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Annual Survey of Corporate Behavior(Summary)FY2009(May 11,2010)

Survey system

(1)Period of the research:January 2010.

(2)Survey items:

Chapter 1: Business environment and management policy

Chapter 2: Corporate reform efforts hitherto and future corporate strategies to cope with the business downturn

(3)Coverage: corporations listed in the first and second sections of stock exchanges in Tokyo, Osaka and Nagoya (2,457 companies in total).

(4)Survey method: self-reporting mailing method using prescribed questionnaire.

(5)Number of companies that responded: 1,032 (532 of manufacturing sector and 500 of non-manufacturing sector).

(6)Response rate: 42.0%.

Main findings of the survey

Chapter 1: Business Environment and Basic Management Policy

  1. Forecast about real economic growth rate for FY2010 to turn slightly upward

    Japan's real economic growth rate is forecast at 0.4% for FY2010, at 1.0% for the next three years (FY2010-2012), and at 1.3% for the next five years (FY2010-2014). While these forecast growth rates are all higher than last year's forecasts, they are lower than the forecasts contained in the surveys conducted from FY2003 to FY2007.

    The forecasts for nominal economic growth rates are minus 0.1% for FY2010, 0.6% for the next three years (FY2010-2012), and 1.0% for the next five years (FY2010-2014). The nominal economic growth rate for FY2010 is continuously negative, following that in the FY2009 survey.

    Comparing the real and nominal growth forecasts, the nominal growth rate falls below the real growth rate in FY2010 for the first time in two years, and decline in prices is expected. Over the next three years(FY2010-2012) and the next five years (FY2010-2014), however, the gap between the real and nominal growth forecasts is expected to narrow, and the margin of decline in prices is also forecast to decrease.

    The real industrial demand growth rate is forecast at minus 0.5% (real-value average for all industries) in FY2010, at 0.5% for the next three years (FY2010-2012) and at 0.8% for the next five years (FY2010-2014). Although the real industrial demand growth rate is continuously negative for this year, as in the previous year, the growth rate is rising moderately over the next 3-5 years. The growth of demand is forecast to be lower for non-manufacturing industries than for manufacturing industries for FY2010 as well as over the next three years and the next five years.

  1. Export companies' break-even exchange rate to be 92.9 yen per dollar

    The break-even exchange rate for export companies is 92.9 yen per dollar, which is higher than that of the survey in the previous year (97.3 yen per dollar), but it is moving toward a lower yen, compared with the rate of the latest month (December 2009, 89.6 yen per dollar).

  1. Capital investment growth forecast at 1.4% over next three years

    The growth rate for capital investment over the next three years is forecast at 1.4% on an all-industry basis. Despite being a positive figure, this is a depressed growth rate compared with the levels forecast in the surveys from FY2002 to FY2007.

  1. The number employees forecast to improve over next three years

    The number of employees on an all-industry basis is forecast to record positive growth over the next three years (FY2010-2012), but it remains at the low level, only 0.4%. For the manufacturing sector, the number of employees is forecasted to remain negative, although the pace of decline is expected to slow down. For the non-manufacturing sector, it is forecast to improve at a slightly faster pace.

Chapter 2: Corporate reform efforts hitherto and future corporate strategies to cope with the business downturn

  1. Background and purpose of the survey

    During the first half of the 2000's, Japanese companies came under the strong pressure to make major changes to their corporate cultures and management strategies. This pressure came in the form of the aftermath of the collapse of the 1980's asset price bubble including so-called "three excesses". In addition, Japanese firms experienced fierce international competition with newly-emerging countries such as China.

    While companies were taking a variety of steps to strengthen their financial and business structures, the world economy was recovering gradually, and as a consequence quite a few Japanese companies posted record earnings. It seemed that the Japanese economy was making a recovery from so-called "the Lost Decade (1991-2000)".

    However, it appears that this business recovery was supported by the fast growth of the world economy and the comparative weakness of the yen's exchange rate, under the dependence on exports. Since 2008, corporate profits have deteriorated sharply as external demand fell away and it suggests that the measures taken by the companies to improve their corporate cultures were insufficient. Moreover, it has been pointed out that new problems, such as the increase of irregular employment, have appeared.

