DDI Corporation History

Company History:

DDI Corporation is a Japanese long distance telephone company established to challenge the monopoly of Nippon Telegraph and Telephone Corporation. From its conception in the early 1980s, DDI has grown much faster than any of the other monopoly challengers and has achieved a large portion of long distance market share in Japan.

The idea for DDI was conceived in 1983 by Kazuo Inamori, founder and chairperson of Kocera, a Japanese ceramics company that had begun diversification into electronic components, such as computers, digital switches, and other high-technology products. During this time, in the United States, a federal court battle was taking place that would end the monopoly of communications leader AT & T, dividing that concern into eight new companies. Inamori followed the developments of the case as did legislators in Japan's parliament who proposed a plan to introduce competition to Japan's telecommunications market, then dominated by NTT.

Inamori reasoned that Kyocera stood a good chance of competing successfully in the telecommunications market, specifically against NTT, then an inefficient long distance monopoly with high-priced services. With no experience in the communications industry, Inamori first had to find capable managers to run the enterprise, and he soon struck up a friendship with Sachio Semmotobc, an NTT engineer involved in setting up NTT's Integrated Services Digital Network prototype, called INS. Semmoto was well connected with MCI and Ameritech, American companies created out of the AT & T divestiture. Inamori and Semmoto then convinced ten other key NTT managers to join the new concern. Subsequent hires were carefully chosen; Inamori wanted only the most dedicated people, with proven records of success, as his employees.

The venture was initially backed by personal investments by Inamori, Semmoto, and Akio Morita, chair of the Sony Corporation. Inamori later won additional financial support from Ushio, Secom, Mitsubishi, and Sony. The company was incorporated in June 1984 as Daini Denden Planning, Inc.

Shortly thereafter, two other contenders announced plans to compete with NTT. One, Japan Telecom, was launched by the Japan Railways Group, which had access to thousands of miles of railroad right of way in which to lay cable. The other company, Teleway Japan, was backed by Toyota Motor Corporation and by the Japan Highway Public Corporation, which also offered thousands of miles of right of way. Unlike Inamori's concern, these companies chose to work closely with the NTT and later received managerial and technological assistance from the local carrier.

Because it opted not to work within the established structure and use traditional methods of industry cooperation, Daini Denden was generally expected to fail. In April 1985, however, the Japanese government permitted Daini Denden to develop a new network under the new Telecommunications Business Law. That month, the company was reincorporated as DDI Corporation.

The company's first task was to construct the network, and the first option open to the company was to use combinations of NTT lines, purchasing traffic rights at a lower tariffed "bulk rate," and passing, in effect, the "wholesale" price on to consumers in the form of lower prices. The company decided to construct an entirely separate network using microwave dishes to relay traffic from one area of Japan to another. This was an extremely expensive proposition and, if unsuccessful, would incur costs of about ¥100 billion.

In establishing its microwave network, DDI faced several difficulties. First, the company had to purchase or win easements for small plots of land where relay stations could be established. Furthermore, due tot he nature of microwave radiation, the company faced unanticipated opposition from environmental groups as well as from residents opposed to the location of the company's Tokyo Network Center. But, after negotiating with the community for more than a year, the company prevailed.

In September 1987, with its Tokyo-Nagoya-Osaka network in place, DDI was at last ready for business. It established more than a dozen interconnections with the NTT network. As NT's local switches were not yet equipped to allow individual subscribers to have their long distance calls automatically routed to DDI, customers were required to precede every call with a special carrier access code. This code, 0077, instructed the local telephone switch to route the call to DDI, rather than NTT, where it would otherwise have been routed automatically.

Fearing that this added inconvenience constituted an anticompetitive barrier, DDI fought NTT for the necessary upgrade in switching software. But this was an expensive and time-consuming process, and, unwilling to wait for NTT to comply, the company turned to Kyocera engineers to develop a solution. Only months later, DDI introduced a small box that attached to customer's telephone lines. The box determined the lowest cost routing for the cal, and automatically dialed the 0077 prefix whenever DDI service was less expensive. Because DDI prices were generally lower, the boxes ensured that the bulk of long distance traffic would be handled by DDI. The boxes were distributed to many of the company's usage-heavy business customers at no charge.

