. The wrapping was done by hand or semi-automatically. The new product weighs and wraps kumquats automatically in around eight seconds. The mechanism devised by Elm was unique and could be adapted to pack a variety of fruits and vegetables. Many inquiries from potential customers followed. The company soon signed a sales agreement in Japan with a subsidiary of Japan Tobacco Inc. Unsolicited offers for technical collaboration came from overseas, making the management aware of potential international markets. The foray into the global market came via a new product, ‘Yose-Tarou’. One of the president’s hobbies is growing orchids. To ensure success in growing the flowers he developed an automated window system for his glasshouse. It worked on the basis of detecting the wind direction and the speed of the wind by sounds. His other pastime was golf, and he had an idea to make a machine for practising approach shots. The methodology behind the system is for the golfer to hit his or her golf ball to a target. The machine uses the sound the ball makes when it hits the target to calculate the height, distance and trajectory to portray a realistic animation of the shot on a TV screen. The system was frst marketed in Japan in 1993. It was followed by a presentation at the US PGA exhibition as ‘Perfect Green’ with three models: putting, approaching and putting/approaching machines. In 1994 they started exporting to Korea via a Korean sales partner. Regrettably, their frst foray into the international market was not successful, but once again it raised the potential for targeting overseas markets. ‘We understood limitations of the Japanese market … The Kagoshima market represent only 1 per cent of Japan’s market and big cities like Tokyo are far away. Starting business with Korea made us realise that overseas markets are not too far … There isn’t a big difference in flying time to Korea and Tokyo’ (Takakazu Miyahara, President, Elm Inc.). In 1999 an acquaintance of the president brought in an idea of ‘doctor of CDs’. The company formed a project team headed by the president of the company. This laid the foundation for the optical disc repair machine. There are numerous rental shops for CDs and DVDs around the world, especially in countries where the options to download music and video are limited. A major problem which these shops face is scratches on the disc surface, resulting in discreading errors. The machine took two years to develop, because the company did not have the technology or knowhow for polishing CDs and DVDs automatically. Their frst machine, ‘EcoMaster,’ was able to repair fve discs simultaneously in two minutes, while the competitive products took 30 minutes by hand. Elm decided to market the product in 2001 via a sales agreement with Plenty Co. Ltd, the largest company in the disc-repair sales business. Elm also outsourced production to Fujita Works, a Kagoshima-based company. The product was introduced to the global market at the Consumer Electronics Show 2002 in Las Vegas. They received many sales offers during and after the event. Another outcome was the establishment of Elm-Digitalia with a Spanish partner in 2003 to service the European market, and an OEM agreement with Research Technology International (RTI) in the United States. RTI services the US and Australian markets. The computerised optical disc repair industry has changed Elm’s business model. Previously Elm operated as a hardware manufacturer, but repairs require supplies of consumables and quick response times. To minimise downtime, the machines are connected in real time via the internet with their service facilities. When a failure occurs, service staff are automatically notifed, facilitating speedy repairs and delivery of consumables just-in-time, enabling 5,000 discs a day Almost monoplised by the company Competitive, especially in the USA 50 discs a day EcoPro Manual machine EcoSmart Manual machine EcoSenior Semi-automatic machine EcoMaster High-speed Fully automatic machine EcoSuper Super-high-speed Fully automatic machine 20 discs a day 10 discs a day High end Low end Market structure and position of ElmGLOBALISATION CHAPTER 1 53 CLOSING CASE DISCUSSION QUESTIONS a. Successful SMEs such as Elm Inc. tend to target niche markets. Discuss the advantages of having a niche strategy. b. Explain the benefts to the frm and the region when a regionally based company such as Elm internationalises. c. What have been the key success factors for Elm? Do you think other SMEs can emulate their success? d. While SMEs can target global markets, it is difcult to remain successful in those markets. How can a frm such as Elm continue to succeed internationally? Discuss. ENDNOTES 1 www.csl.com.au/businesses accessed on 8 September 2015. 