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No.5 ,Economy  Feb 07, 2011


Change may finally have begun. In the third quarter of 2010, capital investment grew above the level a year earlier for the first time in three and a half years. Shipments of machine tools expanded strongly during the second half of 2010. Early in 2011 Hitachi, Ltd., which has been one of the slowest of Japan’s major corporations to shake up its management, announced that it was reorganizing its operations and reforming its research setup. And even Japan Airlines (JAL), which appeared to be having a hard time restructuring to head off bankruptcy, now seems poised to fly into clear skies.

Signs of a business revival are turning up here and there. To be sure, it is still too early to determine whether these scattered developments are indications of a broad-based recovery from the corporate malaise that appears to be the root cause of the economy’s long-term sluggishness or whether they merely show that a handful of actors have decided to take some small steps forward in the hope that a recovery is in the offing. It will soon become clear which of these readings is correct. As I see it, 2011 will be a make-or-break year for the Japanese economy’s recovery, and it may be the last chance Japanese companies are going to get.

It was in 1991, exactly 20 years ago, that Japan’s bubble economy burst, dealing businesses a severe blow. Banks were left with a huge accumulation of nonperforming loans, and asset prices entered into a steep decline of the likes rarely witnessed anywhere in the world. This marked the entry into the low-growth 1990s, a period derisively labeled the lost decade. The sluggishness persisted into the new century, and though the corporate world gained some ground starting around 2006, a second shock hit in the form of the global financial crisis, signaled by the bankruptcy of Lehman Brothers in 2008. Once again business turned sour, and now people are talking of the “lost two decades.”

The year 1991 also saw the start of a fundamental transformation in the world’s structure, which had been in place ever since World War II. The Gulf War began in January 1991. Grave geopolitical risks had arisen in the world’s largest oil-producing region, and it became center stage for the exercise of American military power. Then, in December 1991, the Soviet Union collapsed. That spelled the end of the ideology of communism. It dismantled the structure of the Cold War and initiated a redrawing of the world’s geopolitical map. The victory of American capitalism also rewrote the world’s economic principles. With the dawn of the twenty-first century, moreover, China and other emerging countries continued their surge forward, causing further redrawing of the world’s geopolitical and economic maps.

While these momentous changes were taking place around the world, Japanese companies seem to have simply stumbled blindly forward. Probably this is the most basic cause of the sluggishness over the past 20 years. Sad to say, the underlying problem appears to be that companies drifted along without principles to guide them, applying in-house logic lacking a global perspective.

Companies Without Confidence or Guideposts

In a world caught up in change, one where corporate operations are spreading far beyond national borders, there is naturally a need to revamp corporate management so as to accommodate the changes and match the conditions of a borderless environment. Most executives will agree, however, that even when the times change and operations are conducted in several countries, companies still need a philosophy and principles to give them an identity, and management still must abide by the principles and rules of economics. That is, the starting point of management must be specific policies tailored to the environment and based on principles. The principles are of various types. Some will prescribe a way of management, while others are economic principles.

When we review the performance of Japan’s companies over the past two decades, we can see that many were in effect drifting along without a rudder. Of course, there are also corporations with a fine set of principles. Starting in the mid-1990s, however, many business leaders came to regard US-style management as the global standard, and they imitated the American model when introducing results-oriented pay and corporate governance. More recently, the American-inspired fad in research and development is to apply “open innovation,” utilizing external as well as internal ideas, and to divide the development process into stages using the “stage-gate model.” Have not many of the specific policies of companies become mere imitations disregarding the differences in the environment between Japan and the United States?

One can also find numerous cases in which Japanese corporations brushed aside their own country’s labor practices and principles when setting up operations in other countries, opting instead to “localize” personnel management. This, too, represents an abdication of the company’s own principles in order to imitate the ways of the local community. Other companies did the opposite, applying the specific policies of their management in Japan to whatever country they began to operate in. These are cases in which no attempt was made to modify Japanese principles to match the local setting. Local operators simply imported their policies from Japan, arguing “this is the way the head office does it.”