Inamori understood early on that pricing was extremely important. Pricing largely determined the company's operating costs. If higher prices allowed higher operating costs to become the norm, the company would have a much harder time keeping up with cost competition when a price war began. Still, Inamori had seen that low prices alone couldn't guarantee success. For example, in the United States, when MCI advertised lower prices than AT & T, the competitor responded by claiming that it offered vastly superior service. Rather than allow NTT to respond as AT & T had, Inamori decided that DDI should make customer service its number one priority. He dispatched several work groups to the United Sttes to observe customer service operations at several American telecommunications companies. These lessons were modified slightly for the Japanese market and were then instituted under a comprehensive training scheme. The company established a network of 67 customer service offices, each heavily staffed. Having started out with less than 100 employees in 1984, DDI soon grew to employ more than 1,500.

When the company's president, Shingo Moriyama, died, Inamori chose a successor carefully. Feeling a need for a stronger administrative system within the growing company, Inamori sought someone with a great deal of experience in setting up and administering large organizations. He soon asked Nobusuke Kanda, a former vice chair of the giant Sanwa Bank, to succeed Moriyama.

Upon accepting the job, Kanda was given simple instructions: build a highly efficient managerial structure, superior even to NTT. Kanda succeeded in this task, populating the company with energetic, youthful managers, and he is credited with establishing the company's current lean, low-cost managerial structure.

Kanda also established a system of cost accounting in which transfers between work groups, numbering five to 100 people, had to be negotiated. This kept each group highly cost conscious and ensured that lowest cost providers were used.

As DDI began to steadily take away market share from NTT, Inamori grew concerned that competition would one day become so efficient that virtually all of the profit margins from land-based telephony businesses would be severely squeezed. In order to avoid that possibility, he began studying other lines in the communications business. Inamori was among the first in Japan to recognize the potential of cellular telephones. At the time, cellular phones were bulky and expensive, and the fees for airtime were prohibitive. Inamori reasoned that if more people were able to use the phones, the rates would become cheaper, and that if cellular phone manufacturers could compete on the basis of size as well as price of their phones, the devices would grow in popularity.

An internal feasibility study of the industry confirmed Inamori's conclusions, but suggested that personal paging systems would provide higher growth than cellular telephony. In addition, the company's directors cautioned against such a risky adventure when DDI had not yet consolidated its position in the long distance market.

Overruling the study and his directors, Inamori pressed on, fighting for as many cellular phone licenses as possible. In 187 the government awarded DDI a license to operate in nonurban markets throughout Japan, from Hokkaido to Okinawa, while reserving the most lucrative cellular licenses, serving Tokyo and Nagoya, for a group led by Teleway Japan, called Nippon Idou Tsushin (IDO).

While IDO moved slowly in setting up its operation, choosing to serve only the 23 wards of greater Tokyo, DDI quickly established large cellular operations in Japan's other industrial centers, beginning with Kansai, Kyushu, and Chugoku in 1987. Unable to secure the huge amounts of start-up capital that were necessary--even from its deep-pocketed backers--DDI turned instead to local electric power utilities. Through a series of cooperative agreements with these and other local companies, DDI received manpower and marketing support. By 1989 the company succeeded in setting up four more regional cellular companies, serving Tohoku, Hokuriku, Hokkaido, and Shikolu, and established an eight cellular company in Okinawa in 1991.

In a further break with the establishment, DDI elected to build its cellular network using the total access communication system (TACS), rather than a rival system developed by NTT and adopted by IDO. Inamori reasoned that relying on the same system would place DDI at a competitive disadvantage to NTT.

Also controversial was DDI's 1986 decision to use American suppliers for its cellular operation. In an interview, Inamori proclaimed the superiority of American cellular technology to that of the Japanese, a statement that did not sit well with Japanese manufacturers. However, in choosing a system built by Motorola, DDI faced both lower infrastructure and terminal equipment costs.

