The Response Strategies of Dominant US Firms to Japanese Challengers

Journal of Management 2003 29(1) 5–25

The Response Strategies of Dominant US Firms to Japanese Challengers H. Donald Hopkins∗ Fox School of Business and Management, Temple University, 362 Speakman Hall, Philadelphia, PA 19122, USA Received 5 March 2000; received in revised form 12 September 2001; accepted 18 January 2002

Six case studies are used to examine the response strategies of dominant US firms to the entry of Japanese challengers into their domestic industries. This study examines the question of whether it is better to respond quickly with individual competitive responses or wait until a broad strategic reorientation is possible. The results suggest that the US firms that had a slower but more concentrated and aggressive response lost less market share than firms that responded quickly. © 2002 Elsevier Science Inc. All rights reserved.

Writers and researchers have shown an intense interest in the successful penetration of the American market by Japanese firms. Much of this interest has centered on seeking explanations for this success from the strategies, methods, or attributes of Japanese business or Japanese culture (e.g., Abegglen & Stalk, 1985; Keys & Miller, 1984; Ouchi, 1981; Smothers, 1990). Less interest has been demonstrated, however, regarding the role American firms played in the Japanese successes. Much of what has been written has focused on American competitive weaknesses in areas such as quality, long-term orientation, and manufacturing approach that became apparent when compared to the Japanese strengths in these same areas (e.g., Cusumano, 1988; Haynes & Abernathy, 1980; Nonaka & Johansson, 1985; Schonberger, 1982). Little, however, has been written regarding the actual responses or response strategies of American firms reacting to a radical change in their immediate environment, the entry of Japanese challengers. Yet, examination of the responses of these American firms on a longitudinal basis is likely to provide a vital clue that a static perspective of strengths and weaknesses cannot provide. Examining the process of change over time helps provide a clearer picture of the way firms ∗

Tel.: +1-215-204-8146; fax: +1-215-204-8029. E-mail address: [email protected] (H. D. Hopkins). 0149-2063/02/$ – see front matter © 2002 Elsevier Science Inc. All rights reserved. PII: S 0 1 4 9 - 2 0 6 3 ( 0 2 ) 0 0 2 1 9 - 2

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H. D. Hopkins / Journal of Management 2003 29(1) 5–25

make transitions (Ginsberg & Grant, 1985). Taking such a perspective promises not only to provide new insights on a critical period of American business experience but also to have wider implications concerning the management of change. This paper reports on a study to compare two possible models for explaining the relative success or lack of success of American firms’ responses. These models are competitive dynamics (CD) and punctuated equilibrium (PE). CD holds that fast responses are better than slow responses. PE holds that a change process that involves a period of resistance followed by a period of intense and concentrated change will lead to better performance. The general research question is: Is it better to respond quickly with individual competitive responses or to wait until a broad strategic reorientation is possible? What is it that warrants research about the response strategies of dominant American firms to the entry of Japanese competitors, as opposed to the entry of firms from other countries or even the appearance of new domestic competitors? There are two central reasons. First, Japanese entry into the US market has been extraordinarily successful. In a relatively short period since WWII the Japanese have won significant market share in industries previously thought dominated by impregnable American giants. Second, prior to this success American firms did not view Japanese firms as important competitors. This changed dramatically during the 1980s. It should, therefore, be particularly revealing to examine how leading American firms responded to this new perception of Japanese competitors. In spite of reports in the business press suggesting a reduced competitive challenge from the Japanese, indications are that they have major market share positions in many global industries and that these positions are getting bigger. For example, data presented by Franko (1996) on 15 major industries show that the Japanese have the greatest market share, compared to other countries, in six of these (compared to seven for the US and two for Germany). In each of these six industries the market share of the Japanese increased between 1990 and 1993. More recent work suggests that in spite of the lengthy recession Japanese competitive strength in key industries continues to grow (Council on Competitiveness, 1999; Czinkota & Kotabe, 2000). Thus, Japanese entry into the US is an interesting and important event. It has permanently changed the competitive landscape and has on-going implications. But it has rarely been examined in terms of a rigorous longitudinal analysis of the American response.

Conceptual Framework and Theoretical Justification There are various ways to characterize organizational change. These include its magnitude, speed, number of stages, comprehensiveness, substance, and the extent to which it fits the organization’s circumstances. In a recent review of approaches to change, Newman and Nollen (1998) distinguish between approaches that focus on change at the organization level vs. the population. In the latter category they placed population ecology and institutional theory. At the organization level they point to five approaches: transaction cost theory, contingency theory, resource dependence, life cycle, and strategic choice. These authors also distinguish approaches to change in terms of magnitude of change. On the one hand, most change theories, according to these authors are concerned with

