Companies and Markets Unraveled by Hiroki Matsushita's Value, Discovering the Grounds for Companies That Continuously Create Value
Recently, there has been a salon (newsletter) that has been attracting more and more customers, and after revisiting the salon's information page and article content, I couldn’t help but think, “I see! With this content, I would want to read it.”
That salon’s organizer is Hiroki Matsushita of Aurea Lotus Co., Ltd., who researches and continually publishes methodologies for identifying companies that can continually increase value.
Hiroki Matsushita is,
In 1987, he joined Citicorp Smith Barney (now Citigroup) Securities as a sales professional for Japanese stocks and yen-denominated convertible bonds.
At BNP Paribas Securities (now BNP Paribas) and WestLB Securities, he served as a bond strategist for European and U.S. bonds, covering institutional investors.
In 1997, he returned to Japan and worked as a foreign equity fund manager & analyst at Dai-ichi Life Investment Management (now DIAM Asset Management).
In 2001, he joined the non-accounting team at Asahi (now Azsa) Audit Corporation, where he conducted compliance checks on performance standards according to asset-management company structures and performed due diligence on individual funds.
In 2002, he moved to Hong Kong and joined Value Partners, led by a CIO hailed as the Warren Buffett of Asia, as a fund manager & analyst for Asian equities including Japanese stocks…
For more detailed career history, here is Understanding Companies and Markets through Value
Just by looking at his career history, you can see how remarkable it is, but value investing—the method Warren Buffett practices with Munger at Berkshire Hathaway— is what he emphasizes.
From Mr. Matsushita’s articles, you can see that he practices value investing—the analytical method for locating companies that continually increase value—and investors can obtain techniques for evaluating companies at his seminars and salons. I thought so.
This salon sends about three articles per month, and in the January 6 issue, the companies cited as ones creating value with solid grounds were Daikin, a major air-conditioner maker that adopted a strategy of globally publishing its air-conditioning patents to expand the market, and Nidec, which effectively leverages intellectual-property litigation against competitors to establish a dominant position in the motor market.
These two companies are described as value-investment candidates whose enterprise value has been boosted by the architecture (the structure of the strategy, one might say) Matsushita talks about, and whose stock prices are expected to rise in the future.
We are making this issue fully available, so why not consider incorporating the wisdom of value investing into your investment approach?
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January 2020 No.1 “About Value Creation and Innovation”
2020/01/06 09:24
To everyone subscribing to this newsletter, Happy New Year.
We look forward to your continued support this year.
With that, this is the first newsletter of the new year,
and since 2020 is starting now, I’d like to discuss value investing from a slightly different angle—innovation.
First, where does innovation come from in the first place?
Some people imagine it as breakthroughs brought about by entirely new cutting-edge technology, but that’s not quite right.
Wikipedia describes innovation as a “new fusion,” “new axis,” “new viewpoint,” “new way of thinking,” or “new method,” but the definition explained by the famous management theorist Peter Drucker is, “the ability to create wealth by applying it to existing resources.”
In other words, innovation is not about creating something from zero.
The individual elements or assets that form a new combination aren’t themselves new; what must be new is the combination itself. Through the fusion of knowledge and knowledge, the ability to create wealth, to generate value from existing assets.
The same concept applies to corporate value creation in management; for example, Daikin discussed in the December issue had, due to weak capital strength and lacking sales channels tied to large electronics manufacturers like Panasonic or Mitsubishi, to go directly to strong retail chains with sales power that were just beginning to grow, thereby quickly taking market share and rising to the top.
In the case of China’s market expansion strategy, by partnering with Gree Electric, Daikin chose to partly license its core technology—an open strategy. At that time, China’s household air-conditioner market was overwhelmingly non-inverter, so the decision was made to shift the market by partnering with Gree, the top household air-conditioner company in China and worldwide.
This alliance rapidly advanced China’s inverter adoption—from about 7% at the time of the partnership in 2008 to over 70% today, a tenfold increase. Daikin’s high-quality, high-value-added, high-priced air conditioners helped establish a de facto standard, driving sales growth.