The most serious drifting occurred when companies listened to those saying “this is the way the Americans do it.” This easygoing imitation became widespread in the mid-1990s, backed by the simplistic thinking that since US companies are doing this or that, Japanese companies ought to be doing the same thing. But then the Lehman shock hit and the American economy stalled, causing a complex reaction in the crowd of American idolizers. When comparing Japan with the United States, they were somewhat relieved to see that it was the United States that had stumbled, but having pinned their hopes on the American model, the sudden loss of guideposts for moving into the future left them feeling bewildered.

When the Lehman shock stunned the United States, it seemed likely to me that Japanese businesses would regain their confidence. What actually happened, however, is that quite a few Japanese business leaders became even less sure of themselves. Behind the scenes, many companies continued to drift along without a rudder.

The Fetters of In-House Logic

The classic case of a company applying in-house logic without a global perspective is one that sticks to an unreasonable strategy for the simple reason that the atmosphere within the company precludes anything else, even when many people can readily see that the strategy will not pass muster when applied in other countries. One can find many examples of such behavior in the electronics industry, especially in the information technology and telecommunications fields.

Electronics is an industry in which South Korean companies have taken great strides forward over the past two decades. They have staked out positions in the fields of expertise of Japanese firms one after another, securing a commanding lead in such products as semiconductors, liquid crystal displays, mobile phones, and televisions. Samsung Electronics is representative of this Korean advance. Some Japanese seek to explain away the success of Korean firms by noting that many are chaebols (business conglomerates) under one-man control and that they receive government subsidies, but my view is different. It is true, of course, that decision-making proceeds rapidly when just one person calls the shots and that investment can go forward on a grand scale when the government supports it. On a more fundamental level, however, Korean companies have simply acted in line with sound strategic logic and economic principles at a time when Japanese companies were unable to behave in a like manner because they were constrained by various domestic fetters, especially those created by in-house circumstances.

The most universal principles transcending borders are those of the theory of economics. There is a hardheaded reality underpinning such economic doctrines as economies of scale and price competition. When executives opt to disregard even this elementary business logic and formulate policies based only on what makes sense in the light of the thinking within the company, they become slaves to the in-house logic of a firm that has lost sight of the world. In defense of such companies, it may be noted that the existing domestic industrial structure creates a barrier that can make it hard for individual firms to engage in daring behavior on their own. If that is the case, though, business leaders need to get to work on rebuilding the industrial structure so that they can act in line with global-scale economic principles. While this course of action may cause some loss of blood within the company, surely that is preferable to allowing the company to succumb to a fatal disease.

In the field of mobile phones, it is doubtful that logic suited to global-scale operations offers a good fit for a situation in which as many as nine companies are intent on making phones for the narrow Japanese market. In many other product fields as well, it has long been observed that the goods Japan’s makers produce are not in line with the demand in emerging markets. Their functions and performance exceed what is desired, on top of which they are too expensive. One might think that downgrading product specifications to match expectations and lower costs could solve this problem, but for a variety of reasons, companies say, this simply cannot be done. In-house logic leads to one objection after another. You will be told that the quality assurance department refuses to allow any change that makes it harder to sustain product quality, that the technical staff will lose its motivation if asked to come up with downgraded specifications, and that the existing suppliers have no materials they could deliver at such low prices. When in-house thinking takes precedence, low-cost specifications cannot be used.

A Psychological Double Bind

Japanese companies are struggling with both American-style management and an offensive launched by Asian countries. Their situation closely resembles that of the Japanese government, which is sandwiched between the United States and China and uncertain about what to do. Many business leaders have been wailing about the flip-flops of the ruling Democratic Party of Japan, whose stance on the US military bases in Okinawa and Chinese provocations in the vicinity of the disputed Senkaku Islands (Diaoyu Islands in Chinese) has been vacillating, but have not companies been behaving in much the same way?