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incremental change. They note that the main exception to the incremental approach is the PE model of change. PE leads to radical change because initial resistance to change causes change forces to build until the pressure is so great that when the resistance collapses discontinuous change occurs very quickly. In addition to the extreme positions on these two dimensions it is worth considering the positions that fall in between. For example, in between change at the organizational level and population level is change that occurs among multiple organizations. In this case, change may be tied to a strategic group, strategic network, or the CD between a pair of firms. In between incremental and discontinuous change is mid-range change that may be more successful than either incremental or radical change (Reger, Gustafson, DeMarie & Mullane, 1994). Mid-range change has the advantage of overcoming cognitive inertia but is also modest enough to be accepted by organization members. CD represents an example of incremental change among multiple organizations. PE, on the other hand, represents an example of discontinuous change. Even though PE initially was developed to explain evolution at the population level, when applied to organizations it has been used to explain the change inside individual organizations (Van de Ven & Pool, 1995). Both models, however, are used here to examine changes that take place within individual organizations, i.e., dominant American firms responding to the entry of new Japanese competitors into their home markets. CD is largely concerned with the individual competitive moves and countermoves taken by rivals. Though it would be a mistake to suggest that there is a unified body of research on which a consensus exists, there are a growing number of studies on this topic. CD emphasizes the importance of timing—who moves first, who is second, who is third, and the amount of time between moves. CD also emphasizes intentions. Competitive moves are generally seen as either competitive actions or responses to the competitive actions of rivals. One model of CD, based on the work of Smith, Grimm and Gannon (1992), is grounded in communication–information theory. According to this model moves and countermoves will be influenced by the characteristics of the actor, the action, the industry competitive environment, the responder, and the response(s). The principal premise is that firms gain an advantage by taking actions where rivals do not respond or are slow to respond. Another model developed by Chen (1996) and adapted by Hitt, Ireland and Hoskisson (2001) is broader in scope. This model suggests that broad market, competitive, and evolutionary outcomes are influenced by characteristics of firms (awareness, motivation, market commonality and resource similarity), interfirm rivalry (first-mover incentives, type of action, actor’s reputation, dependence on the market, and resource availability), ability for action (size), and nature of response (speed, innovation, and quality). This model is notable for the broad outcomes it suggests are influenced by CD. Research findings have been summarized by several authors (e.g., Chen, 1996; Connors, 1995; Hitt et al., 2001; Smith et al., 1992). Research most relevant to this study has shown that competitive moves and responses have an effect on performance (Chen, 1996; Chen & Hambrick, 1995). Early responders and first-movers have been found to take market share away from late responders (Chen & MacMillan, 1992). Leaders are more likely to lose market share if they are less aggressive and slower (Ferrier, Smith & Grimm, 1999). The more likely a firm is to respond, the better its performance (Smith et al., 1991). The more

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H. D. Hopkins / Journal of Management 2003 29(1) 5–25

moves a firm initiates the better its performance (Young, Smith & Grimm, 1996), but the more responses its moves stimulate, the poorer its performance (Chen & Miller, 1994). A central consideration suggested by CD models and supported by research is the importance of how quickly the responder reacts (Chen & MacMillan, 1992; Ferrier et al., 1999). A slow response to the competitive action of a rival has several disadvantages for the responder: (1) it allows the first-mover a longer period to reap benefits without being challenged; (2) it allows the first-mover to solidify any gains; and (3) it indicates the responder’s lack of commitment to the product or market. Chen and MacMillan (1992) found a link between response speed and market share in their study of the airline industry. Ferrier et al. (1999), in their study of industry leaders from various industries, also found support for this link. This prompted the first research question: Will a lag in a firm’s response to new competition be associated with a greater loss of market share compared to a firm that shows no lag? Another consideration is whether the responses match the actor’s competitive move or lead to the initiation of new moves (i.e., non-matching responses). For example, if a new entrant introduces a new product at the bottom of the market an incumbent might simply match them by introducing a product for the same segment, or do this as well as reduce prices on the incumbent’s entire product line. Reducing prices would be a non-matching response. A matching response sends a signal that the responder is merely concerned with maintaining the status quo. A non-matching response sends the signal that the responder is intent on defending its position. Such an escalation by the responder is expected to reduce the future aggressiveness of the entrant. This prompted the second research question: Will a firm with a greater number of responses that are non-matching be associated with a smaller loss of market share than for a firm with a smaller number of responses? An alternative perspective is concerned with radical environmental change. One such theory that has received support and attention in recent years is the PE model. The PE model combines the view that organizations resist change with the belief that they can change. According to PE, organizations resist changes in the environment until they exceed a certain threshold. Then, after this initial delay, the organization changes quickly and dramatically. The theoretical underpinnings of this approach are based on the work of paleontologists. They found evidence suggesting that evolution proceeded via short periods of dramatic change punctuating long periods in which species were unchanged. This theory seemed to provide a possible answer to a major debate among organizational theorists. One group of organizational theorists has stressed the rarity and difficulty of organizational change (e.g., Aldrich, 1979; Hannan & Freeman, 1984; Lieberson & O’Connor, 1972). A second group argued that management could direct organizations to make important changes that would keep them aligned with the environment (e.g., Barnard, 1938; Child, 1972; Miles & Cameron, 1982). While empirically-based studies seem to offer support to both sides of the debate (Gersick, 1994), applying PE to organizations provides a possible solution. The PE model holds that organizations evolve during “convergent periods” during which they fine-tune their current strategy or make incremental adjustments to minor shifts in the environment (Tushman, Newman & Romanelli, 1986). During this period of stability organizations resist major changes in strategy. This is “punctuated” by short periods of strategic reorientation (Tushman, Newman & Romanelli, 1985). This pattern of change is not merely descriptive. It distinguishes between highly successful and less successful firms. Research suggests that firms that follow a PE pattern are more