    Though the current corporate earnings environment is severe, at the same time, it may constitute an opportunity for companies to rethink their medium-to-long term growth strategies. This survey addressed the questions of how business enterprises evaluate the effectiveness of the reforms they have undertaken up to now, and what they have in mind with respect to the strategies for the future.

  1. Survey items

    Six items relating to basic corporate strategies were examined in this survey: concentration in core competence; company split-up; business diversification; alliances with other companies; flexible response to changes in the business environment; and focus on shareholders.

    The survey also examined companies' plans relating to eleven individual strategies from the four perspectives, including management and allocation of their resources, efficiency in production/administration, product development and marketing.

  1. Reform initiatives taken up to now and evaluation of results

    (1) Evaluation of basic strategies implemented in the past
    a. Evaluation of need for each strategy

    Looking at the percentage of companies which feel the need for each of basic strategies (the ratio of the companies except replying "Originally unnecessary (not a priority)"), the rate of flexible response to changes in the business environment(98.9%) , a focus on shareholders(98.8%) , and concentration in core competence(92.3%) are very high. The above-mentioned three strategies were considered as required and/or important by most companies. Meanwhile, 84.0% of companies placed importance on alliances with other companies, 61.6% on business diversification, and 34.6% on the company split-up.

    In terms of the strategies related to business fields, almost all the companies felt that strategies for concentration in core competence were essential, whereas only about one-third saw the need for company split-up strategies, which shows that a high percentage of companies felt it was more important to withdraw from unprofitable businesses that were being pursued in-house rather than to split up such businesses, and to focus on their company's core competencies. Meanwhile, the proportion of companies which saw a need for business diversification was not particularly high, with a majority feeling that it would be more effective to forge alliances with other companies rather than expand their own company's sphere of activities.

    b. Evaluation of performance of each strategy

    Looking at the percentage of companies that reported an adequate degree of "performance" of the basic corporate strategies ("Results largely achieved" or "Some results achieved"), the ratio of concentration in core competence is 75.1%, which is the highest among six strategies, followed by flexible response to changes in the business environment(68.1%), achievement in focus on shareholders (67.4%), company split-up(64.5%), alliances with other companies(59.1%), business diversification(30.7%).

    Comparing the four items related to business fields, three-quarters of the companies reported an adequate degree of achievement in the category of concentration in core competence. With regard to company split-up, which have not be implemented in the companies of about 20%, the companies that have implemented the strategy accomplished the high degree of attainment of adequate performance.

    Regarding business diversification, only 5.7% of companies reported "Results largely achieved", and also only 25.0% of companies answered "Some results achieved". In addition, almost 40% of companies answered "Not very effective", and the percentage of "Not implemented" companies was high, at around 30%. The figures suggest that companies realized it had been difficult to obtain sufficient results.

    The survey result for alliances with other companies was neither particularly high nor low, with about 60% of companies reporting an adequate degree of achievement, and the remaining about 40% split equally between those reporting "Not very effective" and those "Not implemented".

    Regarding strategies to realize a flexible response to changes in the business environment, almost 70% of companies reported an adequate degree of performance including "Some results achieved". Among the six strategies, focus on shareholders shows the average result.

    (2) Evaluation of attainment of goals for individual strategies

    Regarding the individual strategies, the percentage of companies that reported an adequate degree of performance of the individual strategies ("Results largely achieved" and "Some results achieved") is 78.7% for improving efficiency in production and administrative work, 75.4% for saving on personnel costs, 73.7% for streamlining ties with suppliers, and 73.7% for consolidating plants and other facilities. Thus, strategies involving cost-cutting and improvement of efficiency in production/administration processes occupied the top positions.

    For the items regarding flexibility, a majority of companies (62.3%) reported performance in respect of accelerating decision-making, and 64.4% reported performance in improving flexibility in employment patterns and formats. However, around 20% of companies reported "Not very effective", and the rate of companies that answered "Not implemented" is also slightly higher than the other strategy items.

    With regard to strategies for product development and marketing, the percentage of companies reporting an adequate degree of performance was generally low, including 62.2% in the development of new products & services, 62.9% for efforts to stimulate demand in domestic market, 59.0% for revising distribution and marketing methods, and 56.3% for efforts to stimulate demand in overseas markets. The lowest figure, at 52.0%, is reported for price-reduction strategies.

