Japan’s Middle Market: Crucial. Competitive. Concerned.

Japan’s middle market
Crucial. Competitive. Concerned.
An Economist Intelligence Unit report
Sponsored by

1© The Economist Intelligence Unit Limited 2013
Japan’s middle market: Crucial. Competitive. Concerned.
Contents
Executive summary 3
Introduction 5
1: Characteristics of Japan’s middle market 8
More productive than its international counterparts 8
More resilient than large companies… 8
…but struggling to maintain employment levels 9
A changing industrial profile 9
Three distinct segments 10
2: Gauging sentiment in Japan’s middle market 12
Economic backdrop 12
Headline results 12
Revenues outlook shows mid-market resilience 12
Export earnings expected to rise 13
Staffing levels to remain flat 14
Financing conditions look brighter 14
A gloomy outlook for middle-market manufacturers 15
Healthcare is the best performing and most optimistic sector 16
OncoTherapyScience: Going it alone 17
Construction and real estate companies are bullish 17
Financial and professional services expect overseas earnings growth to continue 17
Smaller mid-market firms are unhappier 18
Younger firms are much more optimistic 18
Lifenet: A new face in insurance 19
Outlying regions are more pessimistic—but Tohoku sees improvement 20
3: Challenges to growth 21
Macro environment 21
Combating poor domestic conditions 21
Navigating the regulatory environment 22
Strategy 23
Establishing a growth strategy 23
Understanding changing demand 24
Montbell: The power of kinobi 25
People 25
Finding and developing talent 25
Ensuring leadership succession 26
Nakashima Propeller: The world is our market 27
Financial management 28
Securing affordable funding 28

2 © The Economist Intelligence Unit Limited 2013
4: Internationalisation and its challenges 30
Still mostly focused at home 30
Outsourcing but in-selling 31
China and South-east Asia are the biggest draws 32
Finding talent remains the principal challenge 33
Honeys: Playing the long game in Myanmar 34
5: Middle market growth champions 35
Growth champions are flexible and diversified 35
Growth champions have less bureaucratic management 36
Growth champions invest in innovation, IT and human capital 36
Growth champions keep closer control of costs and working capital 37
Growth champions are more likely to have an international strategy 37
Livesense: Growth through entrepreneurial spirit 37
Conclusion 39
Appendix I: Sentiment indices 40
Appendix II: Survey results 51

Japan’s middle market—comprising companies
with global annual revenues of between ¥1bn
and ¥100bn—is a vital part of the economy.
Yet, like its counterpart in other countries, it
receives comparatively little attention—arguably
far less than it deserves given the middle
market employs a quarter of the workforce,
earns around a third of gross revenues and has
demonstrated remarkable resilience amid the
difficult economic conditions of recent years.
This paper, sponsored by GE Capital, seeks to
remedy that deficiency. The paper examines
the characteristics of Japan’s middle market,
gauges the sentiment of senior managers
at mid-market firms, examines the key
challenges they face in growing and seizing
opportunities abroad, and identifies the factors
differentiating those that have grown steadily in
recent years from those that have struggled. The
paper also includes case studies based on in-
depth interviews with the heads of a number of
innovative and notable mid-market firms at the
forefront of their industries. It paints a picture
of a sector of Japanese business that is crucial
to the future of the economy, competitive
compared to its international peers and yet
concerned about its future.
The key findings of the paper include:
l Japan’s middle market is more productive
than its international counterparts
The middle market accounts for a relatively
small proportion of Japan’s total enterprises
(just 2.1%) but over a quarter of employment
and around one-third of total revenues. In
comparison with its developed-economy peers
Japan’s middle market is less significant in terms
of employment (as may be expected, given the
recruiting power of Japan’s giant enterprises) but
matches them in terms of revenues, suggesting it
outperforms in terms of productivity (revenue per
employee).
l It is more resilient than Japan’s large
companies…
The middle market has proved itself to be resilient
in the face of the economic problems Japan has
faced in recent years. Average nominal revenues
earned by middle-market companies between
2008 and 2011—years which saw the nadir of
the financial crisis and the devastating Tohoku
earthquake and tsunami—fell just 7.5%, while
those at large companies (with revenues over
¥100bn) fell 10%. In addition, according to the
survey results, executives at mid-market firms
thought demand for their goods and services
fared better in each of the past three years than
the national economy.
Executive
summary

l …but employment levels have been hit
harder
Comparing average employment among middle-
market firms from 2008-11, the sector has been
hit harder than the small and big sectors—
suggesting many have faced tough decisions
about cost-cutting to protect margins. Average
employment levels at mid-market companies fell
15% in the period 2008-11, compared to a 5%
drop among large companies. Small enterprises
(excluding sole proprietorships) performed best,
with average employment growing 9% in the
same period. The survey suggests that despite
an optimistic growth outlook at middle-market
companies, staffing levels in the sector are likely
to remain flat in 2013.
l Middle-market manufacturing is the least
optimistic industry
Middle market companies in Japan’s
manufacturing sector suffered the worst
performance of any mid-market industry in
2011 and 2012 and are the most pessimistic
about 2013. The sentiment index for mid-market
manufacturers’ total revenues has indicated
steadily contracting revenues year on year,
on average, since 2010. Although mid-market
manufacturers are marginally more upbeat about
2013, the index still shows that more expect
revenues to contract than expect growth—the
only industry group among the middle market for
which this is true. Increasing competition and
concerns about the continued “hollowing out”
of Japanese manufacturing are the most likely
culprits for the pessimistic outlook.
l Healthcare, construction and real estate are
the most optimistic sectors
At the other end of the range, the healthcare,
pharmaceutical and biotechnology industry
group is the middle market’s most bullish
sector. The sentiment index for total revenues
shows growth in each of the past three years
and optimism for continued expansion in 2013.
The sentiment index for total revenues is the
highest of any industry, followed closely by the
construction and real estate sector. Optimism
in these sectors reflects a positive outlook for
domestic demand. For healthcare this is due
partly to the continued ageing of the population,
while the construction and real estate sector
is presumably upbeat about reconstruction
spending and the re-election last year of the
Liberal Democratic Party, with which it has
historically close ties.
l Poor domestic conditions are a major
concern, but the middle market remains
focused at home
Regardless of a brighter domestic outlook
for the healthcare and construction sectors,
three-quarters of mid-market firms say that a
slowdown in domestic demand will be a major
challenge in the year ahead. Meanwhile, more
than half cite increasing competition in their
industry as a concern. However, only 26% of
mid-market companies derive 10% or more of
their total revenues from foreign markets, and
only 42% actually have investments outside
Japan. Younger mid-market companies are the
exception: 38% of those under 10 years old earn
more than 10% of their revenues from abroad.
l Finding and developing talent are major
challenges to growth
Worryingly, only about a third of mid-market
executives feel their firms can attract the talent
they require, reflecting perhaps the dominance
of big firms in Japan’s regimented graduate
recruitment process. As a consequence, just
41% of middle market respondents believe their
firms are committed to developing young talent
who will stay for their entire careers. Meanwhile,
the most pressing challenge for mid-market
companies that venture abroad is the attraction
and retention of suitable staff to manage those
investments. This is seen to be a challenge by
over 80% of mid-market companies.
l Many mid-market firms face a leadership
succession challenge
Less than 30% of mid-market firms feel they
have a well defined succession plan—a particular
concern given that many smaller mid-market

firms remain family owned and run. Executives
at mid-market firms generally have confidence
in their current management teams, though:
more than half of respondents believe their
management teams lead effectively, while only
about a fifth feel they do not have the skill set to
meet the challenges ahead.
l Successful mid-market firms have clearer
strategies, more flexible management and
invest more in innovation
Middle market “growth champions”—companies
that recorded three successive years of revenue
growth in 2010, 2011 and 2012—are identifiable
by certain characteristics not shared by their less
successful peers. Growth champions are much
more likely to have a clear growth strategy: some
71% says their firms have such a strategy in place
compared to just 32% of the poorer performers.
They are more flexible: two-thirds agree that they
are well positioned to take advantage of changes
in their markets, compared to just one third of
the remainder. Moreover, some 57% of growth
champions regard their success and adaptability
as a result of a less bureaucratic management
style while just 29% of the poorer performers say
the same thing. Finally, growth champions are
more likely to invest in product development and
process innovation in the coming year, and are
putting greater emphasis on acquiring new talent
and advanced IT.
These findings demonstrate that Japan’s middle
market is crucial to the economy and concerned
about its future. The research also demonstrates
that successful firms in this sector have the
potential to be Japan’s most internationally
competitive. The case studies show that many
middle-market firms have the entrepreneurial
drive, flexibility and determination to succeed
in expanding their horizons. Moreover, the fact
that they operate in the exacting Japanese
market can give them an edge internationally.
Finally, their competitiveness rests on occupying
a sweet spot between small-scale (and capital-
poor) craftsmanship on one hand, and somewhat
inflexible, highly diversified conglomerates on
the other. Japan’s middle market can therefore
play an important role in the long-awaited
recovery of the country’s economic fortunes.