In July of this year, it declared non-use of patents for its R32 refrigerant (HFC-32), used in standalone air-conditioning units. The company had previously opened the R32 patent worldwide in 2015, but required individual contracts with Daikin. By eliminating the need for written contracts, they aim to promote worldwide adoption of R32, which has a lower warming impact compared with conventional refrigerants.
There are about 270 patents involved, and this refrigerant’s global warming potential is about one-third that of the conventional refrigerant R410A. By international standardization of their developed refrigerant, they aim to maximize their corporate value within this environmentally responsive trend.
So, first, I’ve set out the definition of innovation.
I’d like to cover one more concept this time as well.
Regarding the stricter trade controls with Korea, Japan is particularly strong in functional materials and precision components compared to other nations.
The deeper upstream you go, the stronger it becomes; materials and components held almost exclusively by Japanese manufacturers are not rare. Even as demand booms with semiconductors becoming finer, these oligopolies persist, and the oft-cited reason for this strength is the “architecture theory.”
Architecture refers to how a product’s components and processes are allocated to realize the product’s function and how interfaces between parts and processes are designed. Architecture can be categorized as integral or modular.
“Process architecture” refers to linking required functions with production processes; especially for functional materials and high-precision parts, unlike generic materials, each process must be integrated and managed in coordination with others—this is “fit coordination” or integral-type—an approach highly compatible with the organizational capabilities nurtured by Japanese manufacturers.
Integral-type products have a highly interwoven relationship between functions and components, and all parts interlock to deliver the total system’s performance. In such products, functions and parts aren’t a one-to-one relationship; they are many-to-many, requiring close coordination with other parts during design, so the art of fit coordination greatly influences product completeness.
In manufacturing integral-type products, one must consider the “how to connect” across each design phase—the process flow, layout, and material flow. To realize the functions required for each use, most of the equipment must be produced in-house, enabling overall optimization.
On the other hand, modular-type products are assembly-based; their defining feature is that the relationship between functions and parts is close to one-to-one, each part has self-contained functionality, parts are highly independent, and interfaces are simple. By omitting interpart协调, products can be developed through clever assembly.
Materials that can be obtained simply by buying and assembling existing equipment are “assembly-type.” Commodities in this sense, such as materials that can be produced with standard plant equipment, are the so-called commodity chemicals. In automotive production, for example, components (doors, air conditioning, etc.) are grouped into modules (sub-assemblies) and assembled to complete the product; modules can also be swapped. This is modular-type production (though automobile technology development itself is not modular). Equipment industries tend toward assembly-type or modular-type approaches.
fundamentally, postwar Japanese manufacturers’ competitiveness in assembly-type materials arises from teamwork and meticulous management methods honed under shortages of people, materials, and money. Of course, this alone does not guarantee leadership; highly pure functional chemicals—11N or 12N (99.9999999999%)—require exceptionally difficult plants to operate, and only with high technical and development prowess can this be achieved. Yet Japanese organizational structure and management tend to favor integral-type advantages.
For example, in LCD panels and semiconductors, Japanese manufacturers’ positions have gradually weakened while Korean and Taiwanese firms have risen; however for materials—especially upstream materials—Japanese manufacturers still hold strong shares. For example, in polarizing films used in LCDs, Nippon Seifun Group’s NichiDen Tohk? (Nitto Denko) controls 42% globally, and CLARE, which produces PVA films for polarizers, holds about 85% of the world share, with two Japanese manufacturers jointly monopolizing the market.
Market oligopoly gives suppliers a strong bargaining position in price negotiations. As equipment markets expand, demand for components grows sharply, and in a rising market it would seem new entrants should flourish, but with diverse components, a handful of manufacturers dominate niche areas, and this trend has intensified with increasing sophistication.
Why do these positions persist and why are the barriers to entry so high? First, the decades of manufacturing know-how and process expertise are hard for others to imitate. Second, and crucially, the market sizes for individual components are not large, meaning there is little scale merit. Also, once a component is adopted by an equipment maker, certification is needed for any substitute, among other factors.
Generally, product architecture and organizational architecture tend to mirror each other.
Therefore, integral-type products benefit from vertically integrated organizations that can produce major components in-house, while modular-type products operate effectively with a horizontally split supply chain that relies on external procurement. To manufacture one finished product, many component manufacturers participate in international division of labor.
