Economy, No.4  Dec. 1, 2010


ENDŌ ISAO Talking to executives at major Japanese corporations these days, you get a clear sense of their concern over how to position their companies in the marketplace. Ajinomoto, for example, is a leading food producer in Japan, but globally it is up against mega-corporations like Nestlé with overwhelming market shares in many product lines. Japanese companies in other sectors as well are facing off against global giants, as in the case of Kao versus Proctor & Gamble and Takeda Pharmaceutical versus Pfizer. Given the differences in corporate scale, Japanese companies may well feel that they are simply too small to compete successfully. In my view, however, the quality of Japanese companies is such that they should be fully capable of holding their own despite their smaller size, although they seem to be in a process of trial and error figuring out how to define their business domains.

NONAKA IKUJIRŌ Back in 2005, as you probably know, the American consulting firm Booz Allen Hamilton published the results of its survey of one hundred US companies on the topic of innovation. The survey revealed that there is not necessarily a close correlation between the level of performance and the amount invested in research and development, and that instead performance is more closely linked to the quality of a company’s internal processes.

ENDŌ Japanese companies hold the view that they need to expand their scale of operations in response to the rapid rise of colossal manufacturers in emerging nations like China. Yet these companies are not discarding their commitment to quality. In this respect, they are vacillating a bit. I think that as long as a company is able to guarantee the quality of its processes, then it will certainly be able to survive.

NONAKA It could be said that, in a sense, Japanese companies have had to struggle in an extremely tough business environment within Japan to guarantee that level of quality. In the domestic market, numerous companies compete in the same line of business, all aiming to offer products of the same level of quality. The advance of globalization has brought the emergence of companies like Korea’s Samsung that got their start by imitating Japanese companies and then, in the course of imitating, eventually reached upstream to the point where they could to grasp the underlying concepts; pushing ahead with digitization, they have now become able to take preemptive moves on a global scale. This has meant that the market share of Japanese companies declines even if they come up with innovative new products, making it extremely hard to win on the same playing field. Only one or two companies per industry are capable of surviving based solely on the economic merits of scale. The characteristic approach of Japanese companies has been to continually undertake the challenge of breaking new ground. To abandon that approach would mean losing a great quality of Japan itself.

ENDŌ I agree that success is unlikely without that Japanese brand of tenacity. So, to what extent do you think Japanese companies expanding into overseas markets should stick to a Japanese approach, as opposed to adapting to local business practices?

NONAKA We can take the cases of Honda and Uniqlo as examples. For their manufacturing in China, while coping with the demands of digitization, those companies are dispatching technicians to local production sites to thoroughly imbue employees with an appreciation of their core manufacturing philosophy. This is one way Japanese companies are striving to have their own approaches take root elsewhere. Even if the original model isn’t conveyed to overseas employees in its exact form, something that contains the core elements along with some variation can likely be communicated. I think that Japanese companies need to go to this length when it comes to sticking to their principles.

Meanwhile, Seven and I Holdings, which operates the global 7-Eleven chain, is an example of a company with a commitment to painstakingly testing its assumptions. There are some things that the company has to do differently outside of Japan due to cultural differences. In Japan, individual 7-Eleven convenience stores, as a rule, do not prepare food themselves, and even the hot oden sold at the counter in the winter months is made at a central location. But in China, where consumers are very selective when it comes to food served hot, 7-Eleven stores are allowed to handle the final stages of food preparation for certain items. Yet, despite this variation, the fundamental aspects of the company’s convenience stores in China are based on the same discipline that underlies Seven and I’s overall operations. The greater extent to which a company has this fundamental discipline in place, the more respect it’s likely to earn.

Sticking to Core Principles

ENDŌ You seem to be saying that the core elements shouldn’t be compromised.

NONAKA That’s right. Even when Japanese companies operate in the United States, it hasn’t meant that they end up paying exorbitant salaries to a group of star employees, as American companies tend to do. The reason Japanese companies can survive, nevertheless, is that some Americans also have an aversion to how companies are evaluated based on quarterly earnings and MBAs are overemphasized. Such Americans are in fact attracted by the discipline and communal approach of Japanese companies.

