Wesley J. Johnston, Ph.D.
Wesley J. Johnston, Ph.D., Professor, Department of Marketing, Georgia State, University, Atlanta, Ga 30303, 404/651-4184
In recent years, dramatic changes have occurred within the telecommunications industry which have facilitated rapid growth and the internationalization of procurement in this industry. The major changes include deregulation in the U.S., the opening of the Japanese market, and the diffusion of technology in both countries. This paper develops a complex and strategically oriented model of procurement in the international telecommunications industry- the Interactive Procurement Exchange Model. The model is then used to view the rapidly changing telecommunications industry in the U.S. and Japan and to draw comparisons between the two countries.
PROCUREMENT OF TELECOMMUNICATIONS IN JAPAN AND THE UNITED STATES
INTERACTIVE EXCHANGE MODEL
This section examines the differences in procurement and selling practices in the United States and Japan. The Interactive Exchange Model, developed by Johnston and McQuiston (Johnston, 1986) is a detailed model of industrial procurement relationships. Due to its applicability and comprehensive nature, this model is utilized in this analysis. The model provides a framework for the interaction between two organized behavior systems, both buyer and seller. The buying and selling components each consist of various coalitions that are directly and indirectly involved in the purchasing and selling functions. The model "outlines the resource dependency perspective of the internal and external coalitions that are present on both sides of the dyadic transaction, and impact upon interaction", (Johnston, 1986). In addition, the model incorporates macro-environmental factors which influence the exchange.
The Interactive Exchange Model derived several important concepts from the industrial transaction (Johnston, 1986).
INTERNATIONAL ADAPTATION OF THE INTERACTIVE EXCHANGE MODEL
When industrial transactions occur at the international level, the complexity of several components within the model increases. The macro-environmental influences are affected in the following ways. Political and legal influences are impacted by trade barriers, tariffs, and involvement of governmental agencies; sociological influences are impacted by the employee's orientation towards his role within the company. At the international level, competitive influences include both domestic and international domains; environmental influences often become more pertinent in terms of dissimilar resources and geographical location. Economic influences are complicated by each country's economic structure and agencies.
The internal components of the buying and selling firms are significantly altered in terms of physical distribution, production and inventory systems, and management organization. The Vector of Interaction is also affected by the way each culture perceives the buyer/seller relationship. In some countries (e.g., the United States), the buyer and seller are regarded as mutually important, in other countries (e.g., Japan), the buyer or the seller may be considered more important than the counterpart, and maintain more power in the relationship.
INTERNATIONAL TELECOMMUNICATIONS PROCUREMENT: JAPAN
POLICY: Japanese policies and standards for telecommunications products, set by MPT are focused on the technical requirements necessary to sell equipment in Japan. The standards for telecommunications equipment have been regarded as both stringent and secretive by U.S. producers, and have been a central issue in U.S.-Japan trade disputes. Requirements not only involve the product's performance, but also its design and manufacture. The standards and qualifications set by MPT have served to control the widespread entry of U.S. telecommunications firms, however, pressure from the United States has resulted in the modification of MPT's requirements and policy setting procedures.
MPT has expanded its Telecommunications Advisory Council to 22 members, and has promised to announce its scheduled for setting policies and standards in order to allow foreign involvement and awareness. MPT has also made design guidelines for interconnect equipment available through private organizations to foreign producers. In addition, the number of standards was reduced twice, with the most recent count at 12 (Shethia, 1988). The relaxing of standards has opened the Japanese market to the purchase of foreign products, such as, PBX'S, voice-mail machines, "intelligent modems," and communications satellites.
Certification and product approval have also been a source of frustration to U.S.producers. Traditionally, NTT was responsible for the testing and certification of products. An independent testing foundation was created when the privatization of NIT was in the process of legislation. The foundation was comprised of several leading electronics and telecommunications firms in Japan, and was contracted to perform by MPT. Severe limitations were imposed such as the requirement of applications to be completed in the Japanese language, and certification based on each piece versus type of product. Further, objectivity was threatened due to the vested interest of the firms that comprised that foundation. Strong opposition by the United States forced MPT to ensure impartiality of the board, replace several board members, and allow foreign representation on the certification board. Further, the likelihood that American producers will be able to test and certify equipment for sale in Japan (in accordance to Japanese standards) is increasing.
