Global Business 3rd Edition by Mike Peng

Exercise 15

How do Amazon (a foreign entrant) and Bookoff (a domestic entrant) rise in an industry dominated by incumbents?
The Japanese Bookselling Industry
The Japanese are voracious readers. With annual sales approaching $10 billion, the Japanese retail bookselling industry is larger than the $15 billion US bookselling industry on a per-capita basis.2 However, the competitive environment in the Japanese retail bookselling industry differs in many respects from its US counterpart. This case introduces the competitive forces shaping the Japanese retail bookselling industry and highlights two new entrants, Bookoff and Amazon Japan, both of which successfully created unique strategies to succeed in an otherwise stagnant industry.
Book retailers usually buy their books from wholesalers, and sometimes directly from publishers. Competition in the area of wholesale book distribution is very low. Nippon Shuppan Hanbai and Tohan, both founded immediately after World War II, traditionally control between 70% and 90% of the wholesale book market.3 Also, there is a system called the Itaku Hanbai Seido ("Consignment Sale System") in place that allows retailers and wholesalers to return unsold books to the publisher free of charge, reducing risk and inventory levels for wholesalers and especially retailers.
The rise of the Internet has had a profound effect on the bookselling industry in Japan. Whereas the Japanese used to lag behind other developed economies in terms of Internet penetration, they have now closed the gap. The Internet as a substitute form of entertainment has been cited as a cause for the overall drop in book sales in Japan.4 However, one advantage of the rise of the Internet has been the accompanying increase in online book sales. As of 2010, approximately 6%-7% of all book sales in Japan were conducted online.5
Rivalry in this industry is characterized by large numbers of relatively small booksellers. Whereas the American bookselling industry is dominated by two players-Amazon and Barnes Noble-the Japanese market has no dominant booksellers that have cornered the market (Exhibit 1). One of the key reasons that there is not a great deal of industry consolidation is the unique price-fixing system that makes it illegal for larger or more efficient booksellers to use price competition to drive out competitors. Since 1980, laws have allowed publishers to legally fix the price of new books, music, and newspapers in the bookselling industry. If the publisher sets the price of a book at $10, all retailers are obligated to sell that book to the consumer for exactly $10. These price-fixing laws are known as the Saihanbai Kakaku Iji Seido ("Resale Price Maintenance System," commonly known as the "Saihan system"). Because of the Saihan system, which makes discounting illegal, it would appear that the already oversaturated Japanese retail bookselling industry would be an inhospitable host for new entrants. Nevertheless, two recent entrants, Bookoff and Amazon, have revolutionized the Japanese bookselling industry in a surprisingly short time (Exhibit 2).
Bookoff
Over the years, Bookoff has been accused of unfair competition, cheating authors out of royalties, representing a threat to Japanese culture, single-handedly destroying the nation's book industry, and corrupting Japanese youth.6 However, Bookoff is not a "foreign invader." It is entirely Japanese-owned. The reason why competitors spit venom when they hear founder Takashi Sakamoto's name, and the reason why Bookoff has grown from one store to over 900 (as of 2012) to become one of Japan's largest retailers in only a decade, is simple: Bookoff uses a loophole

in the Saihan system that enables it to be the only major bookseller that can lower the prices on its merchandise.
The reason Bookoff can lower prices is due entirely to the fact that it is a used book store. Used books are a key exemption to the Saihan system, as are books published outside of Japan (such as English language texts imported from the United States). The same Saihan system that supported the bookselling cartel for decades is the same system that is now handcuffing the industry leaders. Bookoff has taken advantage of the situation, seeing its sales soar to almost $500 million in the 2009 fiscal year-nearly tripling its performance in just eight years.

Amazon Japan
When Amazon opened the "virtual doors" on its Japanese subsidiary on November 11, 2000, it appeared to be in a position to exploit a first-mover advantage through online sales and feast on a Japanese bookselling industry characterized by a large market but (relatively) smaller competitors. However, optimism soured quickly when Amazon Japan's 2001 sales were a disappointing $150 million-a fraction of Amazon's worldwide sales of $4 billion. Not surprisingly, the primary source of Amazon's troubles lay with the unique Saihan system of Japan. For Amazon, whose primary competitive advantage rested on its ability to offer the lowest prices, the Saihan system was a critical roadblock.
While this could have spelled doom for Amazon, by 2010 Amazon stood on top of its Japanese competitors, raking in over $3 billion in sales-a 24-fold increase since 2001 (!). In 2001, Amazon's sales in Japan made up only 4% of its total worldwide sales, yet by 2010 Amazon's Japan operations accounted for over 10%.
How did Amazon do this? First, even though Amazon was not the first online bookseller in Japan, it was the first to sell a wide variety of products besides books (such as music, DVDs, computer software, and video games). Second, Amazon adjusted to the unique cultural environment of Japan. A fear of fraud made the Japanese comparatively more hesitant to make Internet credit card purchases. In response, Amazon Japan started a service in 2006 that allowed its customers to make payments at any of over 70,000 convenience stores and ATMs throughout the country, enabling customers to avoid the risk of online fraud. Finally, Amazon used clever methods to bypass the Saihan system to indirectly offer products at lower prices. Late in 2003, Amazon Japan opened a Japanese version of its highly successful "Amazon Marketplace," where third-party users sell both new and used products to each other. This allowed Amazon to indirectly sell books and music at prices below Saihan-mandated prices as third-party users-who are not bound by Saihan laws-officially made the transaction, not Amazon. Also, Amazon started using a points system that allowed customers to accumulate points based on the price of items purchased that could be redeemed for a gift certificate. Even though Amazon could not discount the prices on each item directly, the one-to-one correspondence between the price of items purchased and redeemable gift certificate created a nearly identical result. Despite a slow start, once Amazon adjusted its strategy to the unique institutional environment of Japan, its sales took off and allowed the company to enjoy the same success it had enjoyed in its home market.
Case Discussion Questions
What are Bookoff's firm-specific resources and capabilities?