Using the Western Model to Win in the Japanese Software Market
An Interview with President Naruke of Microsoft Co., Ltd.
Makoto Naruke was born in Hokkaido and is a graduate of Chuo University.
He joined ASCII Corporation in 1982, and in 1983 became assistant general
manager of the Software Development Department. In 1986, he joined
Microsoft KK as senior manager of OEM sal es. In 1990, he became
executive director of marketing, and in 1991 assumed his current post as
president of Microsoft Co., Ltd.
From October 1992 through September 1993, he served as a provisional
member of MITI's Information Policy Committee on Industrial Structure.
interviewed by Terrie Lloyd
Computing Japan: What makes Microsoft different from other software
companies? Why have you been so outstandingly successful in Japan, as
compared with Lotus or Novell?
Makoto Naruke: In terms of revenue, until 1993 we were third in Japan,
behind JustSystem and Lotus. Today, our revenues probably exceed those of
JustSystem and Lotus Japan combined. So, I guess that you could say that
we have been successful.
There are three main points that make us different from our
competitors. One, obviously we own the most widely used operating system
(MS-DOS) and environment (MS-Windows). This gives us good name recognition
with the general public. Until 1993, people bu ying PCs were power users
or so-called "PC maniacs." These days, though, computer novices are more
common - and for them, name recognition is important.
Second, about three years ago we had a big reorganization inside
Microsoft. Steve Ballmer, who was in charge of operating systems
development, moved to head Worldwide Sales and Marketing. At the same
time, I was assigned as president here at MSKK. Togeth er we decided that
we should invest more money in this market. Compared to the first five
years, we are now investing about double the resources, both in head count
and development funds. We are perhaps the first major software developer
to have realized the importance of the Japanese market and to have made a
major investment here.
The third point is that, since I became the president of Microsoft
Japan, we have changed our view of this market. Until this time, not just
Microsoft, but our competitors as well, thought that the Japanese market
was totally different from the US in all respects - people, buying
patterns, pricing structure, channels....
However, I felt that this was wrong. In fact, the Japanese market is
pretty similar to the US market. People buy PCs for the same reasons, and
the channels are not so different. So, afte r all the discussion, we
decided to use the Western model for doing business; including competitive
upgrades ó which we were the first to introduce to software vendors ó plus
new marketing techniques.
CJ: Some other companies, such as Oracle, have achieved similar market
penetration here. They also have followed the "success breeds success"
strategy, where being perceived as successful gains you the all-important
credibility that gives the Japanese con sumer the confidence to buy more.
Now that you are going to start competing with these companies, what do
you see happening here?
Naruke: We have no specific strategies to compete with specific companies.
It's true that MS SQL competes against Oracle products, and that Windows
NT server competes against NetWare. But, the reason customers like our
products is because of the variety a nd seamless integration. Especially
important for corporate users is that we are one of the very few companies
able to provide a unified platform on both the server and the client.
People like this. We are committed to providing a full solution.
CJ: So, you are closely following in Japan the same strategies as in the
States?
Naruke: Yes.
CJ: Microsoft KK has been undergoing some major changes. What area of
change is making the biggest difference to the company at present? For
example, outsourcing, partnering, internal restructuring, product
reorganization....
Naruke: OK, to answer that question: We have an internal index called the
Outsourcing Ratio. The ratio today is 0.72. This means for each MSKK
person, we have 0.72 outsourced staff. In the near future, the target will
rise to 1.2. This outsourcing is not for cheaper labor, but because it
allows us to hire experts. This means that we don't have to train them -
they come to us ready to work and contribute.
For example, our revamped telephone support center will be using
Corporate Software and several other vendors for both sales and technical
support. The reason we decided to outsource this area of operations is
that customers often not only own our soft ware but other companies'
products as well. This obviously causes our specialists some problems that
could be better handled by a third-party provider. To ensure the same
depth of service, however, we are establishing a regional support
escalation center manned by Microsoft employees (MSEs and other
specialists) to handle critical problems and give the front-line provider
immediate backup and support.
CJ: Corporate Software Japan is a joint venture with Fujitsu, and you have
had a long relationship with NEC. Do you have any conflicts in doing
business with both these competitors?
Naruke: From a product point of view, we are a multi-platform provider. I
think both companies are used to our multi-relationship style of business.
With NEC in particular, we have not just regarded them as being a client
or vendor, but rather, as a partn er. We have been working with them on
future products. My advice is that, to be in the Japanese market, you
should pick out a couple of very strong companies to partner with.
CJ: Who else was bidding for the call center project, apart from Corporate
Software?
Naruke: Transcosmos, CSK, and three or four others. Corporate Software was
not the only successful bidder; we are using them for NT and BackOffice
support. For Macintosh support and some telemarketing, for example, we are
using Transcosmos.
CJ: What is your personal background before joining Microsoft?