Japan’s corporate managers still display the mentality of the developing country in relations with the United States but are beleaguered by the advanced-country syndrome when dealing with other Asian countries, China in particular. They have stumbled into a position placing them in a double bind. When thinking about the high level of Japan’s wages, they reason that only a strategy befitting an advanced country can provide their companies with a raison d’être, which leads them to adopt a lopsided stance with the emphasis on producing high-value-added products and pursuing technological differentiation. And even as they pursue this strategy, they continue to exhibit a managerial mentality of virtually worshipping the United States.

Of course, it is natural for managers anywhere in the world to want to learn from that which is excellent. When deciding if something should be viewed as worthy of emulation, however, Japanese managers need to examine the logic, asking whether it has great significance for the particular situation of the Japanese company. In fact the stance many managers have adopted is one of imitating American practices without giving the matter much thought, and in that respect it is fair to say that they have the mentality of the developing country. This mentality does not deserve condemnation for the emotional reason that anyone exhibiting it will never be anything more than a follower. The problem instead is that the application of developing-country thinking leads to warped judgments.

The warping occurs because judgments fail to pay sufficient attention to the tacit supposition that American management practice may only be effective as long as it is confined to the United States. Needless to say, the way of management of American companies operating in the United States is efficacious because it conforms to the country’s social and historical conditions. Because these conditions are taken for granted, they form a tacit supposition that does not need to be made explicit. When Japanese managers disregard this unstated premise and simply copy the superficial features of American management in Japan, their efforts naturally turn out to be unsuccessful in those cases where the premises of a logic that works in the United States are not present in Japan.

When the developing-country mentality holds sway, problems other than those due to blind obedience can be expected. Managers run the danger of becoming unable to evaluate Japan’s own strengths properly. And before they become aware of it, their options and range of thinking will become circumscribed.

External and Internal Structural Factors

Such are the binds Japan’s companies have tied themselves in, cramping their freedom of movement. If they are to awaken to their predicament and cast off their protracted sluggishness as quickly as possible, they need to think more deeply about their management principles and draw a new map in bold strokes, utilizing global-scale logic.

Does not such “deepening” of corporate management strategy provide us with the key to formulating new Japanese-style management practices? Do we not need to dig more deeply into the reasons for Japan’s success in the past in order to get a solid grasp on the principles involved? And should we not then deepen the ordinary logic of economics and strategy in a way befitting Japan? Actually, this may be the last chance for Japan as a whole to perform such an exercise. That is because there may be only two or three years remaining when external and internal structural factors are still favorable, if only barely, for executing an escape from stagnation and designing a deeper management style.

Among the external structural factors, the leading one is the global current of skepticism directed at American-style financial management and capitalism. Originally, this American style of conducting finance and doing business was not one the Japanese were good at. After all, they were familiar with an economy somewhat different from the American-style economy, and their country had achieved success by applying Japanese-style management to its Japanese-style economy. But then communism went down to defeat in 1991, and the triumph of American capitalism became a source of pressure on Japanese companies that sent them drifting off without principles to steer them.

The Lehman shock initiated a reconsideration of the pressure Japan’s firms had been operating under. It created an external structural factor permitting Japan to lay claim to its own principles once again. If firms are slow to take advantage of this opportunity, however, there is no telling what further changes may occur in the flow of the world’s economic and managerial principles. There is not much time left to act.

Among the internal structural factors that can assist an escape from stagnation, the foremost one in my view is the age composition of Japan’s business leaders. For the next five or six years, corporate management will remain in the hands of a generation whose members are familiar with success and gained a sense of growth from their past experience on the front lines. These are executives aged from the mid-fifties to the mid-sixties. As they were between the mid-thirties and mid-forties when the bubble economy burst, they had already worked for their companies for 10 or 20 years during the era when Japan was still growing, giving them experience with what was, in its way, a period of success.