ENDŌ During my time at Mitsubishi Electric, the company had fallen into a dilemma where it couldn’t recoup even a fraction of a multibillion-yen investment it had made in a hydroelectric plant in Argentina because the country’s government had gone bankrupt. Yet Mitsubishi Electric was still sending over a number of technicians to continue performing maintenance on the plant. I was just a new, twenty-something employee at the time, and I wasn’t involved in the project, but I told my supervisor it seemed pointless to stick with the project rather than calling it quits. In response, he scolded me rather severely and said, “Mitsubishi would never do such a thing.” [Laughs] That incident gave me a real sense of the company’s principles, which were so deeply held that it was willing to do a government’s own job for it.

NONAKA In a sense, the great qualities of Japanese companies came to serve, at one point in time, as the backbone holding up Japan. And the corporate leaders espousing those firm principles gained the world’s respect. But European and North American companies are completely focused on performance, even adopting a carrot-and-stick approach at their overseas bases, where they draw together outstanding personnel and cast aside the incompetent ones. Japanese companies aren’t that hard-nosed and instead try to foster their local employees. This spirit of dedication, as far as I can tell, is unique to Japan even among Asian countries. Japanese companies also go out of their way to tend to customer needs based on the view that, in the end, this attitude will determine success.

Creating a True Global Village

ENDŌ Another problem facing big Japanese companies these days is an excess of employees. There are quite a lot of employees at the head offices of companies with too much time on their hands, to the point where a company could shed a third–or in some cases half–of its workforce. If firing idle employees is off the table, it becomes an urgent task to consider how to address this problem and also prevent it from recurring in the future; this is also vital to the effort to raise productivity.

NONAKA I also subscribe to the principle that employees should not be laid off, and I think the answer lies in dispatching underworked employees to workplaces outside of Japan. It used to be that you would encounter Japanese businessmen wherever you might be in the world. But these days you’re more likely to encounter Korean businessmen instead. There’s a lot to be learned from Samsung when it comes to truly fostering global personnel and then positioning those employees around the world. Korean employees at Samsung are sent over to overseas subsidiaries for a year, during which time they receive no support at all from the head office back home and are left free to live as they choose. This allows them to assimilate to the local language, culture, and business practices and to build up their personal networks. Samsung has a special system in place whereby employees sent overseas can post their experiences online to share them with other employees throughout the company.

There are also Japanese companies that are striving to localize their overseas operations by encouraging employees sent overseas to live in close contact with the local community. YKK Corporation is an example. That company has planted roots in the local soil and is channeling profits back into the local areas. And it has prepared its employees to live permanently in those overseas areas. Uniqlo, meanwhile, is training store heads to be able to conduct business anywhere in the world, as part of its “great migration” strategy, and this is the sort of direction in which Japanese companies will have to head once their global operations advance to that stage.

ENDŌ In other words, companies should transfer employees to the front-line operations, rather than having them all languish at the head office.

NONAKA When there are too many idle employees at the head office, the tendency is to overanalyze everything. But analysis isn’t of much use at all in the knowledge society that lies ahead. The knowledge society is about creating the future–and the future is not something that can be understood from analysis. What’s necessary is intuition. Employees who have been posted at the head office tend to be those who have outstanding analytical ability to begin with, so if they’re dispatched to local workplaces they can hone their power of intuition. Companies need to put those types of well-balanced employees in a process of constant motion. After employees have been active at local workplaces and achieved results there, they can return to the head office, where they can then be involved in lending support to local workplaces.

A New Look at Comprehensive Strength

ENDŌ Compared to large corporations, medium-sized enterprises in Japan have been relatively vibrant. They have a clearer notion of what they need to do, and an easier time generating employee unity because their scale of operations is not too large. Medium-sized firms have never accumulated so much flab, so they also have fewer idle workers. This situation is quite the opposite of what we find at large corporations. What are your views on those differences that stem from business scale?