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successful (Grinyer, Mayes & McKiernan, 1988; Miller & Friesen, 1984; Sherman, 1995; Virany, Tushman & Romanelli, 1992). According to this perspective, strategic reorientation is more likely to be successful than slower forms of change for several reasons. First, change is delayed until it is clear that change is necessary. Second, change is delayed until there is agreement on what the new strategy should be. Third, the forces encouraging change have gotten stronger because of the delay. One indication that change is consistent with a strategic reorientation rather just fine-tuning would seem to be the breadth of the change. Changing many aspects of a firm’s operation rather than just a few would be more likely to qualify as strategic reorientation. In some previous studies change was classified as strategic reorientation when change in strategy, structure, and systems all had occurred (e.g., Virany et al., 1992). In the present case, a broad change was defined as having occurred when a firm responded to the new competition with many different types of responses. Third research question: Will broad change be associated with less loss of market share than narrow change?

Method In recent years, case study methodology has generated substantial interest, discussion, and acceptance (e.g., Dyer & Wilkins, 1991; Eisenhardt, 1991). Use of such “fine-grained” methodologies have the advantage of high relevance to business practice, appeal to the human desire for concreteness, provide in-depth attention to detail, and allow the possibility of multiple viewpoints (Harrigan, 1983). In recent years, many excellent case study articles have been published (e.g., Burgelman, 1994; Collis, 1991; Garud & Kumaraswamy, 1993; Gersick, 1994; Hall, 1993; Ross & Staw, 1993). One advantage of case studies is that they include a wealth of contextual variables. In the event that a thesis is not supported or an initial research question not probing enough, these contextual variables help the researcher to go several steps beyond. Also, it allows the researcher to notice any particularly important variables in the data that may have been left out of the initial model. Cases were selected that had certain common characteristics in order to have them represent conceptual categories instead of populations. In particular, where a dominant American firm in a mature industry faced a serious threat from the entry of Japanese challengers into the US market. The entry by the Japanese must have included both exports and foreign direct investment. Such common features allow for what Yin calls “literal replication” (1994, p. 46). Based on a list of 20–25 industries/markets/segments where Japanese competitors accounted for at least 5% of market sales (e.g., semiconductors, electronic calculators, autos, etc.) eight cases were selected. Two cases—CF Martin Guitar Company (producer of acoustic guitars) and IBM’s mainframe computer business—were dropped because it was decided that the Japanese challengers did not represent a serious enough threat to these particular firms. The six remaining cases were selected to achieve what Yin calls “theoretical replication” (1994, p. 46). While with literal replication cases are predicted to produce similar results, theoretical replication is expected to produce contrasting results for predictable reasons. Theoretical replication was expected for one variable: time of entry. Time of entry refers to the date of first entry into the US market by the Japanese challenger. Cases were selected

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Table 1 Identification of case studies Industry

Leader

Challengers

Years

Market sharea

Sewing machines Heavy-weight motorcycles Color TV

Singer Harley-Davidson

Brother, Janome, Riccar, Maruzen Honda, Yamaha, Kawasaki, Suzuki

1947–1986 1959–1990

66/20/34 5/2.4/13.9

RCA

1960–1985

34/18

Film Copiers

Kodak Xerox

1964–1993 1975–1990

85/80 95/12/19

Small engines

Briggs & Stratton

Matsushita, Sony, Sharp, Sanyo, Toshiba, Hitachi Fuji film Canon, R. Ricoh, Mita, Sharp, Minolta, Toshiba, Matsushita Honda, Suzuki, Yamaha, Fuji, Mitsubishi

1977–1992

46/43/61

a

Figures are for market shares in units for beginning and end of period; if three numbers are given the middle one is lowest share prior to turn-around.

where initial entry took place across several decades to allow the detection of any “learning effect.” That is, it was expected that as the American firms became more knowledgeable about Japanese competitors they would see them as more of a threat and thus respond more appropriately. One case involved entry in the 1940s, one in the 1950s, two cases in the 1960s, and finally, two cases in the 1970s. Information was collected from various secondary sources. The companies varied in terms of the extent to which they have been the subject of interest in the business press, textbooks, and non-fiction books. On the other hand, some of the firms have had relatively little coverage. Individual, in-depth cases were written to provide the rigor to allow for documentation of the raw data and verification by others. This resulted in six case write-ups of approximately 30–50 pages in length with each including a time-line specifying when specific responses were made (all case write-ups and references are available from the author). A response was defined as a “discrete event” on the part of the incumbent firms in reaction to the Japanese challengers. The judgment that certain competitive actions were primarily responses to the actions of Japanese competitors was based on: (1) the identification of key words or phrases such as “reacting to,” “responding to,” “as a result of,” found in the business press or industry trade journals; (2) statements by company executives; or (3) instances where responses closely followed the same moves by the competition or which targeted the Japanese competitors. Determination of what was a response involved two raters with substantial field experience. In all cases, the raters were able to agree. This data was then used to calculate several variables defined below. The values on these variables were compared for high performing and low performing firms based on splitting firms into two groups of three each. Table 1 shows both the leader and challenger companies on which the cases were written.