As of 2011, most of the workers these managers are leading are personnel who began their careers after the bubble’s collapse. If they entered the company in 1991 in their early twenties, they are now in their early forties. They form the core of the corporate workforce, and under them is a yet younger generation of workers. The period when people advance the furthest in developing career skills is the first 20 years of work, when they are aging from the mid-twenties to mid-forties. The workforce of the Japanese company today is centered on a group who passed through this vital period during the two lost decades. They have had no opportunity to acquire firsthand experience with great achievements; indeed, they are far more familiar with such matters as corporate downsizing, management reorganization, and backward-looking jobs.

The experience of success will on occasion put a person under a spell, but it can also be a workplace experience provoking thought about truly Japanese management principles. It can become the wellspring of a workplace sensibility that recognizes the importance of thinking with a global perspective. The current generation of corporate managers comes equipped with just such experience. If it fails to rouse itself within the next five years or so, however, it will find itself being replaced by a generation without similar experience, one unable to draw on principles for developing global vision.

In this light, today’s business leaders form the last generation with successful experiences of one sort or another. If they do not act to stop companies from drifting along without a rudder and free them from the fetters of in-house logic lacking a global perspective, the outlook for leadership will only grow darker in the future. Viewed in terms of internal structural factors as well as external ones, this is the last chance.

Utilizing the Galápagos Syndrome

I do not think that the key concepts for new Japanese-style management need really be that novel. What will be crucial is using old principles as the foundation for building new ones. To be sure, when managers give thought to devising specific policies, they must employ a new set of concrete concepts tailored to fit the new environment.

Two concrete concepts will, I believe, be required. The first is that Japan’s strengths must be used to good effect, and the second is that the fetters binding management must be thrown off. Japan’s corporations are often derided for having succumbed to the “Galápagos syndrome,” meaning their products have evolved in isolation from what is going on in the rest of the world, but as I see it, taking a defiant attitude to this criticism and asking what is wrong with the Galápagos approach will be essential for employing both concepts.

The concept of a “complex mechanism” can be employed to make effective use of Japan’s strengths. In the field of manufactured products, talk of complexity calls to mind composite materials, multifunctional devices, combined infrastructure systems (integrating, for instance, electricity, railroads, and waterworks), and complex service systems (as in the case of parcel post deliveries), but in fact Japanese companies also make complicated products, use complicated methods for responding to customer needs, and have complicated production lines and office routines. These are assets Japan can put to use in the world.

An enormous amount of overall ability is required for using complex mechanisms in their entirety, since not even small details can be neglected. Japan’s firms have managed to develop just such an ability from their work in the Japanese archipelago. People sometimes call attention to their operational ability, such as their skill at reconciling requirements in product development. What I am recommending is an expanded version of this thought. Managers should consider the ability to utilize complex mechanisms of various types to be the central element of the Japanese company’s strength.

While it may be true that the acquisition of this ability has involved Galápagos-like evolution, we should look on this style of evolution as one of Japan’s strong points. True, there is currently little world demand for the products resulting from this ability, but the day will come when the emerging countries will want to buy them. In fact, signs of the emergence of such demand are now to be seen. Companies, then, need merely lie in wait. This is, I would say, “lying in wait at Galápagos.”

The concept of downgrading specifications should be useful in liberating management from fetters. If the word downgrading is distasteful, another way of putting it is “zero-based specification design.” The idea is to create products that are a great deal simpler than those being produced by Japanese manufacturers today. This is an essential concept, since complex mechanisms alone are unlikely to meet the needs in all fields when the logic of global-scale economics is applied. When we look back over the course of Japan’s Galápagos-like evolutionary process, we find that just a few decades ago upgrading specifications was by no means the sole concern. In this light, the need now is simply to turn the clock back. It is to return to what the Japanese were doing at an earlier point in time.

