The Essence of Japan's Plight.

• Author: Katz, Richard

Different technological regimes give rise to--and require--different business institutions. When the circumstances change, so must the institutions. If not, then yesterday's strengths become today's weaknesses. Superstar trend-setters like Sony or Sears devolve into also-rans or outright failures, and a country's economic growth erodes. This, unfortunately, is Japan's plight: a failure of its business institutions to make the needed adjustments from the analog era to the today's digital world.

Among thirty-four rich countries, Japan ranked a dismal twenty-fifth in overall digital competitiveness in 2020, according to the IMD World Competitiveness Center. To be sure, Japanese companies spend plenty on information and communications technology. Their problem is that they get less bang for the yen. Japan ranks fifty-sixth among all countries in "business agility," which measures how well they use ICT.

Most Japanese companies use these new technologies primarily to cut costs by automating tasks that people are already doing, such as inventory control or intra-company communications. What makes ICT revolutionary, however, is that it enables entities to do things that they could not do before at any cost. This includes not just the ability to reach far more customers and suppliers via e-commerce, but also using so-called "big data" and the "internet of things" to develop new products, improve old products, and increase sales of existing products. UPS, for example, has sensors built into every parcel delivery truck to monitor conditions such as temperature and stress that typically precede a part breaking down. This avoids the expensive mechanical failure of a truck filled with parcels. Nissan has put similar sensors into its Leaf cars.

Even small companies can benefit. When a grocery store in Finland used ICT to analyze customer purchases, they found to their surprise that, on weekends, the same buyers hiked their purchases of both diapers and beer. New parents compelled to stay home wanted to enjoy beer while watching a movie on television. The store improved sales just by putting beer next to the diapers on the shelves. Without "big data," they never could have discovered this pattern. Similarly, Procter & Gamble discovered that customers were not using the right amount of laundry detergent and so developed laundry pods, now a bestseller.

If used well, ICT should enable the ICT-using sectors of the economy--distribution, services, non-ICT manufacturing, and so forth--to raise their...