  1. Reforms undertaken hitherto and companies' current business conditions in the severe environment

    (1) Relationship between past strategies and current business conditions

    Looking at the business conditions of the companies, the percentage-point difference obtained by subtracting the percentage of those companies that reported worse business conditions compared with one year ago from those that reported better conditions over one year ago is minus 27.8 points for all industries, showing that a higher proportion of companies are suffering a deterioration in business conditions.

    a. Basic strategies

    Comparing current business conditions with the level of previous accomplishment of each basic strategy, the following notable points emerge:

    • In respect of concentration in core competence, companies reporting "Not very effective" show poor business conditions (minus 46.7), indicating that this strategy is the minimum required one with regard to strengthening of corporate finances and management culture. However, even among companies reporting "Results largely achieved", business conditions are not particularly good (minus 19.2) compared with other strategies. It appears that a strategy of concentration in core competence alone is not sufficient to strengthen the corporate structure.
    • Regarding company split-up, the business conditions of those companies reporting implementation (including those reporting "Not very effective" [minus 20.0]) is higher than the average for all companies, and it suggests that this strategy, if implemented, succeeded in strengthening corporate culture to some extent.
    • Regarding business diversification, the business conditions of those companies reporting "Results largely achieved" is extremely favorable (17.6), and although only a few companies reported attainment of goals, this success appears to have been one of the decisive factor in strengthening the companies' finances and management culture. And the companies reporting "Not very effective" (minus 28.6) show not such a poor level of business conditions compared with the all-company average. Therefore, the implementation of such strategies appears to have contributed to strengthening the companies to a certain degree.
    • Regarding strategies for flexible response to changes in the business environment, business conditions are good at companies reporting "Results largely achieved" (minus 0.7), but conditions are poor at companies reporting "Not very effective" (minus 58.6). Business performance differed considerably, depending on the degree of attainment of the strategy, and the extent to which a company is able to flexibly respond to changes in the external environment clearly has a major influence on its success in strengthening the corporate culture.
    b. Individual strategies

    Examining the individual strategies as well, the following significant points emerge:

    • Business conditions are favorable at companies that conducted reforms aimed at flexibility or cost-cutting, such as implementing strategies including "accelerating decision-making" and "consolidating plants and other facilities", and at companies that succeeded in development of new products, and there is a considerable difference between these companies and those that reported "Not very effective" in this respect. The factors mentioned above clearly make a significant contribution to strengthening corporate cultures.
    • Meanwhile, many companies reported an adequate degree of achievement from the implementation of strategies including "streamlining ties with suppliers" and/or "improving efficiency in production and administrative work". However, business conditions are not necessarily good at companies reporting adequate achievement of above-mentioned strategy, indicating that these strategies alone are insufficient to strengthen corporate cultures.
    (2) A comparison between concentration in core competence and business diversification

    In regard to companies reporting "Results largely achieved" of the four basic strategies related to business fields, we compared the degree of performance, i.e. the percentage of those companies reporting "Results largely achieved" and "Some results achieved" of individual strategies.

    Regarding "concentration in core competence", the level of archievement is high for items relating to cost-cutting and efficiency in production/administration processes, such as "improving efficiency in production and administrative work" (87.3%), "consolidating plants and other facilities" (86.8%), "saving on personnel costs" (86.6%), and "streamlining ties with suppliers" (83.1%). On the other hand, the level of achievement is comparatively low for flexibility strategies such as "accelerating decision-making" or "improving flexibility in employment patterns and formats", and for strategies in product development and marketing.

    Companies that have achieved "business diversification" or "alliances with other companies" exceed those at "concentration in core competence" at performance results of overall individual strategies. In particular, the former has significant lead in product development and marketing. This difference is thought to be causing significant divergences in business performance amid the current difficult business environment.

    And among companies reporting the achievements of goals in "concentration in core competence", conditions appear to be comparatively good for companies that have succeeded in "development of new products & services", "efforts to stimulate demand in the domestic market" or "overseas markets".


    In summary, though companies report high levels of achievement in the field of "concentration in core competence", this has not necessarily led to their current business conditions. As background, it would seem that the "concentration in core competence" strategies performed by such companies have revolved largely around cost-cutting aspects including "consolidating plants and other facilities" and " saving on personnel costs" and the extent of achievement in such effective strategies as product development and marketing is not necessarily high.