As a result, companies whose organizations fit modular-type products often face severe difficulties when technology evolves toward greater integral architecture; this is called the modularity trap.
If a company remains a horizontal-split organization even as the product’s integral degree rises, coordinating between parts and processes becomes difficult and it cannot respond well to technological innovation. This is the modularity trap.
Japanese Electric Products Company (Japan Electric Motors & something) has fought this strategically by leveraging the architecture. Since its founding 46 years ago, it is a maker of industrial motors, with numerous globally niche-leading products in precision small motors.
Like Daikin, about 80% of its sales are overseas.
To illustrate how this architecture has been used strategically, let’s look at the history of HDD motors, a core area.
From 1990–1997, MR heads were adopted in HDDs, and conductive properties were added to HDD motors, raising the internal structural integral degree of both the product and its applications.
In response, Japan’s Nichiden? envisioned a Made-in-Market approach to product supply, and followed HDD drive manufacturers’ shift to Asia. They opened plants in Thailand in 1991, 1993, and 1995, and expanded to the Philippines in 1996, unlike competitors who kept their manufacturing in a single location. This improved information gathering about drive manufacturers, enabling tighter product coordination and appropriate response to integral-degree increases.
In contrast, from 1998 to around 2000, as the internal structure of products used by end products became less integral, modularization advanced and product differentiation became difficult, intensifying price competition. The industry’s average HDD motor price fell from the $8 range to the $5 range, and competitors such as TDK and Samsung left the market. Japan’s Nidec acquired Seagate’s motor division to pursue horizontal integration, expanding production scale and market share and strengthening price responsiveness.
When differentiation becomes difficult and price competition intensifies, scale economies begin to work. Therefore, horizontal integration via M&A makes rational sense.
Moreover, this M&A was not just about scale; it also aimed to acquire next-stage technologies—like dynamic bearing motors and mass-production techniques for Seagate’s server hard-drive motors—and, in the same period, two other companies with bearing-processing capabilities, Shinpo Kogyo and Tosoku, were acquired to complement horizontal and vertical integration.
In 2001–2004, as a new technology emerged, product integral degree rose again. Motor makers shifted from ball bearings to dynamic bearings, and Nippon Denso anticipated this by purchasing Shinpo and Tosoku, pursuing vertical integration, and forming a joint venture with Kosan Kogyo to manufacture ball bearings in-house—establishing a dual focus on bearing motors and dynamic bearing motors.
At that time, Minibear, the main competitor, introduced a ball-bearing integrated motor leveraging its strength as a ball-bearing producer. Denso then shifted to dynamic bearing motors to counter this strength, with Seagate’s mass-production technology proving effective.
As a result, the market gradually shifted from ball-bearing motors to dynamic bearing motors, and Minibear found itself compelled to switch to dynamic bearing motors without ball bearings.
Although Minibear maintained the second-largest industry share, its divisional earnings remained tough. Denso had intentionally trapped Minibear in the modularity trap by developing and internalizing the essential technologies for dynamic bearing motors, depriving them of the ability to compete.
Minibear’s preparation of a dedicated dynamic bearing factory came later, as they had hoped to preserve ball bearings; Denso’s strategic innovation and entrapment of competitors via modularity played a pivotal role.
From 2005 onward, through about 2007, once dynamic bearing motors became standard, integral degree declined. Denso used a dual strategy of low pricing and intellectual property (IP) tactics against rivals like Minibear to squeeze them out of the market.
First, for the new product—dynamic bearing motors—Denso implemented periodic, steady price-cut strategies to gradually capture market share. Then, it took a stake in one rival, Sanjo (?) Seiki, to advance horizontal integration, thereby mitigating patent-infringement risks from Sanjo and using the IP to pursue patent-infringement lawsuits against rivals Minibear and Victor (Nippon Victor).
This patent strategy gradually wore down rivals’ development departments. As a niche top, from the perspective of the main rivals, the motor division’s relatively small market and sales meant lower corporate image when it faced lawsuits, leading to less aggressive action and, ultimately, a drop in market share. That is the strategist’s forte in action.
The HDD market share of 85% was achieved through such efforts.