2 For trade statistics, see the databases of the World Trade Organization, www.wto. org; for foreign exchange statistics, see the Bank of International Settlements, www.bis.org on 10 September 2015. 3 M. Naim, ‘Globalization’, Foreign Policy, 171 (March/April 2009). 4 T. Friedman, The World Is Flat, New York: Farrar, Straus and Giroux, 2005. 5 Ibid. 6 T. Levitt, ‘The globalization of markets’, Harvard Business Review, May–June, 1983. 7 Interbrand, ‘Rankings, 2014’, accessed via www.bestglobalbrands.com/2014/ ranking on 11 September 2015. 8 A. Inkpen and K. Ramaswamy, ‘End of the multinational: the emerging markets redraw the picture’, The Journal of Business Strategy, 28(5) (2007); ZPMC, Company Information, accessed via www.zpmc.com/about.php on 15 January 2013. 9 See F.T. Knickerbocker, Oligopolistic Reaction and Multinational Enterprise, Boston: Harvard Business School Press, 1973; and R.E. Caves, ‘Japanese investment in the US: Lessons for the economic analysis of foreign investment’, The World Economy 16 (1993), pp. 279–300. 10 Australian Bureau of Statistics, Characteristics of Australian Exporters, 2013- 14, Cat. No. 5368.0, accessed via www.abs.gov.au/ausstats/[email protected]/ PrimaryMainFeatures/5368.0.55.006 on 10 September 2015. 11 AusIndustry, ‘Success Stories—Gekko Systems’, Australian Government, accessed via www.ausindustry.gov.au on 31 March 2007; ‘Gekko Footprint’, Gekko Systems, News Releases, accessed via www.gekkos.com/pages.php?page=2 on 15 January 2013. 12 US Department of Commerce, A Profle of U.S. Exporting and Importing Companies, 2009–2010, 12 April 2012, accessed via www.census.gov/foreign-trade/PressRelease/edb/2010/edbrel.pdf on 15 January 2013. 13 B. Benoit and R. Milne, ‘Germany’s best kept secret, how its exporters are beating the world’, Financial Times, 19 May 2006, p. 11. the rental shops to maintain their operations. Now they market both products and services. Elm has learned the differences between various national and international markets from its global expansion. For example, in Japan workers in a CD rental shop will read manuals and run the machine according to specifcations. If the machine stops, senior employees will try to fx it. However, in the US the culture of reading manuals and fxing machines is not the norm. The company has worked hard to engineer highly reliable products, and products that are easier to reboot if a fault occurs. Elm was an early entrant into the optical disc repair market with the ‘Ecomaster’. According to Takakazu Miyahara, the president and co-founder of the company, ‘Our product can repair the optical disc 50 times, while competing products only 5 times, because it is quite difcult to grind the surface of a disc accurately like a mirror’. In addition, it introduced a new cheaper machine, ‘EcoPro’, in 2010 to serve smaller shops and gain a greater market share. The company has a wide range of the grinding machines. Their top-of-the-range ‘EcoSuper’ machine can automatically repair up to 500 discs in a single batch; in comparison, most of their competitors’ machines can repair just one disc manually, per hour. Elm Inc. focuses on selling its optical disc repair machines to rental video shops and libraries in 32 countries. This strategy has enabled the company to capture over 80 per cent of the global market for disc repair devices. ‘The rental business of CD/DVDs will shrink in the near future because of the internet. We have to prepare for businesses other than the optical disc repair,’ says the president. Elm has already diversifed into other areas. It placed different types of LED lights for different uses on the market, which includes controlling the budding of chrysanthemums. Based on this technology Elm has developed ‘Aqua Fantasy’, an illumination system in the water using full-colour LED lights. The Hus Ten Bosch theme park in Kyushu Island introduced this system in its canal in 2014 and is entertaining customers. The president is in the process of marketing this system globally. By being innovative, nimble and adaptable to global market demand and conditions, Elm has planted the seed for future business success. (With special thanks to Takakazu Miyahara, president of Elm Inc., and Terumasa Miyahara, vice-president, for their insights about doing business successfully in a globalised world.)