Variables To try and overcome the subjectivity of a case approach, many of the variables were calculated based on quantitative data. The choice of variables is based on the research

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questions. Lag and average response time help examine the delay expected from a PE pattern. Span and response concentration help identify the degree of concentration expected to distinguish CD from PE. Measuring the type of responses allow for examination of whether greater breadth leads to better performance. The case approach also allowed for the examination of contextual variables not specifically required by the research questions. These contextual variables may help to explain any inconsistent cases. Lag The number of years between the entry of the first Japanese challenger into the American firm’s industry and that firm’s first response. Average Response Time Each of the firm’s responses was assessed in terms of the number of years between it and the Japanese entry. These year measurements were then summed and divided by the number of responses. Span The number of years between the American firm’s first and last response. Data were collected on all dominant firms for a period of at least 10 years after their last response. This precluded the use of relatively recent cases of Japanese entry. The requirement of 10 years was used to avoid any kind of “ceiling effect.” Ceiling effect refers to the possible loss of data due to limiting the period over which data is collected. Average Responses Per Year This is the total number of responses divided by the span. Total Responses Total number of responses made by the American firm. Types The responses were classified into the following categories by two coders: outsourcing (of products or components), marketing (increasing marketing, changing market message or advertising), manufacturing (redesigning or moving manufacturing plants), joint venture, organizational restructuring (downsizing or downscoping), geographic expansion, price reduction, offshore manufacturing, new technology (utilizing new product or manufacturing technology), new product/features, new distribution method (changing how the products are wholesaled or retailed), and government/legal (lobbying the government for legislative changes). The number of different types was calculated for each firm.

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H. D. Hopkins / Journal of Management 2003 29(1) 5–25

Response Concentration This variable was calculated as one minus the ratio of span divided by the number of years between the year of the entrant’s entry and the year of the dominant firm’s last response. Non-matching Responses Using the categories listed above as types, the number of types of responses that had not been preceded by an action of the same type by the Japanese challenger was counted as a non-matching response. Pattern A CD pattern was considered to exist when responses were distributed over the time period. A PE pattern was considered to exist when responses showed a time-lag followed by a concentrated period of responses. Market Share Market share figures were based on unit sales in the US and come from various comparable sources such as trade association data.

Analysis The first step of the analysis was to order the case studies accord to the relative performance of the American leader over the period of study. This was calculated in terms of % change in market share over the period of the case study. Beginning and ending figures were calculated. Interim figures were not considered to be relevant to the research questions. Market share was based on units sold in the US market in the focal industry. This gave the following result: HD gained 178.0%, Briggs gained 32.6%, Kodak lost 5.9%, RCA lost 47.1%, Singer lost 48.5%, and Xerox lost 80.0%. All the tables that follow show the firms in the above order so it will be easy to identify patterns associated with market share change. Since the interest is in the responses of the American leaders, it was first necessary to examine the entry methods or techniques of the challengers. One obvious threat to internal validity would be if this research did not address possible differences in method of entry by the challengers. Table 2 shows entry methods based on different types of exporting and foreign direct investment that were used by the challenger upon entry as well as after entry. Table 3 shows types of competitive actions by challenger and leader. In examining these tables, the author attempted to find differences associated with varying levels of performance. Table 2 shows a pattern in that the greater the number of entry methods used by the challengers in a particular case the poorer the performance of the American leader. This pattern could suggest that challengers that used more methods gained more experience and became stronger competitors as a result. Or, that challengers that entered in

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Table 2 Entry methods Cases

Heavy-weight motorcycles Small engines Film Color TV Sewing machines Copiers

Export

Foreign direct investment

No

Brand

X X X X

X X X X X X

JV

M&A

X X X X

Start-up

Total

X X X X X X

2 3 3 4 4 4

No: exported using store brand or non-corporate name; Brand: exported using company or brand name; JV: joint venture; M&A: merger or acquisition; Start-up: built own production plant in US; Total: total number of methods used.

a very gradual way reduced the level of threat perceived by the American leader. Finally, it might be that the use of many methods by the Japanese challengers overwhelmed the American firms. In any case, this pattern will need to be kept in mind while interpreting the role of the leaders’ response strategies. Table 3 shows some evidence that the leaders frequently chose different responses than those of the challengers. Some of these differences may be natural and predictable. For example, lobbying the government is perhaps a natural response to be expected by a threatened leader but not for a challenger. Another example, geographic expansion, by definition, will automatically be associated with the challengers. However, there is a pattern in terms of the number of matching responses in relation to performance. The better performing leaders made fewer matching responses. This may suggest innovation rather than imitation made a difference in performance. Next, responses were placed on a time-line listing the occurrence of competitive actions, competitive responses, or other events in the case. These time-lines were then translated to bar charts showing when responses were made in relation to the entry of the Japanese. Based on this information on each firm’s response strategy: (1) the firms were designated as showing either a pattern for CD, or a pattern for PE and (2) values were calculated for the previously defined variables. Findings Table 4 presents the data split between the three “high performers” and three “low performers” of the six cases. In examining the variables in Table 4, there seem to be non-trivial differences between the high performance and low performance groups for all the variables except for the number of types (TYPES), average responses per year (PY) and the total number of responses (#). Research question one asked if a slower change would lead to a greater loss of market share. Instead, the opposite seems to be true. The lag for the higher performers was 13 years compared to 7.7 years for the low performers. The longer lag is consistent with PE. An advantage of cases is the ability to answer “why” questions (Yin, 1994). So why did the firms show such long lag times? One reason is that in some cases the Japanese entry, at