In 2008, as HDD recording methods shifted to vertical magnetic recording, the quality demands on motors rose further. Drive makers began enforcing stricter dust and gas control on motors, pushing toward base-plate integrated motors, i.e., higher integral degree. Denso responded by acquiring Brilliant, a base-plate company, to push vertical integration and strengthen the ability to create base-integrated motors.
Thus, even for a company with a strong integral-type strategy in precision components, the ability to adapt to innovation and market stages by understanding product architecture and using it strategically increased its competitive edge.
Now, returning to the earlier discussion of innovation.
Daikin’s case represents an ecosystem in terms of a business model.
The term ecosystem, literally translated as an ecological system, in management strategy refers to a cluster of companies whose value propositions combine to create a collectively competitive external offering.
It can also describe scenarios like M&A, joint ventures, or direct trading relationships, but more broadly it refers to looser alliances and value-creation networks where the layers within the network mutually generate virtuous cycles of value.
In the value chain, leveraging others’ strengths and capabilities can be Daikin’s asset, such as leveraging growth in home electronics retailers’ reach as a strength.
Customers evaluate not only each layer’s value but also the combined value created by the ecosystem, and the synthesized total value offers a higher competitive edge than any single component.
When you apply the ecosystem to corporate value creation,
investments are needed to generate future FCF, but they must be directed toward value creation rather than short-term gains; shrinking investments in non-core assets improves ROIC, so the rise of shared economies and fabless models makes sense.
Therefore, becoming lean while leveraging the network to lock in customer loyalty is key to maximizing value creation.
In the past, companies grew large by excluding others, pursuing stand-alone dominance and outsourcing exploitation—from sub-contractors and suppliers, enjoying economies of scale. Today, that approach is a poor strategic move in terms of capital efficiency, and barriers to entry have diminished their advantage in scale.
Japan still clings to this logic to some extent, often focusing solely on technical and product strengths as entry barriers, without considering the business-model approach mentioned earlier and continuing to push for standalone efforts.
Meanwhile, integral-type strategies excel when internal development and production are integrated in-house. The more niche the market, the more stand-alone high-tech is forced to be preserved, which can run counter to innovation’s logic (though this is only a tendency; not always the case). The debate about why innovation is harder to create in Japan is often a trade-off with Japan’s competitive advantages.
And, when profits from ecosystems compound,
each layer benefits from the ecosystem’s advantages (network externalities); the bigger and stronger the provider’s brand, the greater the benefits for the layers, making it a Win-Win rather than a monopolistic exploitation. Conversely, smaller players can often leverage the system more freely to create value with lower capital costs.
Of course, it depends on the ecosystem’s form; franchising is one form of an ecosystem, but in supply-chain models with regional dominance, exploitative logic can creep in, as explained earlier.
Finally, among Drucker’s ideas on innovation, I personally like container transportation the most as an example of innovation that increases wealth from existing resources.
When the speed race in sea freight intensified and people rushed to develop faster ships, the focus shifted not to ship speed but to the goods—packing them into standardized containers, which radically transformed global logistics and dramatically boosted productivity.
The invention of the steam engine was a technical breakthrough, but not an innovation per se.
Building steam locomotives with steam engines is also a technical innovation, but not an innovation per se.
True innovation occurred when the railway system itself enabled customers to ride trains and pay for transport, thereby moving the economy. Innovation happens only when the economy moves.
So, I’ve digressed a bit, but that’s all for today.
We look forward to your continued support this year.
With that, this is the first newsletter of the new year,
and since 2020 is starting now, I’d like to discuss value investing from a slightly different angle—innovation.
First, where does innovation come from in the first place?
Some people imagine it as breakthroughs brought about by entirely new cutting-edge technology, but that’s not quite right.
Wikipedia describes innovation as a “new fusion,” “new axis,” “new viewpoint,” “new way of thinking,” or “new method,” but the definition explained by the famous management theorist Peter Drucker is, “the ability to create wealth by applying it to existing resources.”
In other words, innovation is not about creating something from zero.
The individual elements or assets that form a new combination aren’t themselves new; what must be new is the combination itself. Through the fusion of knowledge and knowledge, the ability to create wealth, to generate value from existing assets.
