Tuesday, 30 April 2013

Quality vs. Cost vs. Japan

Quality AND Quantity

And only about £5 per set!

“Have you been to that Taiwanese restaurant out on Route 6? You have to go – it’s so cheap!”

I was pretty skeptical – in my native UK there are many things you might say to recommend a restaurant but “cheapness” isn’t generally one of them. In the end, I was persuaded to check it out: the food was indeed very cheap, but also very tasty and it came in huge portions too (see above!).

“Cheapness Culture” is widespread in Japan. People with good incomes and very comfortable lifestyles happily discuss which “Dollar Store” or “Pound Shop” equivalent is better. Customers travel for miles and miles to go to a popular Korean-style BBQ restaurant famed for the incredible quality and freshness of its beef, only to discover its prices are the same as any other grill shop you might stumble across.

Time and again in Japan the Quality-Or-Cost Paradigm, a fundamental rule of “basic common sense” strategy, is turned on its head as “differentiated quality competitors” beat their competition on price, and “cost competitors” manage to sell low quality products at high prices.

What exactly is going on here?

Consumers Across Cultures

Let’s take a step back and establish some of my own cultural biases. In the UK, I think it is fair to say, people shop differently and in different places depending both on their income and where they see themselves in society.

Some families would be ashamed to be seen in a high-end supermarket for fear of being labelled “uppity” or “posh”, while other parts of society wouldn't feel comfortable if their friends and colleagues knew they shopped at a pound shop. I don’t want to dwell too long on UK class culture, but even in relatively classless Western countries the same behaviours can be observed – as people move up the pay scales, their consumer habits tend to change.

For me, and many other Westerners, when someone says something is “cheap” what we hear is that the product is “low quality”, and would tend to be put off buying it. There is also the social pressure of being seen as someone who is “cheap”, ie. miserly. In the UK, pound shops are often shame-filled places where people go out of necessity, not choice.

Not so in Japan.

Price Sensitivity

Let’s consider a short case study.

In Hitachi Naka, half way between Katsuta and Sawa train stations is a small ramen shop. It makes the best noodle soup in the city, and yet it doesn’t charge a premium for it – the price of a bowl of soup is pretty much the same as at any other noodle shop. Cheaper than some, in fact.

Why aren’t they charging a premium? If the soup is really as well known and well liked as I know it to be, then surely customers would be willing to pay a little more?

Apparently the answer to this question is a resounding “No, they are not.”.

Largely due to the prevalence of cooking-from-scratch at home (or, as it used to be known, "cooking") and home economics classes in schools, Japanese consumers are very sensitive to price variation in restaurants - they know a rip-off when they see one. 

No matter how high the quality, an incredible bowl of soup is still just a bowl of soup – and people here just won’t pay more than a certain amount for it. So, ultimately, any cost or quality strategy in terms of staff, ingredients or production/process is restricted by highly price sensitive conditions present in each market.

Value Creation vs. Value Capture

In Western economies, when customer spending habits limit prices, companies will often compete with each other to reduce costs, so they are able to “capture” as much “value” back from each sale. This increases profits and so the company is able to continue to produce and employ and make further profits for its owners. This is a "Cost Strategy", and such strategies lead to consumers getting lower and lower quality goods, and is the start of the dangerous path to under-cutting and price wars.

In Japan on the other hand, although businesses may choose to compete on cost, they frequently choose to pursue a "Quality Strategy". The reasons for this are highly cultural, linked to a deeply ingrained artisan-ethic of "doing one's best" (がんばります - gambarimasu). Unlike Western concepts of quality which are often linked to premiumisation and scarcity, many Japanese SMEs capture value in a completely different manner: by using quality to drive up frequency of sale, loyalty and reputation growth.

This may seem counter-intuitive to those who are profit-orientated, but a more able business mind knows that cash flow is the life-blood of business, not profit. The margins will almost certainly be lower because the costs of creating quality are higher, and the price is relatively fixed, but what is the result? Large numbers of reliable, loyal customers, market share dominance, and reduced marketing costs as your customers do this on your behalf through word of mouth (the "Holy Grail" of marketing). 