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Industry

Firm

GT

Motorcycle

Leader Challenger Leader Challenger Leader Challenger Leader Challenger Leader Challenger Leader Challenger

X

Small engines Film Color TV Sewing machines Copiers

OS

MK

MF

X

X X X

X X X

X X X X X

X

X X X

X X X

X X

X X

JV

OR

GE

PR

OF

X X X X X

X

X

TE

X X X

X X

X X X X

X X

X X X X X X X X X

X X X X X X

X X

X

NP X X X X X X X X X X X X

DS X

X X X X

TO

MATCH

5 6 7 3 6 5 6 6 7 6 8 8

2 2 4 5 5 5

Geographic expansion and offshore manufacturing were used as sample selection criteria for challengers. Government (GT), outsourcing (OS), marketing (MK), manufacturing (MF), joint venture (JV), organizational restructuring (OR), geographic expansion (GE), price reduction (PR), offshore manufacturing (OF), new technology (TE), new products/features (NP), new distribution method (DS), total (TO), matching actions (MATCH).

H. D. Hopkins / Journal of Management 2003 29(1) 5–25

Table 3 Types of actions/responses by leader and challengers

H. D. Hopkins / Journal of Management 2003 29(1) 5–25

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Table 4 Results summary table PR leader

LAG

RT

SPAN

CON

PY

TYPES

#

NMR

PAT

MSC%

High performers group Harley-Davidson 17 Briggs 9 Kodak 13 Mean 13

21.5 13.4 19.7 18.2

8 10 11 9.67

.67 .44 .52 .54

1.00 1.40 .64 1.01

5 7 6 6

8 14 7 9.6

3 5 2 3.3

PE PE PE

178.0 32.6 −5.9 68.2

Low performers group RCA Singer Xerox Mean Difference

14.6 16.9 11.8 14.4 3.8

14 22 10 15.3 −5.6

.33 .19 .44 .32 .22

.86 .36 1.00 .74 .27

5 6 8 6.3 .3

12 8 10 10 −.4

0 2 3 1.67 1.73

CD CD PE

−47.0 −48.5 −80.0 −58.5 122.8

8 6 9 7.7 5.3

Performance rank (PR), average response time (RT), response concentration (CON), average responses per year (PY), total number of responses (#), non-matching responses (NMR), pattern (PAT), market share change in % (MSC%).

least initially, may have been seen as being beneficial to the industry. HD may have seen them as providing entry level machines allowing customers to trade up to the bigger bikes made by HD. For RCA, the Japanese may have initially been seen as helping satisfy a shortage in color TVs as well as helping establish a new industry. Research question two asked if a greater number of non-matching responses would result in less loss of market share. The higher the number of non-matching responses the more aggressive the dominant firm was in its response. The high performers group in Table 4 shows 3.3 for non-matching responses vs. 1.67 for the low performers group. Thus, a greater number of non-matching responses does seem to be associated with less loss of market share. Research question three asked whether firms showing a pattern of broad change would show less loss of market share than firms showing a pattern of narrow change. The results in Table 4 do not support this. All the firms averaged about six different types of responses. Measuring the breadth of responses may not be capturing the amount of change. Perhaps the magnitude of each response would have done a better job. Unfortunately, the magnitude of each response with assumed to be the same. But this is clearly not the case. Briggs, HD, Xerox, and Kodak were designated as PE, and RCA and Singer were designated as CD. Confirming the classification of the firms are the measures for response concentration. The two CD firms, RCA and Singer, have the lowest values for response concentration. CD firms were expected to distribute their responses rather than concentrate them. Figure 1 shows the responses each firm made over time. Briggs shows 8 years of no response followed by 9 years of concentrated responses fitting the PE pattern. For Singer Sewing Machine there is a striking 9-year pause between Singer’s two groups of responses. The method used to identify responses ensures that these are not responses to different events. Furthermore, the definition of PE (i.e., long periods of stability punctuated by brief but radical change) makes it hard to interpret Singer’s responses as two PE periods. Singer seems to be consistent with the CD pattern. It further suggests that little learning may

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Figure 1. Responses by years after entry.

have taken place on Singer’s part, either as a result of feedback from their early responses or from learning about Japanese competitors’ successes in other industries (since they did not increase or intensify their responses in an appropriate way). Kodak shows no responses until year 13. Then most of their responses are concentrated in years 19 through 23. This concentration suggests a PE pattern. Harley-Davidson’s responses are concentrated in years 17 through 24. Xerox’s responses are concentrated in years 9 through 12. Finally, RCA shows a CD pattern that is spread over a relatively wide 13-year period.