In addition to concrete concepts, managerial principles can also be put to use. One of the key notions in this area is studying the past to produce new ideas for the future. A useful candidate is “humanism,” which in my view was one of the principles underlying the success of Japanese businesses after World War II. In the Japanese corporate context, managers saw the humanist approach as meaning the construction and development of stable networks among workers, both within the company and with the personnel at other companies. Networks are useful for fostering the ability to reconcile plans and ideas and the ability to engage in team learning in the workplace. For the past 20 years I have been asserting that they provide a way to keep Japanese companies alive, and I still feel that way today.

In other countries, one can normally find a certain portion of the population in agreement with this way of thinking. No doubt the percentage depends on the country. There may not be many Americans who value networks that highly, but I suspect that a large number of Chinese are network-oriented. Even in the United States, moreover, one can find companies like Google that appear to be using the network as the base of their corporate organization. When selling products made with complex mechanisms to the world or exporting the concept of the humanist network, Japan’s companies have no need to target every market and every person. Generating interest among a certain percentage of the population is all that is necessary.

Learning from Leaders of the Past

Surely the Japanese interpretation of humanism is not the only useful old managerial principle. I think that if you asked a large number of managers at today’s companies to give serious thought to what they considered to be key principles, you would find many on which there is broad agreement. Here, let me suggest some examples from the Meiji (1868-1912), Taishō (1912-26), and Shōwa (1926-89) eras, citing expressions used by business leaders that became the starting point of what came to be seen as principles.

First, for the Meiji era, one of the weighty expressions used by Shibusawa Eiichi (1840-1931), known as the “father of Japanese capitalism,” is “Introduce only that on which there is agreement.” In formulating his own managerial principles, Shibusawa drew heavily on the Analects of Confucius. Recently his Kei’ei rongo (Analects of Management), a collection of his comments based on the Analects of Confucius, was reissued in a version written in modern Japanese (Tokyo: Diamond, Inc., 2010). In it is the following passage, penned early in the Taishō era but sounding much more modern:

“These days new ways of thinking in Western countries are being introduced to Japan one after another. That is a very fine thing, but they need to be closely examined from the perspective of whether they are acceptable to the Japanese and suitable for Japan’s national character. Only that on which there is agreement should be introduced. . . . I hope for advancement in every respect, but I wish to awaken the Japanese to the importance of carefully differentiating between good and bad doctrines, especially now when introducing ways of thinking from overseas is becoming so popular.”

For a Taishō-era industrialist, let me select Toyoda Sakichi (1867-1930). He invented world-famous automatic looms, and he also became active in Japan’s textile manufacturing industry and quickly launched a large-scale advance into China. The father of the founder of Toyota Motor Corp. was thus not merely an inventor. He also had a commanding presence as an entrepreneur.

When he began pushing for the advance into China, he encountered opposition from other executives in his firm. His response at the time is good advice for the Japanese company in the present day: “Just open the sliding door. There’s a lot of space outside.”

For an industrialist from the Shōwa era, Honda Sōichirō (1906-91), founder of Honda Motor Co., made several appropriate remarks. He is known for saying that human life consists of three parts, seeing, hearing, and trying out, but many people do not do enough of the third part, trying out. He tried out new endeavors of various types in developing technology, building a business, and advancing overseas, and people were astounded by his successful accomplishments. Here is one of his favorite sayings: “If you don’t try it, you won’t learn anything.”

Japan’s companies are longing for principles that can prevent them from drifting. They are in need of a logic enabling the world to be brought into sharp focus. For that purpose, the people in charge of management must have ideals and a philosophy. Honda, who completed only elementary school, mastered the skills of his trade through training in the workplace, but he placed a high value on ideals and philosophy. As he put it, “Action without ideals is dangerous; ideals without action are meaningless.”

Translated from “‘Genri naki hyōryū’ kara ketsubetsu seyo,” Voice, March 2011, pp. 48-55. (Courtesy of PHP Institute) [March 2011]