The same concept applies to corporate value creation in management; for example, Daikin discussed in the December issue had, due to weak capital strength and lacking sales channels tied to large electronics manufacturers like Panasonic or Mitsubishi, to go directly to strong retail chains with sales power that were just beginning to grow, thereby quickly taking market share and rising to the top.
In the case of China’s market expansion strategy, by partnering with Gree Electric, Daikin chose to partly license its core technology—an open strategy. At that time, China’s household air-conditioner market was overwhelmingly non-inverter, so the decision was made to shift the market by partnering with Gree, the top household air-conditioner company in China and worldwide.
This alliance rapidly advanced China’s inverter adoption—from about 7% at the time of the partnership in 2008 to over 70% today, a tenfold increase. Daikin’s high-quality, high-value-added, high-priced air conditioners helped establish a de facto standard, driving sales growth.
In July of this year, it declared non-use of patents for its R32 refrigerant (HFC-32), used in standalone air-conditioning units. The company had previously opened the R32 patent worldwide in 2015, but required individual contracts with Daikin. By eliminating the need for written contracts, they aim to promote worldwide adoption of R32, which has a lower warming impact compared with conventional refrigerants.
There are about 270 patents involved, and this refrigerant’s global warming potential is about one-third that of the conventional refrigerant R410A. By international standardization of their developed refrigerant, they aim to maximize their corporate value within this environmentally responsive trend.
So, first, I’ve set out the definition of innovation.
I’d like to cover one more concept this time as well.
Regarding the stricter trade controls with Korea, Japan is particularly strong in functional materials and precision components compared to other nations.
The deeper upstream you go, the stronger it becomes; materials and components held almost exclusively by Japanese manufacturers are not rare. Even as demand booms with semiconductors becoming finer, these oligopolies persist, and the oft-cited reason for this strength is the “architecture theory.”
Architecture refers to how a product’s components and processes are allocated to realize the product’s function and how interfaces between parts and processes are designed. Architecture can be categorized as integral or modular.
“Process architecture” refers to linking required functions with production processes; especially for functional materials and high-precision parts, unlike generic materials, each process must be integrated and managed in coordination with others—this is “fit coordination” or integral-type—an approach highly compatible with the organizational capabilities nurtured by Japanese manufacturers.
Integral-type products have a highly interwoven relationship between functions and components, and all parts interlock to deliver the total system’s performance. In such products, functions and parts aren’t a one-to-one relationship; they are many-to-many, requiring close coordination with other parts during design, so the art of fit coordination greatly influences product completeness.
In manufacturing integral-type products, one must consider the “how to connect” across each design phase—the process flow, layout, and material flow. To realize the functions required for each use, most of the equipment must be produced in-house, enabling overall optimization.
On the other hand, modular-type products are assembly-based; their defining feature is that the relationship between functions and parts is close to one-to-one, each part has self-contained functionality, parts are highly independent, and interfaces are simple. By omitting interpart协调, products can be developed through clever assembly.
Materials that can be obtained simply by buying and assembling existing equipment are “assembly-type.” Commodities in this sense, such as materials that can be produced with standard plant equipment, are the so-called commodity chemicals. In automotive production, for example, components (doors, air conditioning, etc.) are grouped into modules (sub-assemblies) and assembled to complete the product; modules can also be swapped. This is modular-type production (though automobile technology development itself is not modular). Equipment industries tend toward assembly-type or modular-type approaches.
fundamentally, postwar Japanese manufacturers’ competitiveness in assembly-type materials arises from teamwork and meticulous management methods honed under shortages of people, materials, and money. Of course, this alone does not guarantee leadership; highly pure functional chemicals—11N or 12N (99.9999999999%)—require exceptionally difficult plants to operate, and only with high technical and development prowess can this be achieved. Yet Japanese organizational structure and management tend to favor integral-type advantages.
For example, in LCD panels and semiconductors, Japanese manufacturers’ positions have gradually weakened while Korean and Taiwanese firms have risen; however for materials—especially upstream materials—Japanese manufacturers still hold strong shares. For example, in polarizing films used in LCDs, Nippon Seifun Group’s NichiDen Tohk? (Nitto Denko) controls 42% globally, and CLARE, which produces PVA films for polarizers, holds about 85% of the world share, with two Japanese manufacturers jointly monopolizing the market.