1
See, for instance, US middle
market firms and the global
marketplace, Economist
Intelligence Unit, 2012; as
well as The Mighty Middle:
Why Europe’s Future Rests on
its Middle Market Companies,
and Leading from the Middle,
The Untold Story of British
Business, GE/Essec Business
School, 2012.
In Japan, as in other developed economies,
micro and small businesses receive a lot of media
attention and policy support, embodying as they
do the nation’s entrepreneurial spirit. Japan’s
largest companies, meanwhile, use their success
and influence to command constant media
coverage, control over leading industry bodies
and significant lobbying power. The middle
market—the focus of this report—falls between
these two stools, and is consequently often
overlooked, yet represents a crucial part of the
Japanese economy, employing a quarter of the
workforce and earning a third of gross revenues.
In this report we include any firm with global
annual revenues of between ¥1bn and ¥100bn in
the middle market. This definition was derived
from several sources, including analysis of the
latest economic census and the characteristics of
various groups of companies in a large database
of 1.3m Japanese firms. This revenue definition
also broadly matches definitions of the middle
market in comparable economies in Europe and
the US (adjusted for yen earnings).1
This revenue range includes a wide variety of
subsectors and company types, each crucial for
the future health of Japan’s economy. At the
lower bound, while it excludes very numerous,
very small enterprises—sole proprietorships
and many family-run service sector firms, for
instance—it includes innovative and fast-
growing small businesses at the cutting edge of
many industries. These include, for example,
new companies like web portal Livesense and
online grocery Oisix, both headed by young
entrepreneurs. At the upper bound it includes
many well-established firms that are leaders in
their industries—such as Honeys clothing, for
instance, or Nakashima Propeller. What role these
smaller growth champions and more established
middle-market stalwarts play in the economy,
what challenges they face, and whether they
have the potential to become Japan’s next giants
is what this research set out to answer.
Introduction

The findings of this report are based on three
research methods. The first involved detailed
analysis of the Orbis/Bureau van Dijk database
of 1.3m Japanese firms. Middle-market firms
were identified as those with annual revenues
of between ¥1bn (US$12.5m at end-2012) and
¥100bn. Discrepancies or gaps in firm-level
information in this database were resolved
through comparison with the most recent
national Economic Census for Business Activity
(2012). Secondly, in December 2012 and January
2013, the Economist Intelligence Unit (EIU)
conducted a survey of 1,000 senior executives
from middle-market firms headquartered in
Japan. Among the respondents, 50% were
board members or C-level executives, while the
remainder were directors, heads of business
units and other senior managers. Thirdly, the EIU
About the
research
conducted face-to-face interviews with a range of
senior executives from middle-market companies
in Japan, as well as with business associations
and industry groups. Our thanks are due to all
interviewees for their time and insights.
David Line was the author of the paper. Takato
Mori PhD and Amie Nagano PhD led research and
reporting in Japan, while Andrew Hutchings and
Sudhir Thomas Vadaketh provided additional
survey analysis. Our special thanks for his input
are due to Professor Ashwin Malshe of ESSEC
Business School, Singapore.
The English version of this paper should be
regarded as definitive. The Japanese translation
was edited by Takato Mori and Amie Nagano.

More productive than its international
counterparts
The middle market occupies a crucial place in
Japan’s economy, accounting for a relatively
small proportion of the total enterprises (just
2.1%) but over a quarter of employment and
around one-third of total revenues earned
(Figures 1.1-1.3). By these calculations,
the middle market in Japan is slightly less
significant in terms of employment than in
comparable economies—as one might expect,
given the preponderant recruiting power of
Japan’s giants—but it outperforms in terms of
productivity, or revenue per worker (Figure 1.4).
More resilient than large companies…
Middle-marketfirmsinJapanaremostlystable
andwellestablished:accordingtooursurvey,
just7%wereincorporatedwithinthepast10
years,58%arebetween11and50yearsoldand
35%aremorethan50yearsold.Theyhavealso
provedthemselvestoberesilientinthefaceof
Characteristics of Japan’s middle
market1
The middle market in Japan’s economy
Figure 1.1-1.3
97.9%
2.1%
Middle market
Companies
(% enterprises)
74.7%25.3%
Middle market
Employment
(% of workforce)
68.3%31.7%
Middle market
Revenue
(% of private-sector revenues)
Sources: Orbis/Bureau van Dijk, Japan economic census, Economist Intelligence Unit estimates
Figure 1.4: Middle-market sectors in comparison
Share of employment (%) Share of total companies (%) Share of revenues (%)
Japan 25.3 2.1 31.7
EU4 (Germany, UK, France, Italy) 32.6 1.52 31.7
US 34 3 33
Sources: Orbis/Bureau van Dijk, Japan economic census, Economist Intelligence Unit estimates, papers cited in footnote 1

theeconomicproblemsJapanhasfacedinrecent
years.Thisisevidentifonelooksatthechange
inaveragerevenuesearnedbymiddle-market
companiesbetween2008and2011,yearswhich
sawthenadirofthefinancialcrisisandthe
devastatingTohokuearthquakeandtsunami.
Throughthisperiod,averagenominalturnover
atmid-marketcompaniesinJapanfelljust7.5%,
whilethatatlargecompaniesfell10%(Figure1.5).
…but struggling to maintain
employment levels
However, when one compares average employment
among middle-market firms over the same period,
the sector has been hit harder—suggesting many
have faced tough decisions about cost-cutting to
protect margins. Average employment levels at
mid-market companies fell 14.6% in the period
2008-11, compared to a 5.2% drop among large
companies. Small enterprises (excluding sole
proprietorships) performed best, with average
employment growing 9.3% in the same period,
doubtless as workers sought alternative jobs in
the face of a tougher employment market. Smaller
companies may also have benefitted more from
official support schemes, of which there have been
a plethora in recent tough times, and from which
many mid-market firms may have been excluded
owing to their size.
Figure 1.5: Comparative average characteristics, 2008-2011
2008 Small ( ¥1bn in revenues)a Middle market (¥1bn-100bn) Large (¥100bn)
Turnoverb 49.5 6,361 594,606
Assetsb 15.6 15,113 2,264,114
Employees 7.5 144 9,411
2011 Small ( ¥1bn in revenues)a Middle market (¥1bn-100bn) Large (¥100bn)
Turnoverb 51.2 5,885 533,330
Assetsb 15.8 15,709 2,271,768
Employees 8.2 123 8,921
% change 2008-11 Small ( ¥1bn in revenues)a Middle market (¥1bn-100bn) Large (¥100bn)
Turnover 3.4% -7.5% -10.3%
Assets 1.3% 3.9% 0.3%
Employees 9.3% -14.6% -5.2%
a Excludes sole proprietorships b Nominal ¥m
Sources: Orbis/Bureau van Dijk, Japan economic census, Economist Intelligence Unit estimates
A changing industrial profile
By industry, manufacturing dominates the
middle market, accounting for over a quarter of
the sector overall. Financial and professional
services, construction and real estate, and IT,
technology and telecoms are the next biggest
sectors (Figure 1.6). However, the industrial
profile of middle-market companies in Japan
is changing. Manufacturing, among the most
pessimistic of industry groups across the middle
Middle-market industries
(% respondents)
Figure 1.6
26.2%
9.2%
7.3%
4.8%
19.5%
12.4%
10%
10.6%
Manufacturing
Financial and
professional
services
Healthcare, phamaceuticals
and biotechnology
Other
Construction and
real estate
IT, technology
and telecoms
Source: Economist Intelligence Unit survey
Logistics and
distribution
Consumer
goods and
retail

2
See Motohashi et al, “Open
Innovation in RD—New
Possibilities of the
Japanese Economy Found in
Medium-Sized Enterprises”,
Keidanren 21st Century
Public Policy Institute, June
2012. The paper focuses
on companies with annual
revenues of ¥100m-¥1bn.
market (see Part 2), is not among the top-three
industry groups in younger companies, while it
remains at the top of those in the established
and older brackets (Figure 1.7).
Three distinct segments
There are three distinct groups of firms within
Japan’s middle market. As in the economy as a
whole, smaller firms are more numerous in this
sector: some 88% of mid-market companies have
revenues under ¥10bn per year. In this paper the
middle market is therefore further subdivided
into small, medium and large sub-groups, the
characteristics of which are outlined in Figure
1.8. These illustrate changing economies of
scale; among the largest of the middle-market
groups, with average annual revenues of ¥70bn,
the average profit margin is almost 5%.
As the sentiment indices in Part 2 show, the
fortunes and outlooks of these sub-groups vary
considerably. Firms in the large subgroup have
been more resilient in weathering the recessions
of recent years: 50% of this group reported that
revenues grew in 2012, compared to just 38% of
the smallest middle-market firms.
Middle-market industries by age cohort
(% respondents)
Figure 1.7
34.9%
22.9%
5.1%
11.1%
10%
6.3%
9.7%
Manufacturing
Professional
services
Healthcare,
phamaceuticals
and biotechnology
Other
Construction and
real estate
Retailing
Logistics and
distribution
Old (over 50 years old)
18.9%29.3%
17.9%
12%
6.4%
5.2%
10.4%
Manufacturing
Professional
servicesRetailing
Other
Construction and
real estate
Financial
services
IT and technology
Established (11-50 years old)
16.4%
28.8%
15.1%
13.7%
8.2%
6.8%
11%
Manufacturing
Professional
services
Other
Construction and
real estate
Financial
services
IT and
technology
Emerging (up to 10 years old)
Logistics and
distribution
The three sub-groups are also characterised to
some degree by their strategy and aptitudes.
Understandably, smaller companies are more
likely to target niche segments (nearly half of
this sub-group does so), but they are much less
confident about innovation: a greater proportion
of small middle-market companies does not think
they innovate in products and services than
thinks that they do so. The large subgroup, those
earning annual revenues above ¥50bn, are the
most confident about their capacity to innovate—
and also about their ability to seize opportunities
and take advantage of change (Figure 1.9).
Smaller firms may nevertheless have the
flexibility to make the most use of new trends
in innovation. Kazuyuki Motohashi, a professor
at the University of Tokyo who led a research
project on medium-sized businesses for the 21st
Century Public Policy Institute at Keidanren, an
industry association, emphasises the importance
of smaller midmarket companies in open
innovation—that is, innovation in collaboration
with external firms and academic institutions.
“Mid-sized companies with sophisticated
technologies are playing an active part in driving