PEOPLE AND PROCEDURES
People and Procedures. Since NTT orchestrates a significant proportion of Japan's telecommunications equipment procurement, it will be considered as representative of Japanese buying centers. NTT's buying structure is organized in a substantially different way than U.S. buying centers. NTT's domestic purchases are handled through their central procurement office in Japan. International Purchases of telecommunications equipment are arranged by the NTT's International Procurement Office in Tokyo. NTT allots approximately $300 million a year for purchasing U.S. telecommunications equipment. NTT America, a wholly-owned subsidiary of NTT located in New York acts as a liaison between U.S. producers and the NTT Procurement Office. NTT appropriate documentation and information to Tokyo office is responsible for the actual negotiation of contracts between NTT and U.S. producers. NTT America often assists in the arrangement of the initial meting, and facilitates the development of the relationship. Some of NTT's large American vendors have offices in Tokyo, in which case a direct relationship is established with NTT International. Base procurement polices are established at NTT headquarters in Japan. General policy requires an openness to purchase high-quality, low-priced products from both foreign and domestic producers.
NTT's International Procurement Office is staffed with senior procurement managers, purchasing managers, and purchasing staff members. Senior procurement managers make all final decisions on new products or suppliers, while simple reorder decisions can generally be made by lower-level managers and staff.
The NTT procurement procedure is segregated by tracks or levels of products, rather than by individual or lines of products. Track I involves low-level purchases, such a magnetic tape and PBX'S; Track II products are of grater importance, and generally involve some modification or adaptation, such as switching equipment; Track III represents products that are very expensive or unavailable in the market and require joint development, such as satellites. Each track is assigned one senior procurement manager, two to three purchasing managers, and several purchasing staff. The purchasing track gathers information regarding product needs from various sectors within NTT. The sectors are structured as profit centers, while the procurement office is structured as a cost center. The procurement track must therefore seek out the highest quality, lowest-priced product in order to meet the profitability and efficiency concerns of the sectors. After careful analysis and compilation of the sectors needs, the procurement track contacts the selling or manufacturing firm to establish price, quality, and other specifications. Once established, the procurement track contacts the sector again for an informal confirmation of its needs, and agreement to the terms. The main purpose of central coordination is the reduction of total cost of equipment to the sectors.
In international procurement, if the order is with a new U.S. manufacturer and is of great magnitude, a team of professionals travel to the United States to inspect the manufacturing plant and the firm's financial situation. This team comprises individuals from the various sectors, and generally one individual from the International Procurement office. The process in effect reduces the possibility of receiving defective or non-performing products. If the purchase is smaller or less significant, representatives from NTT America often conduct the inspection. While U.S. manufacturers sometimes take offense at this inspection initially, it serves to build a solid relationship between the firm and NTT, providing the plant passes inspection.
Once the plant passes inspection, the finished product will be examined for quality and specification requirements. Them, it must pass through government certification. The Japanese system requires manufacturer's responsibility for transportation from the point of origination directly to the site where it will be used or sold. Freight costs are computed into the price charged by the manufacturer for the finished products. The Japanese also demand at least a one to two year warranty (and sometimes up to 10 years) on all equipment purchased from the United States.
INTERNATIONAL TELECOMMUNICATIONS PROCUREMENT: THE UNITED STATES
PEOPLE AND PROCEDURES
Procurement for U.S. telecommunications firms is usually handled through a central purchasing office. A purchasing manager who works for the firm is generally responsible for coordinating the procurement of a single product or multiple products. The purchasing manager interfaces with sales representatives from the selling firms, and with the purchasing office of its own firm. The purchasing manager is usually supported by a staff of consultants with training in the areas of finance, cost-analysis, economics, and legal considerations.
At AT&T, contracts for both domestic and foreign procurement are usually negotiated by the purchasing manager. Products are purchased for the use in AT&T manufacturing plants, and for resale by AT&T. It is the agent's professional responsibility to stay abreast of industry trends and new developments in procurement techniques. Analysis performed often involves the examination of market factors and the life expectancy of the product. The centralized negotiation of purchase facilitates the standardization of products, lower costs, and improved service. In addition to centralized purchasing, purchasing groups at AT&T's field locations are responsible for procurement at those locations.
The relationship with the seller ranges from single transactions to long-term relationships and Vendor Partnership Agreements. In direct contrast to NTT, AT&T generally assumes ownership of the product at its point of shipment, and arranges all necessary transportation to the point of destination. AT&T headquarters maintains a staff of professionals whose primary responsibility is to negotiate transportation contracts, routing, rates, and other logistic concerns. The efforts of this group, referred to as AT&T Technologies' Transportation Organization, reduce overall product costs, and ensure the safe delivery of products to and from AT&T.