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The top three performers in Table 4 all show a PE pattern. The bottom three performers all show a CD pattern except for Xerox. The case of Xerox, however, is exceptional in more ways than one. It was the only case where the dominant American firm had a virtual monopoly and then had to contend with a dramatic loss of the monopoly for multiple reasons. In addition to the challenge from the Japanese, Xerox had to contend with new American competitors (Kodak and IBM) as well as government anti-trust actions and other law suits. Xerox experienced a well-publicized comeback that only partly regained what was lost. Discussion For many of the firms there may have been a key “learning shock” that precipitated a PE approach to change. These learning events may have provided a demonstration of the need to change. In some cases a series of events seemed to prime the firm and make it receptive. This was followed by a “strategic inflection point” where the firm had an epiphany (Grove, 1996). For Kodak it was the loss of sponsorship of the 1984 Olympics to Fuji, for Xerox it was a series of events leading up to a consultant’s report, for Briggs it was the complaints of several major long-term customers, and for HD it was a series of events leading up to the establishment of a Japanese motorcycle factory in the US. Where there was no key learning shock, such as with RCA and Singer, the Japanese entry seemed to be characterized by an incremental build-up and incremental American responses. Table 2 shows that the Japanese entry into color TV and sewing machines involved a greater number of entry methods than all but copiers. The Xerox case seemed to show a convergence of events. Fuji Xerox’s success with its Total Quality Control Program led to increases in sales and profit and caught the attention of David Kearns. Fuji Xerox’s program became the model for the Leadership Though Quality Program at Xerox. The failure of the Xerox 3330 copier that was intended as an answer to the flood of Japanese copiers was a public disaster for Xerox. Introduced in 1979, this copier was so unreliable that it had to be recalled. It helped Xerox realize that simply introducing a “Japanese fighter” was not enough. Instead, a company-wide effort was needed. A trip to Japan by a group of Xerox engineers in 1980 helped the company realize that it was taking Xerox twice as long and costing twice as much as the Japanese to develop a new product. IBM’s faltering effort in copiers led to a “lost decade” for Xerox. Until it became clear in the late 1970s that IBM would not be a major force in the market, Xerox concentrated on the elephant rather than the mosquitoes. Finally, a report prepared by McKinsey & Co. led to restructuring the firm. Xerox went from being a large, highly centralized bureaucracy to a smaller collection of entrepreneurial business units. New Propositions We propose the following relationship: Firms that experience a learning shock respond with more intensity and higher performance. There is also the question of what causes a learning shock. Taking Xerox as an example, change seemed to require several stages. First, there was a long period of denial where Xerox resisted the signals from the marketplace.

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After denial came recognition that something was wrong and the search for a solution. Finally, there was a lengthy period where the solution—a program called “Leadership Through Quality”—was implemented through the entire organization. If we take the year of entry and add to it each firm’s average response time we get a year that represents the centroid of their response. What is very interesting is that all the high performers have a centroid falling in the 1980s, while the low performers fall in the 1960s and 1970s. This suggests a “learning effect” of some type. For example, if we look at the high performers we see the following: Harley-Davidson’s US market was entered by Honda in 1959 and the American firm’s average response time was 21.5 years (see Table 4) resulting in a centroid of 1980; Briggs and Stratton’s US market was entered by Kawasaki in 1974 and the average response time was 13.4 years for a centroid of 1987; and finally Kodak’s US market was entered by Fuji in 1964 and Kodak’s average response time was 19.7 years for a centroid of 1983. For the low performers: RCA’s US market was entered by Sony in 1961 and the average response time was 14.6 for a centroid of 1975; Singer’s US market was entered by the Japanese in 1947 and Singer’s average response time was 16.9 for a centroid of 1963; and finally, Xerox’s US market was entered by Canon in 1968 and the average response time was 11.8 years for a centroid of 1979. What this suggests is the basis for another proposition: The later the entry and response the greater the opportunity for vicarious learning. This learning might have been from the experience of other American firms and from the writings of various authors. For example, several of the firms showing a PE pattern describe a three-stage process including a period of resistance and denial, the search for a solution, and finally, implementation of the strategic reorientation. During the second stage, some firms describe researching possible solutions. For example, one manager at Harley-Davidson describes the company’s decision to develop a three-part change strategy—consisting of just-in-time methods, employee involvement, and statistical operator control as being based on a literature search (Reid, 1990). The early 1980s was a period when business articles about the value of Japanese management started to gain traction. American managers started to gain respect for several Japanese management techniques such as just-in-time inventory management and quality circles. For example, the value of Japanese management skills was highlighted in publications such as Theory Z: How American business can meet the Japanese challenge (Ouchi, 1981) and The art of Japanese management (Pascale & Athos, 1981). Academic journal articles analyzing Japanese management started becoming more common in the early 1980s (e.g., Keys & Miller, 1984; Munchus, 1983; Nonaka & Johansson, 1985; Schonberger, 1982). This growing emphasis may have increased the likelihood that American managers would see the challengers as a non-routine threat requiring a major, rather than minor, change in strategy. Finally, the proposition most central to this study is: Firms that have a slower but more concentrated and aggressive response to new competition will lose less market share than those firms that respond quickly but with a series of less concentrated responses.

Intrepretation of Results Why did each firm respond the way they did? An examination of one firm of each type (i.e., PE and CD) might be instructive. Fitting the PE category we find Harley-Davidson.