Advantages of size?
(% respondents)
Figure 1.9
Agree Disagree
NB: Excludes neutral responses.
0
10
20
30
40
50
Total Large
We target niche segment(s) We are innovators in new
products and services
We feel that companies our size
are uniquely advantaged to
maximise opportunities
Our size allows us to take
advantage of changes when
they occur
Medium Small Total Large Medium Small Total Large Medium Small Total Large Medium Small
38.6
26.6
37.1
26.3
33.3
29
42.9
25
32.2
30.8
32.2
30.4
34.8
17.5
37.1
15.7
46.9
13.7
37.7
16.2
31.9
25.8
33
22.6
41.7
18.9
34
23.5
26.3
36
48.6
17.1
Middle-market subgroups
Small = annual revenues ¥1bn-9.99bn
Medium = annual revenues ¥10bn-49.99bn
Large = annual revenues ¥50bn-100bn
collaborative innovation,” Professor Motohashi
says. “They have more limited resources than
bigger firms. So they tend to be very goal-
oriented and often produce outputs more
effectively.”2
To some degree, then, the middle market in Japan
is characterised by its diversity. To gauge the
diverse opinions among this group of companies,
the Economist Intelligence Unit conducted a
survey of 1,000 senior executives from middle-
market firms across Japan. The survey questions
covered their companies’ overall performance
and sentiment (analysed in Part 2), their ability
to manage challenges to growth (Part 3) and
their plans to internationalise (Part 4). Part 5
examines differences in strategy and operations
between middle-market “growth champions”
and their less successful peers. The picture that
emerges from this analysis is of a resilient, stable
sector, but one that is concerned about the
national economy and for which future growth
opportunities may well lie outside of Japan.
Figure 1.8: Middle market sub-groups by revenues
Middle-market subgroups
Small = annual revenues ¥1bn-9.99bn
Medium = annual revenues ¥10bn-49.99bn
Large = annual revenues ¥50bn-100bn
Middle market subgroup:
Small Medium Large
Proportion of total middle market by number of enterprises (%) 88 11 1
Average number of employees 90 472 1,476
Average profit margin (%) 3.12 3.86 4.99
Average annual revenues (¥bn) 2.7 20.5 69.9
Source: Orbis/Bureau van Dijk

Gauging sentiment in Japan’s middle
market2
Economic backdrop
Japan’s economy struggled in the years after
the global financial crisis, with exporters hit
by weakness in major overseas markets, a loss
of competitiveness vis-à-vis their rivals and
diplomatic tensions with China. The domestic
economy, meanwhile, was battered by persistent
deflation, policy uncertainty and the biggest
natural disaster in modern Japanese history,
in the form of the 2011 Tohoku earthquake and
tsunami. GDP growth, which had rebounded to
4.7% in 2010 following the global nadir of 2009,
shrank 0.5% in real terms in 2011 and registered
only 1.8% growth in 2012, despite a boost from
reconstruction spending, with the economy
slipping back into recession towards the end of
the year—its third in five years (Figure 2.1).
Nevertheless, the mood has brightened
considerably. Optimism has built over the
economic policies of the Liberal Democratic Party
(LDP), which returned to power after a sizable
victory in the general election of December
2012. “Abenomics”, combining a sizeable fiscal
stimulus package, dramatic efforts by the Bank
of Japan (the central bank) to get tough on
combating deflation, and various structural
reforms, has generated the most excitement
about Japan’s economic prospects in decades.
With the yen—the strength of which had long
been the bane of Japan’s exporters—falling 27%
between November 2012 and May 2013 and the
Nikkei stock market index rising some 37% in
the first four months of the year, superficially the
prospects for Japan’s economy look promising.
However, macroeconomic prospects for 2013
remain mediocre, with the EIU forecastingrealGDP
growth of just 1.2%. Concerns remain about both
the impact of ongoing problematic relations with
China and the effect on Japan’s colossal public
debt of yet more fiscal stimulus. Nevertheless,
the sentiment indices, despite being derived
from a survey conducted before excitement
about “Abenomics” had really taken off, reflect
optimism about prospects for Japan’s mid-market
firms, and the economy at large, compared to the
performance of both in recent years.
Headline results
Revenues outlook shows mid-market
resilience
Japan’s mid-market companies are faring better
than the economy as a whole, according to the
Real GDP
(% change year-on-year)
Figure 2.1
Source: Economist Intelligence Unit
-6
-5
-4
-3
-2
-1
0
1
2
3
4
5
2008 2009 2010 2011 2012 2013
-1.1
-5.5
4.7
-0.5
1.8
1.2

Total revenues
(Sentiment index: all respondents)
Figure 2.2
90
92
94
96
98
100
102
104
106
108
110
2013201220112010
In fact, mid-market firms appear to be among
Japan’s most resilient. Executives at mid-market
firms thought demand for their goods and
services—as well the fortunes of their industry
sectors overall—fared better in each of the
past three years than the national economy
(Figure 2.3), despite net negative sentiment
persisting. This shows a continuation of the trend
in average mid-market revenues from 2008-11,
revealed in Part 1, showing mid-market firms
fared comparatively well compared to large firms
(although still suffering from a drop in average
nominal revenues overall).
Export earnings expected to rise
Among mid-market exporters, sentiment is bullish
for 2013, with the index for overseas revenues
rising to 104.2 compared to 102.6 for domestic
revenues (Figure 2.4). This is likely to be linked to
the fortunes of Japan’s currency, which for much
of 2011 and 2012 remained overvalued compared
to those of Japan’s main competitors, particularly
the South Korean won (Figure 2.5). In the weeks
The sentiment indices in this report were
compiled from the results of survey questions
asking respondents to rate, first, whether
quantifiable performance indicators such as
revenues and staffing levels had risen or fallen
in the past three years, and whether they
expected them to rise or fall in 2013. Secondly,
they were asked to rate whether qualitative
factors such as overall demand, market
conditions, the health of their industries,
and the broader economy had improved or
deteriorated in the past three years, and what
their expectations were for 2013. For all of these
questions, respondents ranked their answers
from 1 to 5, where 1=substantial improvement
(or growth), 2=moderate improvement,
3=no change, 4=moderate deterioration (or
contraction) and 5=severe deterioration.
To produce a single index number for each factor
in each year, the percentages of respondents
picking each score from 1 to 5 were multiplied by
1.5, 1.25, 1, 0.75 and 0.5 respectively. The sum
of these figures was multiplied by 100. Therefore
any number above 100, to a possible maximum
of 150, indicates net positive sentiment (eg
growth) in that year, and any number below
100, to a possible minimum of 50, indicates net
negative sentiment (eg contraction).
Although the standardised methodology makes
results between sub-groups in this survey
comparable, it should be noted that data
for the years 2010, 2011 and 2012 are based
on performance while data for 2013 reflect
expectations as of January 2013. Thus it is
unsurprising that in many cases 2013 data show
an expected upturn, reflecting the enduring
hope of many executives that things will be
better tomorrow than they were yesterday.
Index methodology
survey results. Although in 2011 revenues among
the entire sample contracted on average, top-line
growth returned in 2012, with an index score of
just over the break-even point of 100. Projections
for 2013 show sentiment about revenues
improving to 103.3, perhaps reflecting optimism
about the new government’s bold economic
policies (see Figure 2.2).

Company, industry and economy
Figure 2.3
80
90
100
110
120
2013201220112010
Your industry as a whole
Demand for your company’s products and services
Japan’s economy
Domestic v overseas revenues
(Sentiment index: exporters only)
Figure 2.4
90
92
94
96
98
100
102
104
106
108
110
2013201220112010
Domestic revenues
Overseas revenues
before the survey for this report, however, the
yen weakened considerably as the government
increased pressure on the Bank of Japan to
increase the scope of its monetary easing, giving
Japan’s exporters a much-needed boost in
competitiveness.
Staffing levels to remain flat
Rising revenues are not likely to mean increased
hiring across the mid market, however; staffing
levels were unchanged in 2012 and are likely
to remain flat in 2013 (with an index score of
100.8). This runs counter to a separate question
posed in the survey about whether mid-market
US$ spot exchange rate
Figure 2.5
Source: FT/Haver Analytics
70
75
80
85
90
95
100
J
2013
DNOSAJJMAMFJ
2012
DNOSAJJMAMFJ
2011
DNOSAJJMAMFJ
2010
Yen, left-hand side Won, right-hand side
1,000
1,050
1,100
1,150
1,200
1,250
1,300
firms in general will be placing more emphasis
on hiring new talent over the coming year: 47%
said they would and only 9% said this would
receive lesser attention. Regardless of whether
companies focus more on hiring new talent, net
employment in the mid market seems unlikely
to grow even if expectations about revenues are
borne out (Figure 2.6).
Financing conditions look brighter
With regard to external factors affecting mid-
market companies, expectations for 2013 are
more muted. In general, mid-market firms
expect flat or poorer competitive and regulatory

Total revenues
(Sentiment index)
Figure 2.8
85
90
95
100
105
110
115
2013201220112010
Manufacturing Construction and real estate
Consumer goods and retail Financial and professional services
Logistics and distribution
IT, technology and telecoms
Healthcare, pharmaceuticals and
biotechnology
Other
environments to endure through 2013, although
sentiment has improved somewhat from 2011-12
(Figure 2.7). One brighter area is sentiment about
financing conditions: both in 2012 and for 2013
optimists marginally outnumbered pessimists,
with the index rising from 101.8 to 103.9.
This rise is somewhat surprising given the end of
the SME financing facilitation law in March 2013.
The law, which went into effect in December
2009, required financial institutions to try to
accommodate requests from SMEs to extend
repayment periods or reduce interest rates on
loans. While it certainly helped many small
Staffing levels
Figure 2.6
90
92
94
96
98
100
102
104
106
108
110
2013201220112010
External factors
Figure 2.7
90
92
94
96
98
100
102
104
106
108
110
2013201220112010
Financing conditions
Competitive environment
Regulatory environment
companies, many middle-market firms would also
have benefited from its provisions.
Despite the imminent expiration of the act when
the survey was conducted, macroeconomic policy
suggested better financing terms may be on the
horizon. Interest rates in Japan have remained
low for many years, but with persistent deflation,
real rates remained in positive territory. In early
2013 there was considerable excitement about
an expansion of quantitative monetary easing by
the Bank of Japan and a commitment to battle
deflation, which doubtless led to more optimism
among mid-market executives about financing
conditions in the coming year.
A gloomy outlook for middle-market
manufacturers
Middle-market companies in Japan’s
manufacturing sector—the largest industry
group, accounting for 24% of the total—suffered
the worst performance of any industry in 2011
and 2012 and are the most pessimistic for 2013.
The index for mid-market manufacturers’ total
revenues fell from 98 in 2010 to 96 in 2011 and 93
last year, indicating steadily contracting revenues
year on year, on average. Although mid-market
manufacturers are marginally more upbeat about
2013, at 98.6 the index still shows that more