Market oligopoly gives suppliers a strong bargaining position in price negotiations. As equipment markets expand, demand for components grows sharply, and in a rising market it would seem new entrants should flourish, but with diverse components, a handful of manufacturers dominate niche areas, and this trend has intensified with increasing sophistication.
Why do these positions persist and why are the barriers to entry so high? First, the decades of manufacturing know-how and process expertise are hard for others to imitate. Second, and crucially, the market sizes for individual components are not large, meaning there is little scale merit. Also, once a component is adopted by an equipment maker, certification is needed for any substitute, among other factors.
Generally, product architecture and organizational architecture tend to mirror each other.
Therefore, integral-type products benefit from vertically integrated organizations that can produce major components in-house, while modular-type products operate effectively with a horizontally split supply chain that relies on external procurement. To manufacture one finished product, many component manufacturers participate in international division of labor.
As a result, companies whose organizations fit modular-type products often face severe difficulties when technology evolves toward greater integral architecture; this is called the modularity trap.
If a company remains a horizontal-split organization even as the product’s integral degree rises, coordinating between parts and processes becomes difficult and it cannot respond well to technological innovation. This is the modularity trap.
Japanese Electric Products Company (Japan Electric Motors & something) has fought this strategically by leveraging the architecture. Since its founding 46 years ago, it is a maker of industrial motors, with numerous globally niche-leading products in precision small motors.
Like Daikin, about 80% of its sales are overseas.
To illustrate how this architecture has been used strategically, let’s look at the history of HDD motors, a core area.
From 1990–1997, MR heads were adopted in HDDs, and conductive properties were added to HDD motors, raising the internal structural integral degree of both the product and its applications.
In response, Japan’s Nichiden? envisioned a Made-in-Market approach to product supply, and followed HDD drive manufacturers’ shift to Asia. They opened plants in Thailand in 1991, 1993, and 1995, and expanded to the Philippines in 1996, unlike competitors who kept their manufacturing in a single location. This improved information gathering about drive manufacturers, enabling tighter product coordination and appropriate response to integral-degree increases.
In contrast, from 1998 to around 2000, as the internal structure of products used by end products became less integral, modularization advanced and product differentiation became difficult, intensifying price competition. The industry’s average HDD motor price fell from the $8 range to the $5 range, and competitors such as TDK and Samsung left the market. Japan’s Nidec acquired Seagate’s motor division to pursue horizontal integration, expanding production scale and market share and strengthening price responsiveness.
When differentiation becomes difficult and price competition intensifies, scale economies begin to work. Therefore, horizontal integration via M&A makes rational sense.
Moreover, this M&A was not just about scale; it also aimed to acquire next-stage technologies—like dynamic bearing motors and mass-production techniques for Seagate’s server hard-drive motors—and, in the same period, two other companies with bearing-processing capabilities, Shinpo Kogyo and Tosoku, were acquired to complement horizontal and vertical integration.
In 2001–2004, as a new technology emerged, product integral degree rose again. Motor makers shifted from ball bearings to dynamic bearings, and Nippon Denso anticipated this by purchasing Shinpo and Tosoku, pursuing vertical integration, and forming a joint venture with Kosan Kogyo to manufacture ball bearings in-house—establishing a dual focus on bearing motors and dynamic bearing motors.
At that time, Minibear, the main competitor, introduced a ball-bearing integrated motor leveraging its strength as a ball-bearing producer. Denso then shifted to dynamic bearing motors to counter this strength, with Seagate’s mass-production technology proving effective.
As a result, the market gradually shifted from ball-bearing motors to dynamic bearing motors, and Minibear found itself compelled to switch to dynamic bearing motors without ball bearings.
Although Minibear maintained the second-largest industry share, its divisional earnings remained tough. Denso had intentionally trapped Minibear in the modularity trap by developing and internalizing the essential technologies for dynamic bearing motors, depriving them of the ability to compete.
Minibear’s preparation of a dedicated dynamic bearing factory came later, as they had hoped to preserve ball bearings; Denso’s strategic innovation and entrapment of competitors via modularity played a pivotal role.
From 2005 onward, through about 2007, once dynamic bearing motors became standard, integral degree declined. Denso used a dual strategy of low pricing and intellectual property (IP) tactics against rivals like Minibear to squeeze them out of the market.