Now we are starting to see why in Japan, and indeed much of East Asia, there is no connection in the public’s mind between “cheapness” and low quality – “It’s so cheap!” is in fact exaltation to value – “Look what a good deal I found!”, "Look how hard they must have worked!", or "This must be really popular!".

In Japan we see that “quality” and “volume” are quite natural partners while “cost” competitors, with their larger margins, are able to survive with lower sales volumes (which are also inevitable as customer realise they are paying unnecessarily high prices). The psychic connection between Quality and Price is broken: that which is common and that which is good are one and the same.

Conclusion - Business Wins AND Society Wins

There is often a lot of noise made about "alignment" of strategies across different business functions, and this can make a lot of intuitive sense. However, we need to think very carefully about the connection between the value capture side of our ventures (sales) and the value creation side (everything else).

Quality/Cost alignment tends to be most useful when applied to value creation, but the assumptions of "cost therefore low price/high volume" and "quality therefore high price/low volume" are cultural not scientific.

Western companies often shy away from the pursuit of quality (despite invariably paying it lip service) because they assume that quality strategy means high price, niche markets, rare materials and products and low sales volumes. They fear rejection by increasingly price sensitive customers who are trying to make their pennies go further in this tough economic climate.

Japan is a real living example of how the pursuit of quality in value creation is totally workable with a high sales volume and low prices What's more, lower, sustainable profit margins mean that businesses employ more people and that it is in the business's interest to invest in their staff - providing real training and developing real skills.

Pursuing a quality strategy is a win for business AND a win for society.


  1. Well done David! You do not have to be a millionaire or even pay a lot for very good food, and more, fine lifestyle in many ways, here in Japan!

  2. I think you're correct on this issue but it clearly isn't a strategy useful for most businesses, even in Japan, car manufacturers for example cannot expect a lot of repeat business so cars can never be that cheap, ditto electronics (though there is a recommendation effect).

    The main reason this strategy fails in the west is twofold. Firstly consumers are willing to pay for quality, but more importantly high costs of doing business discourage the vast number of different restaurants you see in Japan, and high taxes on prepared food mean eating out is less common so your returns from volume are minimal. As nice as it would be to have a culture to support this it's unlikely to happen in the west.

  3. This comment has been removed by the author.

  4. Yes, we are very fortunate, aren't we, Harold!

    @juleswatt, I am afraid I don't share your pessimism. The crucial point is population density.

    While you are certainly right to point out that there are different administrative and financial barriers to doing business in different countries, I think you would find it hard to argue that Western barriers to business are any more difficult to deal with than Japanese ones.

    As for the likelihood of the possibility of combining quality and volume to compete in the manner described above in Western countries - this is a real possibility.

    However, it is only appropriate if two key market conditions can be met - high price sensitivity and large volume sales potential (most likely through high population AND high population density/good transport links). If these conditions are not met, then the above strategy would not be advisable.

    The industries you mention don't necessarily meet these conditions generally (but they might). If you consider not consumer electronics, but the software industry, specifically "apps", we see that people just plain refuse to buy apps over a certain price. And given that the sales medium of apps is the internet itself, it could not better fit out twin requirements or sensitivity and volume if we were try and construct an example ourselves!

    The Internet and related industries aside, there are plenty of locations in Western countries where these conditions can be found! Any high population density city with a good public transport network is a good place to start looking! A little bit of market research can determine which locations have the greatest price sensitivity, and we can then select an appropriate value creation and capture strategy from there.

    A minor point on volume - volume is certainly achievable in the automobile manufacturing industry. Volume does not necessarily mean repeat custom - if a population served by a manufacturer is large enough, then that alone can sustain such a strategy. It is unlikely to happen in the west? It already does! (though I'd be loath to name names)