NONAKA In trying to address the issue of scale concisely, I’d point to the example of the US Marine Corps, which is made up of around 170,000 soldiers but has been structured such that the organization performs in a highly functional manner, working in tandem with the Army, Navy, and Air Force. The key point, from this perspective, is how a large organization can be made to operate functionally.

In order for a company to have that sort of agility I think it’s important for the president to exercise control over the organization. The president needs to lay out the vision, play a direct role in appointing a “project designer,” and then assume personal responsibility for the outcome. If Japanese companies can put in place that sort of speed-oriented system, I think their prospects still look good. This is precisely the approach that Steve Jobs has taken at Apple, and if Sony, Hitachi, Panasonic, and other Japanese companies acted similarly, their competitive ability would skyrocket. Sony has recently taken the first step toward creating an agile organization through its Sony United initiative, which puts in place a cross-organizational structure to link top executives to the local workplaces and company divisions. If a large company with the comprehensive strength of Sony were to become more agile, it would be truly unbeatable. I say this because we’ve reached the stage where, for the sake of the achievements in the infrastructure sector, the source of Japan’s strength will be its comprehensive ability, which up to now has been ridiculed.

ENDŌ Companies have been exclusively focused on getting rid of excess, undertaking “selection and concentration” in order to correct what had been an overly broad approach, but you seem to be saying that the mind-set needs to be changed so that comprehensive ability is viewed as a strength.

NONAKA Yes, exactly. I think Sharp is to be commended in this respect for naming a recent tablet computer “Galapagos,” as a sly reference to the term “Galapagos syndrome” that has been used to describe the dilemma of highly advanced Japanese products that are too complex to sell well overseas. My view is that unless knowledge is connected not only horizontally but vertically as well, it can’t be accumulated.

ENDŌ When I first heard about the name of that product I couldn’t believe my ears–in a good way, of course. The term “Galapagos,” in a sense, precisely symbolizes the characteristics of Japan today, and instead of viewing it in a negative light, I think we should take the view that the steep verticality found in Japan is one of its strengths.

NONAKA Japanese companies have created a whole lot of things that didn’t have practical applications at first but that now can be put to use. Even when it comes to open-source applications, the wider the range of a company’s resources, the stronger it will be, because Japanese companies can integrate those resources on their own.

Japanese Executives’ Weak Rhetoric

NONAKA One problem Japan faces, however, is that it hasn’t managed to foster the sort of producer needed to accomplish that integration. No matter how powerful a company’s overall strength might be, without that sort of person in charge, the knowledge that lies deep within the organization won’t be integrated.

One of the characteristics of the Japanese management structure in the past was that middle management occupied a highly strategic position. This “middle up-down” management model, where the vision of the top executives and the practical abilities of front-line employees spiral up together, is almost an art form because it’s quite hard to achieve in practice. When it comes to implementing this model, top executives need to verbalize the dream for the organization and encourage the middle managers.

ENDŌ Recently I’ve been talking about companies that have vibrancy versus those that don’t. And there’s a remarkable difference in terms of corporate strength between a company that aims to establish an environment that will enhance its vibrancy and one that lacks that awareness and just bases its management on abstract theories. My impression is that vibrant companies, even if their initial performance is poor, are likely to eventually post good results, whereas those without vibrancy are destined for problems.

NONAKA You might say that putting in place a management structure that acts as a task force willing to undertake such great challenges requires a certain power of hyperbole. IBM, for instance, is now advocating a Smarter Planet concept, which is certainly an example of overstatement. [Laughs] But this is the kind of thinking that’s needed to convey a world-changing vision. Rhetoric is necessary to get people motivated.

ENDŌ For middle management, a key word is breakthrough. If you look at cases where middle management did achieve a breakthrough, it clearly helped the organization as a whole to break free from the status quo. Moreover, we’re not talking about a partial change, but one that runs up and down a company as well as horizontally. Achieving this requires that the necessary personnel be brought on board. It’s a matter of building up momentum. Top management needs to spur things on to make this type of action possible. It takes courage to make strides forward, and it can be tedious at times. But employees can adopt a positive attitude when the company leaders are backing them up.