    In contrast, among companies reporting achievement in "business diversification", although the numbers are small, the degree of achievement in items relating to product development and marketing is particularly high, as well as production/administration processes, and introducing flexibility into corporate response. These factors are believed to have led to more favorable business conditions amid the present difficult business circumstances.

  1. Future Strategies: What are companies' priorities?

    (1) Basic Strategies

    The percentage of companies reporting "Strengthen" over the medium-to-long term " (generally 3-5 years hereafter), is 29.3% for "concentration in core competence", 28.8% for "flexible response to changes in the business environment", and 26.6% for "alliances with other companies". These three, which are all fairly high rates, and "focus on shareholders" (13.7% as "Strengthen") combined with the percentage of companies reporting "Continue" are going to be emphasized by the majority of companies in the future.(The same question was asked regarding their plans for the time being (1 year hereafter), but there was little difference from their medium-to-long-term strategies.)

    With regard to "business diversification", over 60% of respondent companies reported "Strengthen" or "Continue", on the other hand, quite a few companies answer "Deemphasize", "Make change in policy", or "Not implement"(Looking at all companies, including those that replied "Unnecessary from the first (not a priority)" in Evaluation of past strategies, only 40.7% report "Strengthen" or "Continue") . Business conditions are favorable at companies reporting "Results largely achieved" in the past for "business diversification", but the number of such companies is small, and a larger number of companies report "Not very effective" or "Not implemented, although required" for this strategy. The fact that a number of companies have reported as "Deemphasize" or "Not implement" is thought to reflect the difficulty in achieving sufficient results in the diversification strategy.

    (2) Individual Strategies

    The proportions of companies reporting "Strengthen" are 55.9% for "efforts to stimulate demand in overseas markets", 46.6% for "development of new products & services", 33.7% for "efforts to stimulate demand in overseas markets", 30.0% for "improving efficiency in production and administrative work", 27.2% for "revising distribution and marketing methods", and 24.3% for "streamlining ties with suppliers". Thus, strategies relating to product development, marketing and efficiency in production/administration rank high. Compared with other items, the rates of target attainment for product development and marketing are not high, so a large number of companies are recognizing these items as challenges. In addition, companies that have in the past achieved results in "efforts to stimulate demand in overseas markets" and "development of new products & services" have seen these efforts lead to improved business conditions. Therefore many companies are emphasizing in addressing these strategies in an aggressive manner.

    On the other hand, low priority is given to strategies for "consolidating plants and other facilities" (15.2%), "saving on personnel costs" (11.5%), and "improving flexibility in employment patterns and formats" (8.6%). While many companies continue to emphasize these strategies, almost 30% replied "Deemphasize", "Make change in policy", or "Not implement". The low level of adoption can probably be attributed to the fact that many companies have already made a certain amount of progress in implementing such strategies, and some companies also feel the negative aspects such as the lowering of workforce morale.

    (3) Current business conditions and plans for the future

    Overall, with respect to the strategies they intend to emphasize from here onward, there is no major difference depend on their current business conditions. However, the percentage of companies reporting "Strengthen" for "development of new products & services" is higher in the case of companies whose business conditions are "Better". Meanwhile, with regard to items concerned with cost-cutting, such as "consolidating plants and other facilities" and "saving on personnel costs", a high percentage of companies whose business conditions are "Worse" answered "Strengthen".

    While there is not necessarily any significant difference between the two groups of companies in terms of overall trend, as a whole, companies in "Better" conditions tend to be planning to strengthen their efforts in product development. In contrast, those companies replying "Worse" feel they have no choice but to continue making efforts for cost-cutting kind of thing.

    (4) Issues relating to "development of new products & services"

    With regards to the question about the difficulties in the "development of new products & services" (multiple answers acceptable), the most common response is: "Matching market needs" (65.3%).

    Subsequently, items related to securing human resources such as "Securing qualified staff for R&D and commodity planning" with 52.8% of respondents, particularly in the manufacturing sector, and "Securing staff capable of offering high-quality products and/or services" (37.5%), centering on the non-manufacturing sector, are chosen. These are followed by "Shortage for sales and marketing staff " (34.7%), and "Improvements made by on-site staff's ingenuity" (29.3%). Many companies show a keen appreciation of the importance for the category like this, for which human resource is quite essential.