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Initially HD and the British motorcycle companies saw the Japanese as non-threaten and actually as a benefit to the industry because they had expanded the overall market. They initially felt that small and inexpensive Japanese bikes would attract new riders who would later trade up. This is supported by several press statements made by executives in the mid-1960s and cited in the Harvard Business School case study, Note on the Motorcycle Industry-1975 (Jackson, 1978). HD had little success with smaller size bikes in earlier years so they resisted following the Japanese. HD was owned by American Machine and Foundry (AMF) from 1969–1981. AMF precipitated a crisis by trying to change HD from a niche to a mass market firm. AMF learned that the condition of HD’s product (i.e., old and complex designs) and plants (i.e., outdated) made this very difficult (Sucher, 1990). They tried anyway and one result was that their quality declined. After very limited responses in the mid-1960s and mid-1970s, they were primed for dramatic change in the early 1980s. The conservative family owners were gone, AMF was out of the picture, and their early responses to the Japanese were seen as clearly inadequate. The key learning event was when they saw Honda set up production in Ohio and produce high quality machines using American workers. Several statements made by Harley executives capture the importance of this event. It is also reflected in a quote from Peter C. Reid’s book, “Well Made in America”: Here was a plant right in the smokestack belt of the United States—with American employees—that was demonstrating that Japanese superiority could not be attributed to its culture or to any other exclusively Japanese factor. This fact brought it all home . . . (p. 15) Following a CD pattern throughout is RCA. The Japanese entered the US color TV market in the mid-1960s during a time of shortage in sets and tubes as color broadcasting in America took off. The Japanese, by 1975, had gained the lead in labor productivity by utilizing solid-state designs and automated manufacturing. The result was dramatically lower cost and higher quality. American producers like RCA followed suit by rushing to produce offshore. The move offshore reduced wage rates but it did not contribute to either higher productivity or higher quality. Next, the Japanese flooded the US market at a time of recession while RCA and other American producers were pulling back. Imported color sets went from 1.21 million in 1975 to 2.83 million in 1976 increasing the Japanese share of the US market from 17 to 38%. American producers started to follow the Japanese lead down the experience curve and by 1980, they had adopted the same manufacturing techniques as the Japanese and cut their disadvantage in half in their domestic plants. But then the Japanese started to develop other advantages stemming from new Japanese plants in the US and the introduction of the VCR. Ultimately RCA also fell behind the Japanese in new product development when they introduced their doomed VideoDisc machine years after the Japanese had already introduced a “mass-market” VCR. RCA’s loss of competitiveness throughout the 1960s, 1970s and 1980s may have been affected by several factors. For example, their attention may have been diverted by their diversification into mainframe computers. Some critics also suggested that RCA had been slow in making the change to solid-state because they had been vertically integrated with a large vacuum tube business. Another reason for RCA’s slow conversion

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to solid-state may have been their commitment to their established network of servicemen. The RCA Service Company consisted of about 2000 TV servicemen who felt threatened by the conversion to solid-state. Solid-state diminished the importance of service. Finally, another factor that may have worked against RCA was an apparent lack of leadership at the top. Whereas most of the companies that implemented radical change seemed to have a dominating leader at the top—HD had Vaughn Beals, Briggs had Fred Stratton, Xerox had David Kearns—RCA had a vacuum at the top ever since the departure in 1966 of General David Sarnoff after 45 years.

Implications for Theory In terms of theory, this research gives added support to the PE model. Even though the ability to generalize from six cases is limited, the study adds weight to the limited findings that have found a link between performance and frame-breaking change (Grinyer et al., 1988; Miller & Friesen, 1984; Sherman, 1995; Virany et al., 1992). It seems that responding quickly may be important in regard to “normal” or routine competition. But when the competition is “abnormal” or non-routine speed is less important and concentrating or marshalling ones forces is more important. Thus, the answer to the first research question of whether a slower change of strategy leads to a greater loss of market share seems to be a resounding “NO.” The better performers in this study had response strategies that were slower, more concentrated and aggressive. This research is inconsistent with findings that early responders and first-movers take market share away from late responders (Chen & MacMillan, 1992) and that leaders are more likely to lose market share if they are slower (Ferrier et al., 1999). Why might this be the case? First, change is delayed until it is clear that change is necessary and thus resistance is minimized. For example, at Harley-Davidson it was important that the union be convinced that change was necessary in order for the firm’s formula for change—employee involvement, statistical operator control, just-in-time inventory—to be successful. Second, change is delayed until there is agreement on what the new strategy should be. For example, at Xerox a long period of resistance and denial was followed by a stage where the company searched for the right strategy. Harley-Davidson also went through a period where they finally realized there was a problem and had to search for the solution. Third, the forces encouraging change have time to get stronger because of the delay. When change finally comes it is more dramatic. The resistance to change crumbles and the pent-up pressures for change are released. If the firm dissipates the pressure for change through early partial responses, as suggested by CD theory, the potential for broad change will be reduced. Fourth, the change does not have time to get mired in politics since it happens so quickly. In fact, some resourceful managers use the evidence of a clear shift in the competitive environment as the opportunity to bring about changes that may go beyond those that relate to the new challenger. An example of this is Briggs’ justification of closing a unionized plant in a northern state and replacing it with a non-union plant in a southern state by citing the new Japanese competition. A second contribution to theory is related the to the second research question. A greater number of non-matching responses was found to be associated with a better outcome.

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There are several possible explanations. One is that non-matching responses show more innovation. Rather than simply imitating the challenger the dominant firms that innovated had better outcomes. Second, non-matching responses are more likely to occur when a firm responds with a strategic reorientation rather than just a narrow and limited response. Third, non-matching responses may signal a more aggressive response from the leader and this may affect the challenger’s future actions. The third contribution to theory is the finding of a learning effect. These cases may point to a period of time where firms become receptive to changing their “mind-sets” after a period of denial. The period of denial may prepare the firm to throw out its assumptions and accept a radical strategic reorientation. Without this preparation time only mid-range or incremental change may be possible.