expect revenues to contract than expect growth—
the only industry group in the middle market for
which this is true (Figure 2.8).
This pessimism is perhaps to be expected.
Manufacturing in Japan has suffered a variety
of hardships in the past three years. In
particular, the strength of the yen cut export
competitiveness—and mid-market manufacturers
are among the most dependent of any industry
on external markets. Some 59% receive a portion
of their total earnings from overseas, compared
to 42% among the middle market as a whole. The
survey also shows that 37% of manufacturers
receive more than 10% of their total revenues
from overseas, while across the entire middle
market this is true of just 26% of firms.
But depressed earnings from direct exports are
only part of the story: many manufacturers in
Japan’s middle market are suppliers to Japan’s
major exporters, for instance in the auto
sector. Falling exports at these giants in recent
years—whether down to the strong yen, or rising
anti-Japanese sentiment in major markets like
China—meant fewer orders for suppliers in Japan.
Given this, it is encouraging that a majority of
those who do earn revenue in overseas markets
expect conditions to improve. The index for
overseas revenues climbs into positive territory
in 2013, at 102.4 (although manufacturers are
still the most pessimistic industry).
Healthcare is the best performing and most
optimistic sector
At the other end of the range, the healthcare,
pharmaceutical and biotechnology industry
group is the middle market’s most bullish sector.
The index for total revenues shows growth in
each of the past three years, and optimism for
continued expansion in 2013. At 107 (the highest
for the total revenues index, along with financial
services and construction and real estate), this is
a slight deterioration from a strong performance
in 2012 (109) and an even stronger one in 2011
(112), although optimists still outnumber
pessimists by some margin.
This is optimism borne principally on conditions
in the domestic economy. A glance at Japan’s
ageing population, coupled with policy steps
to encourage innovation and investment in the
sector, suggest healthcare is one of the most
promising growth industries in Japan’s middle
market. This can be seen in these companies’
expectations about demand for their products
and services in 2013: the index number of 108
for this variable suggests considerably more
optimism than in manufacturing, for instance
(at 99). Healthcare, pharma and biotech firms
are also the most bullish about the competitive
environment, which after a tough 2012 is
forecast to improve in the coming year.
This translates into a particularly marked
difference between healthcare and other sectors
with regard to staffing levels. In each of the
past three years the index for staffing in the
healthcare industry group does not fall below
108. In no other sector does the index go above
104 (Figure 2.9). Some 60% of mid-market
healthcare, pharma and biotech companies are
putting a greater emphasis on hiring new talent
in the coming year, compared to 47% across the
whole sample. Moreover, some 52% agree with
the statement “We are committed to developing
Staffing levels
(Sentiment index)
Figure 2.9
90
95
100
105
110
2013201220112010
biotechnology
Other

young talent who will stay with us for their entire
careers”, compared to 41% across the entire
middle market.
Construction and real-estate companies
are bullish
One other sector in Japan’s middle market that is
notable for its optimism is construction and real
estate. Indeed, in terms of the outlook for total
revenues in 2013 the index for this industry, at
107.7, is second only to the healthcare, pharma
and biotech sector. Middle-market firms in this
sector are also the most bullish about conditions
for their industry overall in the coming year,
with the index for 2013, at 106, well above even
the healthcare sector. This follows three years in
which a much greater percentage of respondents
in the industry reported worsening conditions
than improving ones—despite a presumed boost
A biotech venture that sprung from the
University of Tokyo’s Institute of Medical Science
in 2001, OncoTherapy Science (OTS) specialises
in discovering novel anti-cancer therapies
with minimal side-effects, based on human
genome research. OTS, which had forecast
sales of ¥6.3bn in 2011/12, listed on the Tokyo
Stock Exchange’s Mothers Index in 2003. Its
business model is based on licensing new cancer
treatments to pharmaceutical companies,
which carry out clinical trials on them. So far,
OTS has only licensed to Japanese companies,
though it is currently also negotiating with
pharmaceutical firms from overseas.
OTS operates out of the Kanagawa Science
Park in Kawasaki, a facility that receives some
support from the prefectural government,
though it is mostly directed at new start-ups.
CEO Takuya Tsunoda says the financial support
that is available to mid-size firms comes with so
many obligations and restrictions, it’s mostly
unworkable. “For example, budgets that come
from public bodies usually have to be used up by
the end of the financial year in March,” says Dr
Tsunoda. “And then, if we make any money from
it, that has to be paid back quickly, but we need
the funds to reinvest in our research.”
Although OTS faces some of the same
challenges as other mid-level companies and
ventures in attracting talent, its close links
with the University of Tokyo does mean that
hiring from Japan’s top academic institution
is easier than it otherwise might be. However,
Dr Tsunoda points out that for a biotech
venture, unconventional thinking is often more
important than high test scores.
Dr Tsunoda says OTS would consider acquisitions
to strengthen its pipeline and grow its business,
but it is not interested in becoming a “big
pharma” company, preferring to remain a
developer of innovative treatments. He says
that part of the problem for biotech ventures in
Japan is the lack of role models that have grown
into larger companies. “We would like to become
that model case, without any help from the
government.”
OncoTherapyScience: Going it alone
from reconstruction spending in the tsunami-hit
north.
Partly this sector’s newfound optimism reflects
short-term considerations: given the historically
close ties between the LDP and the construction
sector, its victory in the general election buoyed
sentiment in the industry. Indeed, a large
part of the new government’s ¥10.3trn fiscal
stimulus plan, unveiled in January, was allocated
to infrastructure and construction spending.
Consequently, it is no surprise to see the middle-
market construction and real-estate sector also
bullish about hiring this year, with the EIU index
for staffing levels rising to 104—second only to
the healthcare sector.
Financial and professional services expect
overseas earnings growth to continue
All mid-market sectors that earn revenues from

overseas are, on average, positive about export
earnings rising this year, thanks no doubt to
the weakening yen. Among the most optimistic
are financial and professional services firms, of
which 35% in the middle market earn revenues
overseas. Although moderating from a strong
2012, more firms in this sector expect growth in
the coming year than expect contraction, with an
index score of 107 (Figure 2.10).
These companies have fared better in the recent
past than other mid-market exporters (for
instance manufacturing and retail firms), in part
because of the increasingly acquisitive nature
of large Japanese companies. By mid-December
2012, when the survey for this paper launched,
Japanese companies had bought 489 foreign
firms since the beginning of the year, beating
a calendar year record of 463 set in 1990.
Cumulatively these deals were worth ¥6.89trn
(US$8bn), the third-highest figure on record
according to Recof, an MA advisory firm. Each
of these deals entails the involvement of both
financial and professional services firms, and
those in the middle market with the capability
to support acquisitive clients abroad have been
rewarded.
Smaller mid-market firms are unhappier
It is no surprise that smaller mid-market
companies, in the main, are less happy with
their recent performance and more pessimistic
about future conditions than larger ones. In this
sense the index results follow similar surveys
of corporate confidence, such as the Bank of
Japan’s headline Tankan Index (published
quarterly). Indeed, although in the EIU index in
2012 large mid-market firms (those with annual
revenues of between ¥50bn and ¥100bn) fared
worse than medium-sized ones (with revenues
of ¥10bn-¥50bn), their outlook for 2013 is much
more optimistic, with an index number of 109
for total revenues—compared to around 102 for
both medium and small (¥1bn-¥10bn) mid-
market companies.
Younger firms are much more optimistic
The indices reveal that emerging mid-market
companies—those up to 10 years old—are
considerably more optimistic about their
prospects for the coming year, and had a far
better 2012 than older, more established firms
(Figures 2.11-2.14). This optimism is evident
for both domestic and overseas revenues, for
respondents’ industries as a whole, and with
regard to demand for individual companies’
products and services. Even in external
factors such as the regulatory and competitive
environments, and financing conditions—a
factor not commonly better for new firms than
for more established entities—youthful firms are
more bullish.
Several points should be made about the
apparent brighter outlook for younger mid-
market companies. One is that the result comes
from a much smaller dataset: only a minority
of middle-market firms in Japan is young—just
7.3% were established within the past decade.
In addition, it is true that earnings are
considerably more volatile in younger companies
and industries than in their more mature
counterparts, so there is no guarantee that their
optimism will be justified.
Overseas revenues
(Sentiment index: exporters only)
Figure 2.10
85
90
95
100
105
110
115
2013201220112010
Other

Established in 2008, Lifenet Insurance Company
was the first new independent insurance
company in Japan since the second world war.
With 90% of households already covered by life
insurance policies and the industry dominated
by giant, venerable firms with colossal
resources, the prospects for a new entrant would
not appear to be great. But the 100% internet-
run business has achieved a rapid growth rate
(with the annualised premiums of policies in
force worth approximately ¥6.3bn as of end-
2012) with a gamechanging strategy.
In Japan’s struggling economy, “There
is strong demand for more affordable
insurance products, especially from younger
generations,” claims Lifenet’s president and
founder, Haruaki Deguchi. In order to exploit
this niche, the company has reduced policy
premiums drastically by using the internet
as its only sales channel and targeting
computerliterate young consumers. Mr Deguchi
is scathing about the established giants, saying
they are “dependent on the business model of
the 20th century premised on high economic
and population growth—selling highly priced
products through extensive sales networks.”
Lifenet isn’t worried about the market’s
90% saturation rate. “We currently have
about 170,000 policies in force, for 100,000
policyholders. But this is only a small proportion
of the younger population in Japan given that
the country has about 1.2 million new adults
this year,” Mr Deguchi says. “The life insurance
market in Japan is a ‘blue ocean’ for us.”
Lifenet: A new face in insurance
Total revenues
(Sentiment index)
Figure 2.11-14: Youthful optimism
85
90
95
100
105
110
115
2013201220112010
Emerging Established Old
Staffing levels
(Sentiment index)
85
90
95
100
105
110
115
2013201220112010
Demand for your company’s goods and services
(Sentiment index)
Competitive environment
(Sentiment index)
85
90
95
100
105
110
115
2013201220112010
90
95
100
105
110
2013201220112010