    (5) Issues relating to "price-reduction"

    When asked about "price-reduction" issues, 32.1% of respondents asserted "We cannot sell our products simply by reducing prices", 30.1% responded "Rival companies have cut their prices still further", and 20.4% chose "Sales volume has risen, but this has not led to improved profits", in descending order.

    Looking at "price-reduction" policies over the medium-to-long term according to the reasons for their adoption, companies replying "Rival companies have cut their prices still further" reported "Strengthen", of which the percentage is much higher than that any other companies did, showing that they are under pressure to carry out still further price reductions in the severe price competition. On the other hand, a fairly large number of companies replying "We cannot sell our products simply by reducing prices" reported "Deemphasize" or "Make change in policy". It looks like a considerable number of companies have realized that there are distinct limits to the effectiveness of price-reduction strategies.

    (6) Issues relating to "saving on personnel costs"
    a. Evaluation of steps taken up to now for "saving on personnel costs" and so forth
    • When asked to evaluate their efforts in relation to "saving on personnel costs" and "improving flexibility in employment patterns and formats" (multiple answers acceptable), the great majority of respondents naturally replied "They contributed to cost-cutting"(71.2%). Then, positive effects cited included: "They helped readdress flexibly the imbalance of work volume between different divisions, and helped the company adapt to changes in the business environment in a flexible manner" (27.7%), and "They helped us increase our added-value by assign the right people to the right tasks and through efficient performance thanks to teamwork" (18.4%). Meanwhile, quite a large proportion of companies also cited negative aspects, including "They made it more difficult to accumulate technique/know-how and pass it on to successors" (22.3%), and "They caused a decline in employee morale and motivation" (18.1%).
    • Furthermore, a comparison of future plans (medium-to-long term) for "saving on personnel costs" (broken down according to the evaluations in the above category) shows that about 40% of companies that cited "They made it more difficult to secure talented or qualified employees", as well as "They caused a decline in employee morale and motivation", reported "Deemphasize", "Make change in policy", or "Not implement".
    • As described above, while companies generally cited positive contributions from such cost-reduction efforts, some companies are intending that they will "Deemphasize" or "Make change in policy" for the "saving on personnel costs" strategy, due to the adverse effects of falling employee morale and difficulty in securing staff with adequate talent/qualifications.
    • Meanwhile, the number of companies reporting "Strengthen" for "saving on personnel costs" is not small, despite evaluation of such negative aspects.
    • As stated above, a high percentage of companies whose current business conditions are poor reply "Strengthen" for "saving on personnel costs". It is therefore thought that the some companies are aware of the positive and negative aspects of such strategy, but feel they have no choice but to save on personnel costs further in view of the lack of growth prospects.
    b. Measures to develop human resources
    • With regards to the question about their plans to develop human resources (regular employees) over the next three years, the percentage of companies replying " We plan to conduct in-house training to ensure both that employees can correctly perform routine tasks and that they can contribute to improving operations " is 80.1%, followed by "We plan to conduct in-house training to ensure that employees can correctly perform routine tasks"(74.0%). Thus, the majorities of companies plan to conduct such training by themselves, rather than simply entrust it to outside institutions. Moreover, companies want their regular employees not simply to be able to correctly perform routine tasks, but also to demonstrate their abilities to contribute to improving operations.
    • Regarding the use of educational methods other than in-house training, 67.9% of companies reported "We plan to provide support for employees' self-development", and 47.4% "We plan to make use of external private-sector organizations", while only 16.2% replied "We plan to make use of educational institutions such as universities, graduate schools, or schools in the miscellaneous category" and only 4.4% "We plan to make use of public institutions".
  1. Global Developments

    (1) Ratio of overseas production

    Production was carried out overseas by 67.1% of all Japanese manufacturing sector companies in FY2008. This proportion is expected to rise to 67.5% for the estimate of FY2009, and 67.2% for the estimate of FY2014. The figure is thus foreseen to remain in the same narrow zone in and after FY2007.