Naruke: After I graduated from university, I joined an automobile parts
manufacturer called Dynax. They mainly make clutch plates for automatic
transmissions, but amazingly they have a 50% market share worldwide.
At Dynax, I worked in marketing and also was in charge of
intellectual property. The strength of this company was in protecting its
trade secrets; they don't patent anything, they just keep it secret. Even
today, they have some manufacturing techniques t hat others can't
reproduce.
I became interested in technology and eventually decided to join
ASCII Corporation. In my second day at ASCII, I was moved to
ASCII-Microsoft, which at that time was a 100% subsidiary of ASCII. So, I
have been working for Microsoft for 15 years. My first
job at ASCII-Microsoft was the control of intellectual property - way
back in 1980, before MS-DOS. Our best-selling product at the time was
BASIC-80 for CP/M!
CJ: When did Microsoft KK become independent of ASCII, and how did ASCII
feel about it?
Naruke: Eight years ago. The separation caused some ill-feeling on the
ASCII side, but business is business, and life moves on. The relationship
between us has improved a lot.
CJ: The last time we met, you mentioned some things that you thought are
wrong with the Japanese software industry, and what is needed to improve.
Why are there so few young entrepreneurs coming up through the ranks?
Naruke: There are three reasons for the problems today. First, I know that
there are some programmers in Japan who can create good software, but most
of the people I meet have no desire to become an entrepreneur. They're not
interested in changing the wor ld.
By-and-large, they are just kids, totally focused on the
technology and not the business. My guess is that this is largely due to
their education. People say that the Japanese education system is not
conducive to creativity. But my personal opinion is that the problem is
not lack of creativity. The problem is that the education system does not
make people excited about doing new things. The schools want people to fit
into society and not take risks. So what we are seeing is a migration of
creative indivi duals to the US. The Japanese working for us in the States
are doing a good job in NT development and localization; they are capable
and creative.
There are some people here in Japan who have the entrepreneurial
drive to develop products, and for these few individuals, the hurdle is
raising funds. Japan's small business development is retarded by the very
strict rules on companies going public. It is really hard to go public, so
the only alternative is to go to the banks. In these hard times, with a
continuing credit crunch, banks have no interest in investing in software
development projects that have no collateral as backing.
The last reason is that the software market is small and immature.
In Japan, the average number of software packages per PC is about 3.2,
whereas in the USA it is about 8 or 9. I do see this changing over the
next year, however. Up until now, people have only been interested in
buying word processors and spreadsheets - that's all. This year and next
year though, people will be buying screen savers, small database
packages, multimedia titles, etc.
CJ: Which young entrepreneurial companies in Japan do you think have a
bright future?
Naruke: Game vendors, such as Square and Koei. In fact, most of the
companies who made it big on Nintendo have the ability to make it big in
the PC market, too. They have the money to invest and the know-how to
export. They understand business, unlike peo ple directly from a
programming background. Maybe Nintendo trained them to think about how to
make money!
You have to look at the industry segment to see who will make it
and who won't. Games made in Japan are competitive worldwide. However, in
spreadsheets there is no Japanese competition. Microsoft invested 10 years
to develop Excel. For someone to compete with us, they would probably
have to invest around $500 million to develop a similar product.
Another area likely to be successful are very small vendors, such
as ASP, a five-person company developing components for OLE2. While OLE2
is a good technology, it is difficult to build for. ASP is one of the
first to get into this technology. I can thin k of another three or four
similar-size companies with the ability to find market success.
CJ: Do you try and help these smaller companies become successful?
Naruke: Well, we don't do anything monetarily, but I do try to help
personally by talking about them with the press, or by having dinner and
giving them advice about marketing, and introducing them to key people in
the sales channels.
We also have a new intern program, whereby we accept university
students into the company. I recall one young guy in particular, who goes
to Tama University. I met him at a party, and he stood out as a potential
entrepreneur. He has his own ten-person company, even as a student.
Although he isn't in engineering, he already understands how to make
connections, get other people motivated, and make them write software for
him. I want to encourage these sorts of people.
CJ: Moving on, what non-Microsoft products released into the market over
the last three months stand out in your mind?
Naruke: Among competing products, I would say not so many. Perhaps only
Ichitaro [Japan's best-selling wordprocessor program] and ATOK9 [a
Japanese language front-end processor], which by-the-way, is a very good
piece of software. The creator of Ichitaro is JustSystem, and I respect
them. They only target a market of 4 million users, as against our
worldwide platform of around 70 million, and yet they have good products
and marketing. Apart from JustSystem, there is Novell, but I don't think
much of them. IBM's OS/2 Warp seems OK.
Other products that stand out that I have personally tried out are
two games: Kinoki Shogi, a very strong shogi [Japanese chess] game, and
Nobunaga no ki, a 16th century history simulation game. With Nobunaga no
ki, you really have to know your Japanese history.
CJ: Can you predict what the Japanese market will be like 12 months from
now?