First, for the new product—dynamic bearing motors—Denso implemented periodic, steady price-cut strategies to gradually capture market share. Then, it took a stake in one rival, Sanjo (?) Seiki, to advance horizontal integration, thereby mitigating patent-infringement risks from Sanjo and using the IP to pursue patent-infringement lawsuits against rivals Minibear and Victor (Nippon Victor).
This patent strategy gradually wore down rivals’ development departments. As a niche top, from the perspective of the main rivals, the motor division’s relatively small market and sales meant lower corporate image when it faced lawsuits, leading to less aggressive action and, ultimately, a drop in market share. That is the strategist’s forte in action.
The HDD market share of 85% was achieved through such efforts.
In 2008, as HDD recording methods shifted to vertical magnetic recording, the quality demands on motors rose further. Drive makers began enforcing stricter dust and gas control on motors, pushing toward base-plate integrated motors, i.e., higher integral degree. Denso responded by acquiring Brilliant, a base-plate company, to push vertical integration and strengthen the ability to create base-integrated motors.
Thus, even for a company with a strong integral-type strategy in precision components, the ability to adapt to innovation and market stages by understanding product architecture and using it strategically increased its competitive edge.
Now, returning to the earlier discussion of innovation.
Daikin’s case represents an ecosystem in terms of a business model.
The term ecosystem, literally translated as an ecological system, in management strategy refers to a cluster of companies whose value propositions combine to create a collectively competitive external offering.
It can also describe scenarios like M&A, joint ventures, or direct trading relationships, but more broadly it refers to looser alliances and value-creation networks where the layers within the network mutually generate virtuous cycles of value.
In the value chain, leveraging others’ strengths and capabilities can be Daikin’s asset, such as leveraging growth in home electronics retailers’ reach as a strength.
Customers evaluate not only each layer’s value but also the combined value created by the ecosystem, and the synthesized total value offers a higher competitive edge than any single component.
When you apply the ecosystem to corporate value creation,
investments are needed to generate future FCF, but they must be directed toward value creation rather than short-term gains; shrinking investments in non-core assets improves ROIC, so the rise of shared economies and fabless models makes sense.
Therefore, becoming lean while leveraging the network to lock in customer loyalty is key to maximizing value creation.
In the past, companies grew large by excluding others, pursuing stand-alone dominance and outsourcing exploitation—from sub-contractors and suppliers, enjoying economies of scale. Today, that approach is a poor strategic move in terms of capital efficiency, and barriers to entry have diminished their advantage in scale.
Japan still clings to this logic to some extent, often focusing solely on technical and product strengths as entry barriers, without considering the business-model approach mentioned earlier and continuing to push for standalone efforts.
Meanwhile, integral-type strategies excel when internal development and production are integrated in-house. The more niche the market, the more stand-alone high-tech is forced to be preserved, which can run counter to innovation’s logic (though this is only a tendency; not always the case). The debate about why innovation is harder to create in Japan is often a trade-off with Japan’s competitive advantages.
And, when profits from ecosystems compound,
each layer benefits from the ecosystem’s advantages (network externalities); the bigger and stronger the provider’s brand, the greater the benefits for the layers, making it a Win-Win rather than a monopolistic exploitation. Conversely, smaller players can often leverage the system more freely to create value with lower capital costs.
Of course, it depends on the ecosystem’s form; franchising is one form of an ecosystem, but in supply-chain models with regional dominance, exploitative logic can creep in, as explained earlier.
Finally, among Drucker’s ideas on innovation, I personally like container transportation the most as an example of innovation that increases wealth from existing resources.
When the speed race in sea freight intensified and people rushed to develop faster ships, the focus shifted not to ship speed but to the goods—packing them into standardized containers, which radically transformed global logistics and dramatically boosted productivity.
The invention of the steam engine was a technical breakthrough, but not an innovation per se.
Building steam locomotives with steam engines is also a technical innovation, but not an innovation per se.
True innovation occurred when the railway system itself enabled customers to ride trains and pay for transport, thereby moving the economy. Innovation happens only when the economy moves.
So, I’ve digressed a bit, but that’s all for today.
Written by Hayakawa
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