FACTORS INFLUENCING THE VECTOR OF INTERACTION
THE ROLE OF REGULATION
Historically, regulation has significantly impacted the interaction between Japanese and U.S. selling and buying centers. With the U.S. deregulated telecommunications market, and the reduction of regulation in the Japanese market, the impact of regulation on the Vector of Interaction is no longer as import a factor. The U.S. government has successfully negotiated the removal of several trade limitations with Japan, which facilitated entry for many U.S. telecommunications firms into the Japanese market.
SOCIETAL AND CULTURAL FACTORS
Japan is a homogeneous society, both ethnically and in terms of values. The United States is culturally, ethnically, and politically diverse. Although Japan is a modern, industrialized nation, the development of its culture and value system spans many centuries. The United States, by contrast, has existed for slightly over two centuries. These differences alone help to explain, at the most simple level, the difference in the long-term perspective held by the Japanese and the U.S. emphasis on the short-term.
Since the Japanese approach to the procurement process favors a long-term relationship orientation, U.S. selling centers have been required to adapt their relationship orientation, U.S. firms have shifted their focus away from the quick-close sale toward instilling Japanese confidence over time. For instance, one U.S. firm invested a tremendous amount of time and effort in obtaining their first sale from NTT (Johnston, 1990). First, the firm had to convince NTT that their product outperformed all others in its class in terms of speed and cost-savings, and demonstrate that there were no Japanese firms that were capable of providing the same technology. In addition, the firm made a commitment to answer a daily onslaught of questions from NTT, with a turnaround of less than eight hours. Information regarding the engineering of products, quality guarantees, and delivery schedule history was released to NTT in order to facilitate the initial sale.
Until recently, U.S. firms have marketed products internationally with the notion that "if it's good enough for the United States, it's good enough for any other country." This attitude has contributed to the unpreparedness of U.S. selling centers to market telecommunications equipment to the Japanese effectively. The Japanese are very aggressive marketers in terms of price, quality, and the ability to adapt products quickly. The Japanese buying centers expect the same aggressiveness from U.S. firms, however, are focused on short-term profits: product modifications devour profits based on the current factory lay-outs; U.S. executives are evaluated on short-term quarterly profits. Price cuts, and profit-margin cuts necessary to obtain Japanese market share are not rewarded in the American system of business. The initial response of U.S. firms was to withdraw from this situation, ignoring the vast opportunities for growth in Japan. Some firms, however, have sought to improve the Vector of Interaction with the Japanese buying centers by addressing their needs for low price, high quality, sales support, and product adaptation. Firms that have established this type of relationship with Japan are positioning themselves for considerable earning power in the future.
Another cultural factor that impacts the interaction is the team orientation of Japanese management. Traditionally, U.S. selling centers are accustomed to dealing with a key decision maker from the buying firm. The diffusion of decision making to all levels in the Japanese system has been a source of confusion and frustration for U.S. selling centers. Successful U.S. entrants have discovered that patience and persistence are two necessary qualities to complete deals with the Japanese.
There has been some speculation that AT&T could sell more to NTT if they were willing to modify equipment. IBM Japan has been the most successful and largest firm to enter the Japanese market because it adapts products to the specific needs of the Japanese.
Both the U.S. and Japanese telecommunications markets are opening to foreign suppliers. Each side has different perspectives on the optimal rate of acceptance of foreign suppliers and technology. The U.S. market is not only the largest telecommunications market, it is also opening up the fastest. The Japanese realize, however, that opening their markets is a necessity not only to remain technologically viable but to also bring about the long range goal of being an information-based society by the year 2000. Perceptions also vary between U.S. and Japanese firms as to the benefit of opening up to foreign suppliers. As is typical in other industries, the Japanese seem to be.more demanding in what they expect from a supplier. Two trends may change this preference. The significantly strengthened yen improves the value of foreign purchases by Japanese telecommunications firms. At the same time, AT&T and other U.S. telecommunications firm struggle to reduce their foreign expenditures because of pressure from the federal government over the trade imbalance. If the rising pressure of trade imbalances leads to increased protectionism (Johnston, 1990), the real barriers to increases in industrial marketing exchanges may come not from within the firms themselves but through changes in political variables in the environment. Some joint ventures have been formed to help provide temporary bridges for improved trade relations. The future of telecommunications trade between the United States and Japan will be determined by both governmental action and inaction and the ability of firms on both sides to bridge the gap. The Interactive Procurement Exchange Model helps in understanding the differences between procurement and marketing strategies and suggests ways to overcome the real trade barriers in telecommunications buyer-seller exchanges.