IDO's market strategy, largely at the insistence of its benefactor Toyota, was to promote the use of cellular phones in automobiles, particularly in urban areas. However, the large volumes of pedestrian and automobile traffic typically found in Japan's cities made driving difficult, commanding the motorist's undivided attention ,and cellular phones in cars therefore proved unpopular. DDI, on the other hand, envisioned millions of commuters and pedestrians using pocket phones, and it fought to import Motorola's calculator-sized MicroTac phones, the smallest in the industry.

In 1989 Japanese cellular operators encountered a new kind of problem: it was excluded from the large urban markets where Motorola's tiny phone would be most marketable. In addition, Motorola products were subject to stiff import restrictions. Determined to resolve the problem, Motorola brought its trade dispute to the U.S. trade representative, who publicly censured Japanese trade practices as discriminatory and anticompetitive. Consequently, the Japanese parliament summarily amended the import restriction law and opened the Tokyo and Nagoya cellular markets to Motorola.

DDI customers were thus able to use their MicroTac in Tokyo and Nagoya, as well as in rural areas.

DDI was unable to immediately set up operations in Tokyo. Rather than permit IDO to benefit from a slow construction schedule, DDI formed a partnership with Nissan called TUKA Cellular Tokyo and, with a substantial investment from Nissan, began construction immediately.

The company targeted its cellular sales at residential and small business customers, hoping to appeal to a larger customer base than that of the corporate business world. By 1991 the company controlled 20 percent of the Japanese cellular market.

DDI attempted to repeat this success in the battle for long distance market share. However, it was impractical to offer the bulky autorouting boxes to millions of residential customers, whose urban living spaces are notoriously small. Instead, Inamori ordered a team of engineers to reduce the works in the box to a more compact size, a technologically feasible but expensive proposition.

At the end of 1990 the engineering team reduced the autorouting box onto a single microchip. DDI promoted the "Alpha" chip with equipment manufacturers, including Kyocera, Sony, Sharp, Sanyo, and Toshiba, and won a deal to jointly market telephone sets and fax machines with DDI long distance service. Customers who purchased the equipment could register for DDI long distance service and activate it by dialing a telephone number. All the customer information was registered and verified by the equipment's Alpha chip.

In terms of growth, 1990 was a banner year for DDI. The customer base increased by 50 percent that year, from 3.6 million subscribers to 5.4 million. The following year, the customer base increased again by two million customers.

In 1991, DDI finalized a strategy that would move the company into the equipment manufacturing business and further de-emphasize its exposure to the increasingly less profitable long distance market. With substantial records on all its customers, DDI possessed a huge marketing database useful in selling equipment. Furthermore, DDI regards this database as a potentially effective tool for marketing information services--an industry still in the developmental stages in Japan.

Now in control of more than ten percent of Japan's long distance business and 20 percent of its cellular market, DDI has accomplished more than any other upstart telecommunications competitor in the world. This has caused considerable concern at NTT, which was forced to begin lowering its rates in 1991 in order to stem losses to DDI. Welcoming the competitive response from NTT, Semmoto assured Telephonyin 1991 that "a king without an enemy cannot be strong."

Principal Subsidiaries: Kansai Cellular Telephone Company (64.3&percent;); Kyushu Cellular Telephone Company (63.5&percent;); Chugoku Cellular Telephone Company (63.2&percent;); Tohoku Cellular Telephone Company (64.1&percent;); Hokuriku Cellular Telephone Company (63.3&percent;); Hokkaido Cellular Telephone Company (63.2&percent;); Shikoku Cellular Telephone Company (62.7&percent;); Okinawa Cellular Telephone Company (60&percent;).

Further Reading:

• "No One Is Laughing at Japan's DDI Now," Telephony, September 2, 1991.
  Telecommunications in the Far East, McGraw-Hill, 1992.
• "DDI Corporation," Harvard Business School Case Study, September 18, 1992.
• Business Report, 1992.

Source: International Directory of Company Histories, Vol. 7. St. James Press, 1993.

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