Of course, older companies that have remained
in the middle-market bracket, rather than
graduating out of it, are unlikely to be
identifiable as growth champions, or notable
for the gung-ho optimism of their managers.
Still, they are marginally the most optimistic
group concerning Japan’s economy as a whole in
2013. This may well reflect their satisfaction at
the return to power of the LDP after three years
of Democratic Party rule. Executives at older
companies that established themselves in the
post-war years under a long period of LDP rule
may feel more sanguine now the party is back in
power.
Outlying regions are more pessimistic—but
Tohoku sees improvement
While in the Bank of Japan’s most recent
quarterly report of regional economic conditions
(the Sakura report) only Hokkaido reported signs
of a pick-up after a national recession, the middle
market there is less bullish. In fact, Hokkaido
is one of only two regions—the other being
Kyushu Okinawa—where the total revenues
expectations index for 2013 is below the 100
break-even mark and pessimists outnumber
optimists.
Things are, however, looking up for the Tohoku
region’s middle market. Although for obvious
reasons companies there are far from bullish
(and reported the worst index score for revenues
and staffing levels in 2012), sentiment is
improving somewhat from a low base. Indeed,
in 2012 middle-market companies in the region
have the highest index score for domestic
revenue growth (at 107.4) and the second-
highest for total revenues (at 106.1). They are
also very optimistic about improving financing
conditions in 2013, with an index score of 110.8
on this factor.

The mixture of confidence and concern revealed
in the sentiment indices suggests Japan’s middle
market faces some pressing challenges. This
section looks more closely at the strategies
employed by Japan’s middle-market companies
as they grow and the problems they face in doing
so. The section is split into four parts, looking at
the macro situation—including the regulatory
and policy environment—strategy, people and
financial management.
Macro environment
Combating poor domestic conditions
Japanese mid-market firms are clearly nervous
about macro challenges to their business. Three-
quarters of respondents say that a slowdown in
domestic demand will be the biggest challenge
in the year ahead (see Figure 3.1). Meanwhile,
more than half cite increasing competition in
their industry. This suggests that mid-market
firms expect a difficult and tricky year ahead with
challenges on multiple fronts—lower domestic
demand will hurt revenues, while increasing
competition could, among other things, lead to
price wars as companies battle for a dwindling
customer base.
Higher taxes and inflation are the next two
major economic challenges. Worse, almost half
of respondents feel they cannot pass on higher
commodity costs to their customers. Issues such as
exchange rates, a slowdown in export demand and
worsening relations with China are of less concern.
The impact of these challenges varies by industry.
Some 73% of manufacturing firms, for instance,
are concerned with a slowdown in domestic
demand. The “hollowing out” of Japanese
manufacturing, faced with cheaper overseas
competition, is one major reason. Akinori Tsuji,
president of Tosa Denshi, a Shikoku-based
manufacturing firm specialising in electronic
components and LCD devices with annual
revenues of around ¥1.6bn, calls this “a real and
deepening crisis” for firms like his. “The time will
come when the management team of the next
generation is forced to seriously consider moving
our operations offshore in order to survive.”
Related to this problem, many manufacturers are
also worried about exchange rates (44%) and
a slowdown in export demand (30%). However,
Challenges to growth3
Economic challenges to growth
(% respondents selecting challenge in top three)
Figure 3.1
Slowdown in domestic demand
Increasing competition in industry/market
Operational risks (eg, natural disasters, fraud)
Slowdown in demand for exports
Inflation (higher input prices)
Exchange rates
Higher taxes
75
55
45
37
30
26
19
13
Worsening diplomatic relations with China

only 18% are worried about worsening diplomatic
relations with China, suggesting either that it
is not a key market for them or that they believe
that their warm corporate relationships will
supersede any international hostility.
Pharmaceutical firms, meanwhile, are most
concerned with higher taxes, with 71% of
respondents believing that that will be their
biggest economic challenge in the year ahead.
Almost as many are worried about rising
competition in their industry. But the sector
appears inward-looking: only 13% are concerned
with exchange rates and only 4% with a
slowdown in exports.
Among larger mid-market firms (those with
annual revenues of ¥50bn-100bn), there is less
worry about competition (44% of respondents)
and operational issues (14%) but more concern
with a slowdown in export demand (35%). This
indicates that as mid-market firms grow in size,
they start to dominate their sector a bit more and
become better at mitigating operational risks.
Regulatory challenges to growth
Figure 3.2
Uncertainty about Japanese national
economic policy
Unstable politics in Japan
Dealing with local/prefectual taxation
requirements
Navigating regulations in overseas markets
Dealing with national taxation requirements
Uncertainty about Japanese local/prefectual
economic policy
Keeping up with changing domestic regulations
(excluding taxation)
65
63
49
37
36
24
20
7
Dealing with taxation requirements in overseas
markets
Navigating the regulatory environment
When asked about the biggest regulatory
challenges to the growth of their companies,
some two-thirds of executives cited uncertainty
about Japanese national economic policy
(see Figure 3.2). A similar proportion worries
about unstable politics in Japan. Almost half
middle-market firms believe that keeping up
with changing domestic regulations (excluding
taxation) might hobble their progress.
These fears were perhaps exacerbated by the
timing of the December 2012 general election,
which took place while the fieldwork for our
survey was being conducted. But it is fair to
say that the political turbulence Japan has
experienced over the past five to seven years
has created an extremely uncertain operating
environment for mid-market firms. They do
not wield the economic influence of large
corporations, or command the political cachet of
the SME sector, and therefore perhaps feel more
vulnerable to sudden shifts in the political and
policy landscape.
To make matters worse, less than a third
of respondents feel the government looks
favourably on their business or industry. In
particular, within the consumer goods sector,
only 23% of respondents say the government
looks favourably on them—the imminent higher
consumption tax presumably weighing heavily
on their minds. Despite positive sentiment about
the economic policy of Shinzo Abe, the new LDP
prime minister, it is likely to take a long period of
stability to assuage middle-market fears about
political and regulatory capriciousness.
There are some interesting differences at the
sector and firm level. For instance, almost half
of respondents from construction firms worry
about local policy. This could be because success
in the Japanese construction sector depends a
lot on local political relationships. Newer mid-
market firms are much more likely to worry about
local taxation requirements, with some 40% of

respondents citing it as the biggest regulatory
challenge ahead. This suggests that, as young
firms, they have yet to figure out the most tax-
effective corporate structure and strategy.
Strategy
Establishing a growth strategy
Despite the macroeconomic challenges the
middle market faces, when it comes to marketing,
positioning and growth strategies, Japan’s mid-
market firms present a mixed picture. Less than
half the executives surveyed believe their firms
have a clear growth strategy (see Figure 3.3).
Relatedly, fewer than 40% of them claim to target
niche segments, and less than one third says their
firms are innovators in new products and services.
This suggests that the average Japanese mid-
market firm is caught somewhat in the middle
of a long corporate growth cycle. Though they
have outgrown the start-ups and small, niche
producers in their industries, relatively few are
committed or prepared to grow beyond their
middle-market position. This may be an issue if
they remain focused only on their core business,
warns Naohiro Nishiguchi, executive managing
director of the Innovation Network Corporation
of Japan (INCJ), an investment fund financed in
part by the Japanese government. “If companies
only look after their existing business, at a
certain point in time they will most likely face
stagnation as they remain unprepared for rapid
changes,” he says. “It’s important to prepare for
the next step, especially when things are positive
with existing business.”
To be sure, many see the distinct advantages
of their middle-market position. Koji Yoshida,
president of Sun Ace of Kanagawa prefecture—a
manufacturer of polyvinyl chloride stabiliser, with
sales of ¥17.2bn in 2011-12—sees the merits of
specialisation. “Big companies tend to diversify
their operations and cover vast business areas,”
he says. “It could mean that the quality of their
products and services in each business area is
disproportionate. Unlike our bigger counterparts,
we are more of a specialist that focuses on limited
business areas of strength. That enables us to win
the confidence of our clients.”
The survey suggests that as middle-market
firms grow bigger, their strategies crystallise,
they start to innovate more, and they begin to
offer a wider range of products (see Figure 3.4).
Furthermore, when asked about their product
development investment plans over the next
year, 43% of respondents from larger mid-market
firms say they will be investing more—compared
to an average of 31% across the sector as a whole.
This is partly in response to the problem of
being squeezed by cheaper competition from
Diverse strategies
(% respondents)
Figure 3.3
We have a clear growth strategy
We target niche segment(s)
We are innovators in new products and services
We offer a wide range of products
426 28 20 3
327 35 21 6
335 33 24 4
284 37 24 7
Strongly agree Agree Neither agree nor disagree
Disagree Strongly disagree

abroad—especially in cases where middle-market
companies operate as undifferentiated suppliers
or service providers. Tosa Denshi’s Mr Tsuji warns
that the company has to move up the value chain
to survive. “It is becoming increasingly clear
that we cannot continue to make a profitable
business for long just by providing high-
quality production and assembly services as a
subcontractor. Which is why we are currently
trying to strengthen our capability to develop
quality-sensitive products”, he says.
The transformation from subcontractor to
independent product developer is crucial to
success, reckons Professor Motohashi of the
University of Tokyo. Listing the three most crucial
attributes of a successful mid-size company,
Growing up
(% responding “Strongly agree” and “Agree”)
Figure 3.4
We are innovators in new products and
services
We have a clear growth strategy
We offer a wide range of products
59
44
48
27
55
33
Large Small
he also stresses the need for speedy decision-
making and the need to develop products in line
with the needs of clients.
Understanding changing demand
The research suggests, however, that
understanding changing demand is a challenge
for many middle-market companies. Japanese
mid-market firms do not currently seem to be
conducting exhaustive market research. Less
than a third of them invest in market research
to understand their customers’ current and
future needs (see Figure 3.5). As a result, more
than a third struggle to adapt to new ways of
communicating with their customers and more
than 40% find it hard to forecast changes in
demand.
Struggling to be flexible
Figure 3.5
We invest in market research to understand our
customers’ current and future needs
We are struggling to adapt to new ways of
communicating with our customers
We find it hard to forecast changes in demand
for our products or services
265 39 24 6
315 47 15 3
374 45 13 2

