It was 6:00 pm on June 22, 1991, and Rudolf Richter, President of Lussman-Shizuka Corp., could see several photographers and journalists representing Osakas major newspapers gathered outside on the street 20 floors below. Richter signed and glanced nervously at his secretary who was signaling him that yet another reporter was on the telephone wanting his view of the allegations recently made against the company. Four hours earlier, the Japanese authorities had arrested three of Richters employees and accused them of bribing university professors to win orders of the companys products. In his entire 25-year career with Lussman Pharmaceuticals, Richter had never faced a more difficult situation.

Lussman in Japan

Located near Osaka, Lussman-Shizuka Corp, was a 50:50 joint venture between Lussman Pharmaceuticals based in Dusselderf, Germany and Shizuka Corp., a Japanese chemical firm. Formed to produce and distribute anti-cancer drugs in Japan, the venture had operated since 1971 in what Richter called one of the toughest, most competitive markets in the world. Richter had headed Lussman-Shizuka for the past six years and was the only foreigner working in the joint venture. Although he had began learning Japanese, his ability to handle a business discussion was still limited. Consequently, most meetings were conducted in English. Two executives from Shizuka Corp., Hiroshi Shibuya and Yusumi Kato, served as vice presidents of Lussman-Shizuka were involved in the daily operations of the joint venture. They both had a reasonably good command of English.

For many years, Japan had kept foreign products out of its national market with what Richter described as high tariffs and complex production and import procedures. Through negotiations with the European Community, these trade barriers had gradually been dismantled, but importing goods into Japan was still cumbersome in Richters view. Lussman Pharmaceuticals had entered the market by trying up with a leading Japanese company. The venture represented a rare success for a European company in Japan. Lussman-Shizuka sold quality products at competitive prices, serviced through a national distribution network. Technological leadership had given the venture its initial edge in the fight for market share. Currently, the company manufactured 10% of its products in Japan and imported the reminder from a Lussman factory in Germany.

Over-the-counter drugs in Japan were primarily available through doctors rather than pharmacists. Japanese physicians typically charged low fees for clinic visits, relying on the sale of drugs for the bulk of their income. Doctors had a great deal of influence over their hospitals buying decisions as well as the drug purchases of their former students now working in other medical institutions.

The Lussman-Shizuka Affair

Three weeks earlier, five doctors who worked at prominent university hospitals in Osaka had been arrested for accepting improper cash payments from Lussman-Shizuka. Two doctors who had previously purchased Lussman products, had reportedly received $22,000 for entertainment expenses. Another was arrested for accepting $31,000 from Lussman-Shizuka for attending an academic conference in the United States. Two other professors in a major Japanese university were each accused of receiving $18,000 from Lussman-Shizuka, but prosecutors had not yet released their names. Shortly after this incident, the Ministry of Health, together with the Ministry of Education, advised all state university hospitals against purchasing drugs from Lussman-Shizuka for an unspecified period of time, a move that could have devastating consequences for Lussmans business in Japan.

Dr. Yutaka Hayashida, an Osaka physician, observed, Pharmaceutical companies commonly court doctors to buy their drugs because it is such a competitive market. Salesmen will do almost anything to get access to the most influential practitioners. Theyll give them presents, buy drinks, pay for trips, even help to their kids get into the best universities. Dr. Hayashida added that he had made a personal decision to turn down all such offers, although there was no hospital requirement to do so. He continued, Low-paid university professors and newly-established doctors are particularly vulnerable to such offers. The Lussman-Shizuka affair is just the tip of the iceberg. Most companies and most doctors do the same thing. In fact, much of the competitive bidding that does happen in hospitals is meaningless, because the doctors have decided in advance which drugs they want to buy and the specifications are set so that only those products will be accepted.

The Reaction from Shizuka Corp

Yasumi Kato, a director in the Japanese parent company who was also a vice president in the joint venture, offered his view of the situation:

The fact that Lussman-Shizuka is an outsider makes the company especially vulnerable to exposure. Furthermore, in Japan, stability is very important. We brought attention to ourselves by marketing aggressively. Within less than a decade of its founding, Lussman-Shizuka moved to the top ranks in the industry in its particular specialty. Our share of the market and focus on maintaining high profits, Lussman-Shizuka wanted to be at the top in anti-cancer drugs, and the company matched Japanese discounts below for below. Now we are paying the price.

Richter knew that the ventures quick climb had created a lot of tension among the competitors. In fact, his Japanese partners had warned him of the danger of disrupting the market with an aggressive sales policy. Industry leaders had frequently complained that prices had fallen too low. Now, the ventures Japanese staff speculated that a competitor had leaked inflammatory information to the press. Richter was aware that scandals typically broke in the Japanese press after reporters were fed information aimed at undercutting foreigners who were seen to be undermining the status quo.

Why was Lussman-Shizuka singled out? According to Richter, In some respects, the company has been too honest. When investigators raided out office last week and demanded to see the companys accounts, we had only one set of books with a straightforward accounting of our activities. Many local companies have two sets of books or, at a minimum, they have couched the payments to doctors in vague terms, such as cooperative research. The reality in this industry in this country is that you are not a fully-fledged salesman until you have reached the point where a doctor will accept your gifts and agree to meet with you.

Hiroshi Shibuya, a vice president in the joint venture, felt that what had gotten the company into difficult was its effort to woo university professors. Investigators had told the press that Lussman-Shizuka had compiled a list of influential doctors to be regularly targeted by its salesmen.

Where To Go Next

Richter had to decide how to proceed, and quickly. He could not help thinking that a scandal now would jeopardize his forthcoming retirement. His wife had already moved back to Bavari and Richter himself was scheduled to leave Japan permanently at the end of December. Now, the Japanese authorities had forbidden him to leave the country, and he could face a long trial if convicted.

While his Japanese partners tended to blame Richter openly for the consequences of aggressive selling, Richter felt they also shared some responsibility for the current situation. Although he knew that gift-giving was a longstanding Japanese tradition and standard industry practice, Richter felt that the salespeople may overdone it.

While Richter had been mulling over his alternatives, the crowed outside the office building had grown considerably. And, there were likely to be more waiting for him at his home, all with the same questions. Should he talk to the press and give his own version of the story, or should he try to avoid the media at all cost? Since Japanese doctors and the salespeople considered the alleged actions as acceptable industry practice, should he follow the advice of one of his managers to meet with the competition to work out some common actions? Should he also ask for assistance from his government, as one of his German business associations had suggested? Should try to get help from his European headquarters?

- What went wrong? Was Richter aware of what was going on? If he knew, what were his obligations?

- What is the responsibility of the Japanese partner?

- Look at all four options (talk with press, meet with competition, solicit help from German Government, and contact German headquarters). What are the pros and cons of each option? Which one should Richter pursue, according to your opinion, and why?

- What can be done to avoid this kind of situation?