    Meanwhile, the ratio of overseas production output to total production by Japanese companies is 17.4% for the entire manufacturing sector (average of real figures) in FY2008, and is expected to rise to 17.8% in FY2009. The figure has been at around the same level since FY2006, but is foreseen to rise to 20.1% by FY2014.

    (2) Deployment of production processes (manufacturing sector)

    With regards to the question about the plans of companies for deployment of production processes within Japan and overseas in manufacturing sector over the medium-to-long term, the significant proportion, 55.7% of companies replies "Expand/strengthen" for deployment overseas. For deployment in Japan, a majority (64.9%) says "Maintain at current level", while 13.3% for "Downsize or withdraw", slightly exceeding the 13.1% for "Expand/strengthen"(To facilitate a comparison of the absolute numbers of companies answering "Expand", "Downsize" etc. for their production process deployment within Japan and overseas, we have included companies that replied "Unnecessary from the first" here.) .

    Overall, a majority of companies plan to maintain production within Japan at around the same level, and the scale of production in Japan may not necessarily decrease over the medium-to-long term, but certain firms appear to be planning to switch production overseas.

    (3) Reasons for setting up production facilities overseas

    When asked about the reasons for setting up production facilities overseas (up to three answers allowed), the percentage of companies replying " Strong demand exists, or demand is forecast to expand, for our products in the local market and markets in neighboring countries is the highest(77.0%) ,followed by "Labor costs are low" (45.3%), "We can cater effectively to overseas users' needs" (42.6%), " We have entered the overseas market(s) following entry by our parent company or customer(s) and so on " (28.5%), and " We can enjoy low costs of materials, overall production processes, distributions, and land/buildings." (27.1%).

    • In the FY2006 survey, companies in the manufacturing sector were asked about their reasons for maintaining production bases overseas. Although a simple comparison with this year's results is impossible due to differences in the choices available and so on, the common replies given at the time (single-choice question) were: "Possibility to secure good-quality and low-cost labor" at 35.4% and " Local product demand is brisk or is expected to grow in the future" at 33.0%. These figures show that lower labor cost excels a little as the reason to set up operations overseas.
    (4) The rate of reimports

    An examination of the "the rate of reimports," indicating the ratio of exports to Japan to the total overseas production, the average of real figures for the whole manufacturing sector is 24.5% in FY2008, and is expected at 24.1% for FY2009, showing a slight decline. The forecast for FY2014 is down still further, at 23.1%, which would be the lowest level since the start of the survey in FY2001.

    (5) Deployment of R&D departments

    Over the medium-to-long term, the percentage of companies in all industrial sectors reporting "Expand/strengthen" for their R&D overseas is 21.8%. This is, however, lower than the companies reporting "Expand/strengthen" for their R&D within Japan (29.4%). Additionally, for R&D in Japan, 49.5% of companies say "Maintain at current level", while a mere 0.8% of companies intend to "Downsize or withdraw". At the present time, the general trend among companies is to strengthen R&D activities within Japan. But companies answering "Expand/strengthen" for R&D overseas occupy 21.8%, and this trend may well gather pace gradually from here on.

    (6) Procurement of intermediate commodities and finished products, and outsourcing of operations

    An examination of Japanese companies' plans for the procurement of intermediate commodities and finished products reveals that about 30% of companies say "Expand/strengthen" overseas, which is much larger than the percentage of "Expand/strengthen" in Japan. For the domestic market, the majority of companies answer "Maintain at current level" while the proportion of "Downsize or withdraw" (10.9%) is slightly higher than those of "Expand/strengthen" (6.0%). Overseas procurement levels are expected to continue rising.

    Regarding the overseas outsourcing of operations (typically IT-related work, call-center operations, and financial services) overseas, the most companies reply "Not decide" or "Unnecessary". Thus, such overseas outsourcing has not yet become common among Japanese companies, but judging from the percentage of "Expand/strengthen", we estimate the total scale is approximately the same as for that in Japan. While it is not likely to exceed the scale of such outsourcing in the domestic market, growth in such operations overseas will probably grow gradually over the longer term.

Contact

Questions about this survey can be made to HERE

Cabinet Office, Government of JapanEconomic and Social Research Institute
1-6-1 Nagata-cho, Chiyoda-ku, Tokyo 100-8914, Japan.