Isamu Tatsuno started Montbell, now the largest
outdoor clothing manufacturer and retailer
in Japan, in 1975. The company, which had
revenues of ¥42bn in 2012, offers integrated
outdoor services, from apparel and equipment
to travel-agency services and insurance.
Mr Tatsuno notes that while the outdoor sports
industry is stable and relatively “recession-
proof”, Montbell’s success is founded on the
Japanese tradition of kinobi, which evokes
beauty through functional simplicity. “The
quality of our monozukuri [production] is
certainly one of our key assets,” Mr Tatsuno says.
Mr Tatsuno also stresses the importance of
responsible business practices, embodied in
the company’s CSR programme and also in
the values espoused by the 400,000-strong
“Montbell Club” of like-minded outdoors
enthusiasts. “In mature markets, value
judgments carry increasing weight. People are
not just interested in buying a jacket per se.
They want to know the story behind it and the
message that it carries.”
Montbell enjoys the best of both worlds
as both a market leader and a mid-sized
company, including the entrepreneurial drive
of its founder-president as well as the kind of
favourable access to resources that benefits
bigger companies. “As we grow bigger, our
challenge is to maintain a good level of intra-
company communication,” Mr Tatsuno says. “I
will be relying a lot on those with whom I have
had direct contact to carry and pass on the
company spirit and culture.”
Montbell: The power of kinobi
Large firms are more likely to invest in market
research, possibly because almost half of them
admit to having trouble adapting to new ways
of communicating with their customers. By
contrast, only about a quarter of small firms
have trouble with this—they are probably more
nimble and easily able to adjust their customer
touchpoints.
The ability to incorporate feedback from clients
is crucial to innovation at some middle-market
firms. One such example is Weathernews of
Chiba prefecture—the world’s largest private
weather service company, with offices in 40 cities
across 15 countries and revenues of ¥12.9bn
in 2011/12. As well as weather forecasting,
the company transforms weather information
into services tailored to the needs of individual
users in various industries, including shipping,
transport, media and energy. “Our competitive
advantage rests on the ability to engage in
interactive communication with clients and
create a positive cycle of continuous feedback
and service innovation,” says Chihito Kusabiraki,
global chief executive officer and president of
the company. Such feedback has been greatly
enhanced with the advent of the internet and
social media.
People
Finding and developing talent
Worryingly, only about a third of executives feel
their firms can attract the talent they require,
reflecting perhaps the dominance of big firms
in Japan’s regimented graduate recruitment
process. As a consequence, just 41% of middle-
market respondents believe their firms are
committed to developing young talent who will
stay for their entire careers.
These trends are partly a reflection of the
changing dynamics of the Japanese workplace—
away from lifelong employment towards more
flexible career paths, including more temporary
stints at different firms. But these new work
ethics and practices can be detrimental to
organisational harmony: executives cite “low
staff morale” and the “difficulty of attracting and
retaining talented employees” as the biggest
organisational challenges to the growth of their
firms (see Figure 3.6).

Organisational challenges to growth
Figure 3.6
Low staff morale
Difficulty attracting and retaining talented
employees
Lack of managerial experience/skills
Difficulty providing competitive compensation
and benefits
Difficulty providing sufficient training
Poor internal communication
Lack of clear growth strategy
45
42
40
38
37
36
31
31
Difficulty developing future leaders
Japanese mid-market firms hope to address these
issues head on. Over the next year, hiring new
talent is the most important strategic initiative,
with almost half of respondents saying their
company will be putting greater emphasis on it.
The talent challenge is more acute in some
industries than others. For instance, 60% of
respondents in the mid-market pharmaceutical
sector consider the difficulty of attracting and
retaining talented employees as the biggest
organisational challenge to their company. As
a result, they believe they are more focused on
developing young talent who will stay with them
for their entire careers and are placing relatively
higher emphasis on hiring new talent. This could
be because they are the most ambitious and
successful of mid-market firms with the brightest
growth prospects (as the sentiment indices
illustrate).
Meanwhile, larger middle-market companies
are generally more able to secure the talent
they need, suggesting that Japanese employees
prefer the security of a big firm. However, that
does not imply that they necessarily prefer older
companies—almost half of “emerging” mid-
market firms (up to 10 years old) say they can
attract the talent they require, compared to an
overall average of 34%.
According to Haruaki Deguchi, founder and
president of Lifenet Insurance Company, an
internet-based insurance firm that began
operations in 2008, the key to competing
with large established companies for talent is
to promote diversity and create a supportive
working environment. Lifenet employs fairly
flexible working policies, at least by Japanese
standards. Male and female employees can take
maternity/paternity leave, for instance, and it
has an “age-free” recruitment policy. “You have
to demonstrate by actions that you really care
about diversity, not just saying it,” Mr Deguchi
says. “Job applicants can sense it if a company
advocates [diversity] just as a PR stunt.”
Ensuring leadership succession
Executives at mid-market firms generally have
confidence in their current management teams.
More than half of respondents believe their
management teams lead effectively, while only
about a fifth feel they do not have the skill set
to meet the challenges ahead (see Figure 3.7).
However, less than 30% of mid-market firms
feel they have a well defined succession plan—a
particular concern given that many smaller mid-
market firms remain family owned and run.
The respondents’ broad confidence in their
management reflects the belief that continuity
in leadership can be a good driver of growth.
Yoshihisa Ejiri, president of clothing chain
Honeys—with revenues of nearly ¥60bn in
2012—is keenly aware of the need not to rest on
his laurels, precisely because he was the founder
of the company in 1978. “Our task is to find
the next business model for success,” he says,
emphasising the fighting spirit characteristic of
mid-size companies that still have the founder as
the company head.

Problems for the next generation of leaders?
(% respondents)
Figure 3.7
We have a management team that leads
effectively
We can attract the talent we require
We have a well defined succession plan
We are committed to developing young talent
who will stay with us for their entire careers
466 28 16 4
304 40 22 4
365 34 19 6
245 36 26 9
Our management team has the skill set to meet
the challenges we face 397 34 17 4
Nakashima Propeller, headquartered in
Okayama, produces propellers of all sizes and
for all types of vessels, from small pleasure
boats to tankers and container ships. It is now
the biggest propeller maker in Japan and has an
approximately 30% world market share in large
propellers—recording ¥25bn in sales in the
financial year 2011-12.
The company’s growth strategy has had several
elements, but the core is diversifying the
company’s client base. “The future is not bright
if one subscribes to the culture of subcontractor
and becomes a mere servant” to a particular
client, says Motoyoshi Nakashima, president
of the company. “This is true regardless of
company size.” Mr Nakashima explains that his
company always thinks and acts as an equal
player. “We do not limit ourselves to supplying
one or two companies. In the same regard, we
do not limit ourselves to Japan. We actively seek
to win contracts beyond borders, in China and
Korea… The world is our market.”
The significance of global markets has grown as
Japan’s post-war dominance in shipbuilding has
waned. Mr Nakashima stresses the importance
of exposing all staff to the company’s
international business. He is abolishing an
operational system that distinguishes between
domestic and foreign markets, with the aim
of quickly ensuring that all workers deal with
clients worldwide.
Arguably, for any middle-market company
that sees the world as its market, developing
international management expertise is
increasingly important—especially considering
the importance of managing succession issues.
Mr Nakashima is confident his company’s future
is secure, and not only because his son works at
the company. “Young staff are well exposed [to
the international business],” he says, “and are
endeavouring to gain a range of experience and
skills in their daily work.”
Nakashima Propeller: The world is our market

Prudential management
(% respondents)
Figure 3.8
We are able to manage working capital effectively
We are able to manage costs effectively
We find it hard to get favourable financing terms
We are able to access funding at an affordable
cost of capital
364 40 18 3
355 37 20 3
396 40 13 3
163 45 27 9
The INCJ’s Mr Nishiguchi agrees that leadership
continuity can definitely be an advantage. “In the
case of mid-size companies, it is not unusual to
find the entrepreneurial founder of the company
to be still heading the organisation. Given that
growth comes from creation of new businesses,
these companies are generally better placed to
attain growth,” he says.
However, Mr Nishiguchi also warns that the “key
issue” for those companies still headed by their
founder is to “secure an eco-system before [the
founder’s] retirement that will ensure the health
of the company after the founder leaves. For
instance, the company will need to secure talent
to innovate and those who support innovation…
as well as the management capacity to leverage
external resources.”
Financial management
Securing affordable funding
Japanese mid-market firms are generally able to
exercise prudent financial management. Some
40% of firms are able to manage working capital
effectively; a similar number are able to manage
costs effectively (see Figure 3.8). By contrast,
less than a quarter of respondents admit to
having problems with either of those issues.
Meanwhile, some 45% of firms are able to access
funding at an affordable cost of capital.
That said, when asked about the biggest financial
challenges to the growth of their companies,
some 54% of respondents cited “Having
sufficient working capital”, followed by “Having
predictable cash flow” (49%) and “Securing a
low cost of funds” (46%). Therefore, although
mid-market firms are generally stable financially,
they still worry about their financial future.
Unsurprisingly, larger mid-market firms find
it easier to manage costs and access funding.
However, 29% of respondents from these firms
say they find it hard to get favourable financing
terms, compared to an overall average of 19%.
This could be because their expectations are too
high; or possibly also because creditors are less
willing to lend to largish middle-market firms
with uncertain growth prospects (as opposed to
smaller, more focused companies).
However, it is not surprising that younger mid-
market firms are still less likely to be able to
access funding at an affordable cost of capital:
38% of emerging firms have this complaint
compared to 16% overall. This shows that while
they might be able to attract talent (see section
above), the lack of a long track record counts
against them in Japan’s capital markets.
This situation itself provides opportunities for
adventurous entrepreneurs. Masami Komatsu

spotted one of these in establishing Music
Securities, an investment company “with a touch
of social entrepreneurship” that finances a range
of enterprises through collaborative investment
funds. Mr Komatsu, a drummer himself, devised
the platform first to help struggling musicians by
allowing fans to invest in them directly.
Financing problems are common across middle-
market firms, Mr Komatsu says, especially for
regional businesses. “Bank loans are the biggest
funding channel in Japan, but sufficient capital
has not flowed into regional businesses.” Equity-
based venture capital, meanwhile, is relatively
small-scale, and many small and medium-sized
companies prefer not to go public. “So there is a
big demand-supply gap.”
Music Securities has received an increasing
number of enquiries from regional banks that
are eager to support promising local businesses
but are not able to do so on their own. Many of
them are also keen to act as over-the-counter
distributors of his funds. Meanwhile, Mr Komatsu
says, the government is also paying more
attention to this type of investment platform
as a “third funding channel” that can take full
advantage of abundant personal savings in
Japan, and it is discussing how to promote such
funding as a part of regional revitalisation.