Naruke: The reason why I have been personally trying out games recently is
that we believe the multimedia market for consumers, in particular
children, will expand faster than any other area. In the next year, we
plan to release at least 16 products for the home computing market.
The other market that will be expanding dramatically is that for
big business. I have to admit though, that I don't personally test many of
these products - they're too complicated! [Laughs.] Seriously, though, the
market for products targeting 1,000-plus-employee companies, not small-
to medium-size businesses, is a very exciting one. We estimate that PC
shipments in Japan will rise to about 4.3 to 4.5 million over the next 12
months.
The channels will change a lot. Software will be sold through
video rental shops, toy shops, and book shops. At the other end of the
market, apart from the major sales channels we already have, Microsoft
Solution Providers will take on a more important role, companies such as
Nomura and NTT. Some of these Solution Providers are already bigger than
the major PC vendors, and sell more than 150,000 units a year each. Their
sales comprise about 10% of the total sales of the PC vendors in Japan.
CJ: Do you think that the market for big-business client/server software
is finally starting to open up?
Naruke: Very definitely so. Especially the "middleware" business, such as
for OLTP, which US companies are very good at. But these vendors need to
make an investment here to get started, which they don't seem to want to
do. Instead, the best performers in Japan are companies like SAP, the
German company. I don't know why, but US companies tend to use an agent
for the first five years, then they separate, like we did at Microsoft.
Maybe ten years ago this was a good strategy, but right now I think that
it is the worst way to get started. Direct investment and rapid growth
are needed. The market will mature very soon, so quick action is
necessary. CJ: Are there any particular business areas that need
client/server solutions, and that might be open to foreign
(non-Japanese) developers?
Naruke: Case-by-case, industry-by-industry. For example, the retail
industry, such as 7-Eleven-type chains. These companies are very receptive
to Western business techniques and want to emulate them. They want the
software and marketing ideas. Itoyokado, 7-Eleven's parent company, has an
agreement with WalMart to import know-how and technology.
Another good example is the automobile companies. They are global
and are interested in marketing software. Financial companies? There are
chances in the management of money, but for sales tools, none.
Pharmaceuticals? Yes, there are good chances there.
These companies are global and are receptive to international business
methods. In contrast, I wouldn't bother with the transportation industry
and similar infrastructure-related businesses. They have too many
regulations and lack of competition.
CJ: How do you think Windows NT will do against Novell over the next 18
months?
Naruke: Novell-san, Gambatte kudasai ("Do your best")! In the USA, Novell
is much bigger than Microsoft in networking, so they are a dominant
competitor that we have to overcome. However, here in Japan we have a dual
relationship with Novell.
On the one hand, the more they increase the networking market, the
more sites are opened up for us in which to sell desktop software. I think
one of the reasons why Japan is behind the US in networking is because of
the weakness of Novell here. If they really were doing a good job in
Japan, theoretically they should have about 70% market share, as they do
elsewhere in the world. However, the reality is that they have less than
50% (actually, 45% to 48%). LAN Manager and LAN Server, both of which are
prod ucts we sell OEM, plus our own-branded Windows NT gives Microsoft a
combined LAN market share of greater than 50%. Don't you think this is
amazing? If Novell was doing a better job, the networking market in Japan
would be much bigger than it is today.
The second part of our relationship with Novell is that of a
direct competitor. It looks like they are emphasizing NetWare 4.xx series
products. However, people still want to use version 3.1x, which they
consider to be more appropriate for their organiza tional needs. I don't
believe that even Novell KK really knows how to position both of these
products, or when to recommend one over the other. I feel sorry for
customers buying NetWare version 4.xx. There really do have to be some
technical people inside Novell KK who know the version 4.xx bugs and
idiosyncrasies better than they actually do today.
CJ: When you say that Novell is "weak," in what area (apart from the
technical support example just mentioned) are they weak?
Naruke: Marketing is a clear point of weakness. They need younger, more
energetic leaders to push the company ahead.
CJ: To wrap up, I know that you have been lobbying the Japanese government
to improve access into the Japanese market by non-Japanese software
companies. Can you tell us more about those efforts?
Naruke: Yes, we are talking with three different government departments.
These are the Education Ministry, where we have offered 50,000 copies of
Microsoft software to 100 schools free of charge. They endorsed the
program, and it has been quite successful . The second is the Ministry of
Posts and Telecommunications, where we sat on the New Communications
Technology Committee, whose current goal is to determine what kinds of
telephone lines are needed from the software industry's point of view. In
the Mini stry of International Trade and Industry (MITI), I am on the
Industrial Structure Committee; we are asking MITI to support Japanese
software publishers' exports and to invest more money into companies
creating innovative software.
My most memorable experience in these various discussions happened
about two months ago, when I was chatting with a newly arrived MITI
person. To my great surprise, he thought that Microsoft was a Japanese
company! That just goes to show how well we have done our marketing job.
We also get help from the US embassy. It helps to be a global
company, because we can call on the help of each government to promote
their local software business.