NONAKA When the top executives are able to act spontaneously, middle managers are then inspired to act in a similar way. And those middle managers are good at getting their own employees to join in too. This is the sort of dynamism is crucial.

Training Makes a Comeback

ENDŌ Experience is another key factor. Lately there’s a growing trend toward bringing back on-the-job training. Japanese companies in the past had adopted organizational structures that were either flat or networked to speed up decision making and delegate authority. The result was a weakening of vertical ties within a company–to the point where personnel were no longer being fostered. Faced with this problem, companies are taking a fresh look at on-the-job training as a way of once again providing employees with opportunities to gain experience. Toyota, for its part, has reintroduced its assistant manager system and the position of foreman [hanchō]; and these two moves alone are likely to lead in a healthy direction. The concept of on-the-job training is summed up in the Japanese expression mendō o miru [look after someone]. One person looks after another person, and then that person can look after someone else. Workplace motivation has suffered precisely because these personal connections were neglected.

NONAKA Experience seems to be an important factor when it comes to the practices of mieru-ka [making problems “visible”] and the mentor-mentee system. The word “agile” has been used as a blanket term to refer to the development work of promptly providing valuable software that responds to changes in required specifications, and in recent years what’s called “scrum development” has become the mainstream approach within agile development. This concept first appeared in the 1986 essay “The New New Product Development,” published in Harvard Business Review, that I coauthored with Harvard Business School professor Takeuchi Hirotaka. We described the development process as similar to a rugby scrum, where the teammates form a single unit passing the ball back and forth to each other as they try to reach the opposition’s goal area. This approach differs completely from the relay-race style of development that had been common in the West, where the scope of responsibility for each individual is clearly stipulated.

For example, if shared work is done on the same computer, a chart can be created each day to let everyone know how the work is progressing. Taken one step further, “pair programming” can be introduced, involving two programmers using the same computer–although in this case, it’s best to pair off a veteran worker with a newcomer. An outstanding programmer gets an intuitive grasp of the needs of a customer and can then create an appropriate program. And if the next person improves the program, the original programmer praises the work, and the workplace functions like a martial arts dōjō where the senior practitioners recognize the abilities of their juniors. Once a number of mentors appear in the workplace, things become a lot livelier and people feel motivated, which in turn helps convey tacit knowledge. It’s a sort of synthesis between the more tangible analog mind-set and a digital one.

ENDŌ The old mentor-mentee system really seems to be making a comeback. It has been said that one reason for the lack of workplace vibrancy is that young people these days lack a sort of get-up-and-go spirit. Do you think that younger employees have some sort of problem?

NONAKA My view is that the lack of enthusiasm among younger employees in the workplace reflects problems in middle management, just as the lethargy of middle managers reflects problems in top management. The actual situation is that young people are waiting for a supervisor who isn’t afraid to be forceful and will say, “Let’s do this together.” Nowadays supervisors tend to ask younger employees, “Is it going OK?” instead of conveying a confident “No problem!” attitude that lets those employees know that the supervisor is prepared to pick up the pieces for them should they fail.

ENDŌ I know from my own experience as a management consultant that there’s no need to have lots of analytical data to be a great consultant. Just having two points is enough: From there you can freely draw a graph to make your points in a persuasive way. In other words, instead of creating graphs from data, you can create it on your own. Particularly today, when it’s so hard to know what’s coming next, I think top executives need to make decisions on their own about the next steps to take because two points that they can see are the present situation and how to think about the future. Company executives are asking the impossible if they call on those below them in to predict future developments by themselves. Such an approach would result in lethargy among both middle management and younger employees.

NONAKA Once the middle managers are able to respond with enthusiasm to the direction of company leaders, I think that vitality in turn gets the whole organization moving in a positive direction.

Translated from “Burasagari shain o kaigai ni okurikome,” Voice, December 2010, pp. 167-76. (Courtesy of PHP Institute) [December 2010]