Internationalisation and its
challenges4
Conventional wisdom might suggest that Japan’s
diverse mid-market companies would have a
strong commitment to developing markets
abroad and investing outside the country. The
need would appear to be particularly acute
given the fact of Japan’s relative decline in
competitiveness, and shrinking population.
Indeed, some 75% of middle-market executives
identify slowing domestic demand as a top
economic challenge to growth. Naohiro
Nishiguchi of the INCJ describes this as the core
challenge facing companies of all sizes. “The time
is gone when it was fine to stay singularly focused
on the domestic market,” he warns.
Why internationalise?
Principal factors driving overseas investments
(% respondents selecting factor in top three)
Figure 4.1
To enhance long-term growth prospects
To replace sales lost in Japan
To keep up with competitors
To increase access to talent
To lower operating costs
To gain better access to raw materials
To diversify risk
62.3
44.7
44.2
40.4
40.4
25.2
22.6
20.2
To take advantage of less stringent regulations
(eg, on labour)
Still mostly focused at home
Mid-market companies have therefore had the
motivation to pursue foreign opportunities.
However, few have taken this step: the majority
are entirely domestic businesses and only 42%
actually have investments outside Japan. Those
companies that do have foreign investments
are motivated by a number of factors. As Figure
4.1 shows, 62% of the companies with foreign
investments identify the enhancement of long-
term growth prospects among the top three
reasons for internationalising. Just under half
want to replace sales lost in Japan.
One of the reasons why, collectively, mid-market
companies are ambivalent about investing
outside Japan is that few of them do much
business overseas. Only 26% of mid-market
companies derive 10% or more of their total
revenues from foreign markets (Figure 4.2). For
smaller companies (with revenues of between
¥1bn and ¥10bn) the figure is even lower—at
just 15%. Younger companies, though, are the
exception. In the “emerging” cohort (under 10
years old), 38% earn more than 10% of their
revenues from abroad.
Unsurprisingly, the greatest numbers of
export-oriented companies are found in the
manufacturing sector—in which Japan’s
competitive advantages are well established,
particularly in high-precision and niche sectors.
One such example is Sun Ace. The company
generates about 90% of its sales from overseas
markets and allows its overseas subsidiaries,
which account for 90% of total employees, a fair
amount of autonomy.

Figure 4.2: Few exporters
Proportion of middle market deriving 10% or more of
revenues from outside Japan
All middle market 26%
Large 48%
Medium 29%
Small 15%
Manufacturing 37%
IT, technology telecoms 32%
Logistics distribution 26%
Financial professional services 22%
Consumer goods retail 21%
Construction real estate 13%
Healthcare, pharmaceuticals and biotechnology 8%
Emerging 38%
Established 25%
Old 24%
That said, it is reluctant to give up on Japan. Ryo
Sasaki, chairman and CEO, thinks there are good
reasons to retain Sun Ace’s Japanese base. “This
is a market where we have to meet expectation
of excessively demanding clients at the highest
global standards, in terms of product/service
quality and technological sophistication. We
may be able to generate only a small proportion
of our revenue, but this market gives us a vital
competitive edge that we need for doing business
globally.”
At the other extreme, only 8% of middle-
market healthcare, pharmaceuticals and
biotechnology companies derive more than 10%
of their revenues from outside Japan. Japan’s
demographics, and the growth of the already
large numbers of elderly people, presumably
means that for many companies in this sector
the opportunities at home are irresistible. The
regulatory difficulties of exporting healthcare
products and pharmaceuticals also make
growing internationally a harder proposition for
this sector.
Outsourcing but in-selling
As Figure 4.3 indicates, the number of mid-
market companies that have investments outside
Figure 4.3: Overseas investment
Proportion of middle market with investments outside
Japan
Large 70%
Medium 48%
Small 27%
Manufacturing 59%
Emerging 59%
Established 44%
Old 38%
Japan is boosted by the 70% of larger mid-
market companies with foreign investments:
conversely only 27% of the small cohort have
invested outside Japan. The implication is
that, for many of the small companies, the
challenges associated with foreign investment
are overwhelming.
Comparing Figures 4.2 and 4.3 shows middle-
market firms across the board are more likely to
have foreign investments than to derive a large
proportion of their revenues from outside Japan.
The obvious implication is that many mid-market
companies (although not the majority) have
responded to the general strength of yen over
recent years by sourcing from outside Japan.
Mid-market manufacturing and IT, technology
and telecommunications industries are the
most likely to invest overseas in order to procure
from suppliers outside Japan. Manufacturing
especially has long faced competitive pressure
and the need to reduce costs by shifting
production abroad. Almost one-half of
manufacturers with investments overseas cite
cost reduction as a major driver. Conversely,
companies in the most domestically-focused
industries (construction and real estate and

healthcare, pharmaceuticals and biotechnology)
appear to be less inclined to invest in foreign
suppliers.
Some 44% of older companies (those aged 50 or
more) and some 38% of established companies
(which are 10-50 years old) have foreign
investments. The implication is that at least
some of the established companies have focused
entirely on domestic opportunities even though
they were founded during Japan’s “lost decades”.
Younger companies, though, are the exception.
In the “emerging” cohort (under 10 years old),
some 59% have made investments overseas. This
suggests that though many across the middle
market recognise that growth opportunities lie
outside Japan, seizing them requires taking the
kind of risks that more mature companies are less
likely to tolerate.
China and South-east Asia are the
biggest draws
For the mid-market companies that have
ventured abroad, the lure of China is enormous.
Some 34% of all companies—but 60% of the
larger subgroup, 47% of manufacturers and
Figure 4.4: (Greater) China first
Proportion of middle market with actual or planned investment in Greater China, South Korea
and SE Asia
China HK/Taiwan South Korea South-east Asia
All middle market 34% 24% 21% 31%
Large 60% 53% 49% 59%
Medium 39% 25% 23% 36%
Small 21% 13% 9% 16%
Manufacturing 47% 31% 26% 42%
IT, technology telecoms 45% 31% 26% 29%
Logistics distribution 37% 25% 21% 29%
Financial professional services 36% 22% 18% 26%
Consumer goods retail 28% 22% 18% 25%
Construction real estate 18% 12% 15% 20%
biotechnology
15% 10% 10% 10%
Emerging 51% 41% 29% 40%
Established 37% 26% 20% 32%
Old 30% 21% 20% 28%
45% of IT technology and telecommunications
companies—have actual or planned investments
in that country. The details are shown in Figure
4.4. One conclusion is that geopolitical tensions
between Japan and China have been seen to be
largely irrelevant—although whether investment
flows this year will continue remains to be seen.
If Japan’s mid-market companies are not actually
investing in China proper, many are still doing
business there—whether selling or sourcing—
through Hong Kong/Taiwan or South Korea.
Interest in other parts of the world is relatively
low. Across all mid-market companies, just 13%
have investments in North America and another
8% plan to invest there. In Western Europe, the
numbers are 8% and 8%. In each of Eastern/
Central Europe, South America and Africa,
the numbers of companies that actually have
investments are in low single-digit figures.
Outside Greater China, the emerging markets
that really appeal are those of South-east Asia.
As Figure 4.4 shows, the numbers of companies
that have, or are planning, investments in South-
east Asia are almost as large as the proportion
invested in mainland China. This is broadly true
of the mid-market companies regardless of their
size, industry or age.
Those mid-market companies that are seeking
opportunities outside Japan are, therefore,
actors in three major trends across the Asia-
Pacific. One is the growth in domestic demand in
China, whether they are investing directly in the
mainland or in nearby locations. The second is
the domestic demand-led growth of South-east
Asia. The third is the continuing growth in intra-
regional trade.
The overseas investments of King Jim, a
stationery and office equipment company
founded in 1927 with expected revenues of
¥30bn in 2012, exemplifies these trends. In
recent decades it has shifted all of its production
offshore, reducing costs and leading to
unexpected new business opportunities. King Jim
Indonesia was established in 1996 to produce