Directions for Future Research First, this research needs to be expanded by examining a broader sample. For example, do these findings hold true for the automobile industry or for electronic calculators? Do these findings hold for firms facing challengers from other regions of the world? Second, is it possible to model the implications of this study in a way that allows for integration of the CD and PE models? For example, Oliva, Day and MacMillan (1988) develop a model that essentially incorporates both CD and PE. This model includes a measure of industry inertia. Thus, it might be reasonable to expect that in mature industries with high inertia a PE strategy would show the better outcome while in embryonic industries a CD approach would be better. This would suggest the need for researchers to extend the present study by including both types of industries. It is interesting to note, that the Japanese generally have a tendency to enter mature industries (Smothers, 1990) and that most of the industries included in the present study could be labeled as mature (with perhaps the exception of color TV and copiers). Finally, this study did not examine some logical possibilities such as middle range approaches as suggested by Reger et al. (1994). Are there certain situations where mid-range strategies are better? This would seem to be an area worth researching.

Limitations A weakness of the present study is that no attempt was made to confirm the conclusions and conjectures about the case studies with company executives. However, many of the executives involved in these cases are no longer involved in company affairs having left or retired. Another weakness is the lack of an adequate measure of intensity. The magnitude of each response was assumed to be the same. Making a distinction in intensity would have allowed a more accurate measure of differences between CD and PE. For example, some research studies of CD make the distinction between tactical responses, such as price changes, and strategic responses, such a new product introductions (e.g., Smith et al., 1992).

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A third possible criticism of this study is that it may not be relevant to conditions today given that it based on cases from the 1960s, 1970s, and 1980s. Though US firms may never again face a group of foreign competitors that they initially regarded so lightly and later become such major competitors, the key findings are likely to be relevant today. That is, when a new competitor arrives on the “scene” that fundamentally weakens the strategic position of a dominant firm, a strategic reorientation, rather than a series of incremental moves, is probably the better course of action. This is supported by recent research on successful corporate turnarounds that found that the extent of strategic change initiated in a successful turnaround increased systematically with the extent to which the firm’s decline was due to a weakened strategic position (Barker & Duhaime, 1997).

Implications for Managers What does this study suggest today’s managers should do when faced with new competitors? It seems reasonable for an established competitor to take a “wait and see” attitude toward an unfamiliar competitor or to respond in a limited way instead of committing to a major effort to respond given that many other issues are probably pressing for management’s attention. This would be especially true if the competitor’s initial product was “uncompetitive,” targeted a niche that the company was not interested in, or was actually helping an embryonic industry become established. Once the threatened firm realizes that this new competition is not “routine,” they then need to focus their attention and make an all out effort. The change needs to be revolutionary instead of evolutionary. The key will be to distinguish “routine” competition from “non-routine” competition. As difficult as it may be to anticipate our rivals, there are some steps a firm can take to improve its chances. For example, Hamel and Prahalad (1989) advocate paying less attention to a rival’s current resources and position and more to its “resourcefulness.” Zahra and Chaples (1993) advocate being on guard against common blind spots of competitor analysis such as analyzing the wrong competitor or making faulty assumptions about competitors (e.g., stereotyping or underestimating competitors). Also, an awareness of a rival’s actions in other industries may be very helpful. Help in all these areas could come from a well-developed competitive intelligence system. Competitor intelligence has been the subject of a number of recent books (e.g., Fuld, 1995; Kahaner, 1997). Finally, it may be useful for firms to exploit the arrival of new competition. The leader’s ability to respond may be delayed by a closed managerial mind-set, delusions of superiority, ingrained strategies, rigid assumptions about the industry or the competition, entrenched culture, or rigid structure and systems. These sources of resistance to change may actually serve a good purpose in that they allow the forces for radical change to build. When the resistance collapses the pressure to change is so strong that the opportunities for change are much greater than would otherwise have been possible. Given this series of events, it may actually be in the firm’s interest to allow the pressures to build by avoiding partial responses. If the firm can buy time by using its slack financial resources, relying on a loyal customer following, or by selling or liquidating unprofitable businesses, this time can be used to allow the pressure to build.

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This scenario can be seen at Harley-Davidson. Harley prepared for the coming revolution by first buying time. The implications of the shift in the motorcycle industry were accepted only after Vaughn Beals took charge. To stay in the game until the best strategy was decided on by management and accepted by employees, the company appealed to the banks and relied on its traditional base of customers. RCA, on the other hand, never allowed the pressure for revolution to build because they were always busy copying each individual move that their Japanese competitors took.

Conclusion This research suggests that managers should be less concerned with speed of response and more concerned with focusing their response. Non-routine competitive challenges require revolutionary change. Future research needs to be done so that these findings can be generalized to other companies and different types of environmental change.

Acknowledgments The author acknowledges the assistance of Stephanie Hughes and Andrew Mongar on earlier versions of this paper.

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H. Donald Hopkins is an Associate Professor and Chair of the General and Strategic Management Department at the Fox School of Business and Management at Temple University in Philadelphia, Pennsylvania. He has published articles in Strategic Management Journal, Academy of Management Review, Journal of International Management, Global Focus, and Human Relations, among others. His research interests are primarily in the area of mergers and acquisitions.