plastic files, and opening a factory there was
“easier than we’d expected,” says Hideto Yokota,
managing director of RD and overseas business.
Facilities for stationery production have since
been opened in Malaysia (in 1998) and Vietnam
(in 2007), while manufacture of office electronic
gadgets remains outsourced to China.
As labour costs have risen in China, King Jim has
seen its plants elsewhere attract new business.
“In the last two to three years, we’ve started
getting a lot of orders from companies around
the world to produce office supplies for them in
our factory in Vietnam,” says Mr Yokota. “We’ve
expanded the plant, which was initially built
just to make King Jim products.” The economic
development of Indonesia and Vietnam has
meant that King Jim also now sells the products
it manufacturers there, locally. “When I first went
to Indonesia, most people were still walking
around barefoot,” he recalls. “We never imagined
they would become markets when we opened
factories there.”
Finding talent remains the principal
challenge
The fact that fewer than half of the mid-market
companies actually have investments outside
Japan suggests that, collectively, they find
foreign investment difficult. This is in spite
of the fact that for some, their size carries
distinct advantages in operating abroad. Sun
Ace’s Mr Sasaki says being mid-sized gives the
company the three traits required for successful
international business: capital strength,
organisational agility and speedy decision-
making. Yet it is fair to say that this highly
internationalised manufacturer is atypical of
Japan’s middle market in general.
The survey asked companies to comment on
nine issues that could pose challenges. Of these,
the most pressing is clearly the attraction and
retention of suitable staff to manage foreign
investments. Across all mid-market companies,
this is seen to be a severe challenge by 40%.
Another 41% see it as a moderate challenge.
Figure 4.5: Finding the right talent: easy for few
Proportion of middle market that says attracting suitable
talent is NOT a challenge to internationalising
Large 21%
Medium 17%
Small 16%
Other 26%
Manufacturing 11%
Emerging 22%
Established 19%
Old 19%
Only 19% believe that it is not a challenge at
all. As Figure 4.5 shows, the figures are fairly
consistent regardless of the size or age of the
company in question. However, the (perceived)
problem varies quite markedly from industry to
industry. At one extreme, 31% of healthcare,
pharmaceuticals and biotechnology companies
do not see the attraction and retention of
suitable staff as a challenge. At the other, this is
true of only 11% of manufacturing companies.
The problems faced by Tosa Denshi are typical.
Around 10 years ago the company decided to
establish a manufacturing base overseas in order
to maintain and improve cost competitiveness.
Mr Tsuji says that although China was the first
choice, he felt the company lacked the scale and
capital strength to succeed there. He turned
instead to Vietnam. The company opened a
branch office in Hanoi in 2003 and built two
factories there, in 2006 and 2009, which now
employ about 150 workers in total.
Attracting qualified staff is not a problem, Mr
Tsuji says, but retaining them is—particularly
since competition between Japanese companies
for high-quality workers in the country is

rapidly increasing. Since language training new
Vietnamese recruits is a long and painstaking
process (requiring two to three times as much
time and money as for Chinese recruits, Mr Tsuji
reckons), many Japanese companies take the
short cut of headhunting capable Vietnamese
staff from competitors. Tosa Denshi has lost a
third of its Vietnamese workers to its Japanese
competitors, Mr Tsuji says.
Human-resources issues are therefore likely to
be a big reason why middle-market companies
are reluctant to take the plunge abroad. If
manufacturers like Tosa Denshi, who have been
operating abroad for years, cannot solve the
problem, the challenge for new entrants must be
even more daunting.
Yet staying at home—especially given mid-market
pessimism over the Japanese economy—carries
its own risks, particularly in terms of missed
opportunities. Despite the difficulties he
describes, Mr Tsuji says Tosa Denshi’s Vietnam
venture paid off in unexpected ways, including
the rare direct offer of a supply contract from a
major Japanese conglomerate. “Knowing that
Vietnam could offer low-cost production, they
were looking for Japanese companies with reliable
local operations,” Mr Tsuji says. “If we were stuck
in the domestic market, a small regional company
like us would never have an opportunity to make a
deal with a major firm, especially through a direct
enquiry.”
Headquartered in Fukushima, Honeys, a clothing
chain, has grown rapidly since it started in 1978
and boasts revenues of ¥59.9bn in 2012, with
over 6,300 employees (on a consolidated basis).
Having hit a ceiling in Japan with over 800
stores, Honeys moved into China in 2006 with an
ambitious plan to open 1,000 stores within 10
years. By December 2012 they had opened more
than 500. Honeys also recently moved part of
its fully integrated supply chain into Myanmar—
their first factory there began operating in April
2012.
Yoshihisa Ejiri, president, explains that the
firm selected Myanmar as the second location
for direct investment partly because labour
costs were rising in China. But he accepts
that Myanmar has only just opened up. The
investment was made with the view of the
country’s mid- to long-term potential, with the
hope— “eventually”—of securing the factory
to deliver a stable supply of quality products
at low cost. “It could take around five years
for the country to secure a reasonable level of
infrastructure,” Mr Ejiri reckons.
Honeys’ stability and solid finances are
beneficial in playing the long game. Although
speed of stock turnover is a key feature of their
business model, one of the company’s mottos
is “making steady efforts and solid steps”, Mr
Ejiri says. “We don’t have to deal with the kind
of pressure that you might face if your company
was too well known,” he jokes.
Honeys: Playing the long game in Myanmar

Although stable as a whole, clearly not all
middle-market companies in Japan are equally
successful. Indeed, some have been considerably
more successful than others in recent years. In
this section we identify Japan’s middle-market
“growth champions” and seek to identify what
about their operations and strategy marks them
out from their peers.
Our definition of “growth champion” is a
company that has recorded three successive
years of global revenue growth in 2010,
2011 and 2012—years in which the Japanese
economy experienced multiple contractions and
setbacks. Such performers are comparatively
rare: growth champions make up just 17.6% of
the middle market as a whole. By industry, it is
not surprising to see they are most numerous
in the relatively non-cyclical healthcare,
pharmaceuticals and biotechnology sector:
more than a third of such middle-market firms
are growth champions (Figure 5.1). However,
higher-beta firms such as those in financial and
Middle-market growth champions5
Figure 5.1: Growth champions in Japan’s middle
market
(% in each sector)
Middle market overall 17.6%
Healthcare, pharmaceuticals and biotechnology 37.5%
Financial and professional services 22.6%
IT, technology and telecoms 22.0%
Construction and real estate 19.8%
Consumer goods and retail 17.4%
Logistics and distribution 13.7%
Manufacturing 9.5%
Other 16.1%
professional services, and IT, technology and
telecoms are also relatively successful: more
than a fifth of the middle-market companies in
each of these sectors are growth champions.
Manufacturing has the fewest high performers.
It is significant that the distribution of smaller,
medium-sized and large middle-market firms is
the same among growth champions as among
the overall middle market, as is the distribution
of emerging, established and old firms. This
suggests that firms of a particular size and age
are not more likely than others to be successful.
Rather, operational and strategic factors are
likely to determine which companies among
Japan’s middle market have best weathered the
economic storms of recent years.
Growth champions are flexible and
diversified
Firstly, and unsurprisingly, growth champions are
much more likely to have a clear growth strategy:
some 71% says their firms have such a strategy
in place compared to just 32% of the poorer
performers. Secondly, they are more flexible:
two-thirds agree that they are well positioned
to take advantage of changes in their markets,
compared to just one third of the remainder.
This flexibility is borne partly of diversity in
product and service offerings. While many in the
middle market are still filling niches, some 52%
of growth champions claim to offer a wide range
of products and services, compared with just 31%
among the rest. Importantly, growth champions
understand their clients’ changing needs better:
47% invest in market research to understand

these shifts, while just 22% of the less successful
cohort do so.
Interestingly, growth champions also have far
better relationships with their supply chain
partners than less successful mid-market
companies, with 59% characterising these
relationships in a positive light compared to
just 30% of the remainder. In some sectors this
speaks perhaps to the importance of keiretsu,
or close networks of allied firms linked together
in particular industries such as the auto and
manufacturing sectors.
However, while keiretsu-type relationships might
promote stability, they also reduce flexibility in
terms of being able to negotiate with major clients
when times are tough. Indeed, growth champions
are actually less likely to think they can pass on
higher commodity costs to their customers—53%
do not think this is possible, compared to just
44% of the less successful cohort.
The INCJ’s Mr Nishiguchi warns of the danger
for mid-market companies of this inflexibility.
“If the company is a subcontractor and operates
only within a value-chain, it tends to be more
exposed to volatility, compared with those
that operate more independently,” he says.
Clearly, though, for growth champions this does
not impair performance. Successful middle-
market companies in Japan are therefore able
to absorb shocks to a greater degree than their
peers, which explains their resilience in recent
challenging years.
Growth champions have less
bureaucratic management
Though it may be a truism that executives at
better performing companies have a higher
regard for their managers, there is a striking split
in terms of perceived management competence
between Japan’s middle-market growth
champions and the rest. Some 71% of growth
champions agree that they have a management
team that leads effectively, compared to just over
a third at less successful companies that think the
same. Flexibility here, too, is key: 57% of growth
champions regard their success and adaptability
as a result of a less bureaucratic management
style while just 29% of the poorer performers say
the same thing (Figure 5.2).
Growth champions invest in innovation,
IT and human capital
In keeping with a greater diversity of product
and service offerings, growth champions are
twice as likely as their less successful middle-
market peers to be innovators. Some 43%
characterise themselves as innovators in terms
of products and services, compared to 22% of
the remainder. Internal innovation in processes
and efficiencies—a competency long associated
with successful Japanese companies—is also
important. Among growth champions nearly half
(48%) claim to innovate in these areas, compared
to 29% of less successful middle-market firms.
Figure 5.2: High performers: strategy and management
(% respondents agreeing)
Growth champions The rest
Clear growth strategy in place 71% 32%
Positioned to take advantage of changes in markets 65% 33%
Diversified products and services 52% 31%
Invest in market research to understand changing client
needs
47% 22%
Have effective management 71% 38%
Adaptable because less bureaucratic 57% 29%
Figure 5.3: High performers: innovation and investment
(% respondents agreeing)
Growth champions The rest
Innovators in products and services 43% 22%
Innovators in processes and efficiencies 48% 29%
Greater emphasis on investing in product development in
coming year
40% 22%
Greater emphasis on investing in process innovation in
coming year
34% 14%
Investors in advanced IT infrastructure 38% 22%
Greater emphasis on investing in upgrading technology
in coming year
36% 15%

Japan’s Middle Market: Crucial. Competitive. Concerned.

Japan’s Middle Market: Crucial. Competitive. Concerned.

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Japan’s Middle Market: Crucial. Competitive. Concerned.