Can Japan Compete? 

 

                                   

“If Japan cannot develop a more fluid job market and flexible management style, the recession will last for many more years to come.  Japan does not need any more highways, dams, empty museums, or concert halls with no musicians to play.  The government must stop wasting money on useless and overpriced government projects.  Now is the time to support entrepreneurs and foreign firms that can create jobs and bring flesh blood into management.”

Nakato Hirakubo[1]

This book is based on an in depth study of Japan conducted by three eminent scholars, Michael Porter of Harvard Business School, Hirotaka Takeuchi of Hitotsubashi University and Mariko Sakakibara of the University college of  Los Angeles.  Porter needs no introduction.  His books, Competitive Strategy, Competitive Advantage and Competitive Advantage of Nations are master pieces.  Takeuchi is known for his brilliant book “The Knowledge-creating company.”  He is one of Japan’s most famous management gurus. Sakakibara has done a lot of research on Japan’s global competitiveness. It comes as no surprise that when such eminent scholars come together, remarkable insights emerge.

 Japan’s success has fascinated many western management scholars and practicing managers.  Early studies attributed Japan’s emergence as one of the leading players in the global economy to two sets of factors: enlightened government intervention (or state capitalism as termed by some economists) and unique Japanese management practices such as life time employment, continuous improvement, total quality management and just-in-time production.  The study conducted by Porter, Takeuchi and Sakakibara reveals that the government has played a marginal role in the development of Japan’s most competitive industries like cars and video recorders.  And where the government has been  actively involved in sectors such as chemicals and aircraft, the results have been disappointing. Right from the preface, the authors make it clear that Japan has succeeded in spite of and not due to government intervention. The authors also emphasise that while Japan must continue to leverage on some of its unique management practices, it must also learn to change with the times.  They argue that the need of the hour for Japan is to encourage competition wherever it is absent. “We will demonstrate in the pages that follow that Japan is not a special case after all.  Its industries succeed not when the government manages competition but when it allows competition to flourish.  And Japanese companies succeed when they follow the accepted principles of strategy.”

 In recent times, Japan has been going through a recession.  And western leaders and business journalists have been regularly taking pot shots at the country.  Various macro economic reasons have been given to explain Japan’s plight.  The authors point out such explanations are unsatisfactory.  They reiterate Porter’s argument in his book, “The Competitive Advantage of Nations,” that a nation’s competitiveness is essentially determined by micro economic factors.   After all, it is companies and not countries which compete in the global market place. They point out that in Japan, globally competitive industries such as cars coexist with uncompetitive ones like agriculture, chemicals, computer software and retailing.  If the role of the government had been that critical, industries would have been uniformly competitive or uncompetitive.

 Indeed the coexistence of both highly competitive and uncompetitive industries in Japan has been discussed by other scholars.  In his influential article, “Fixing Japan’s white-collar economy: A personal view,”[2] Shintaro Hori, pointed out that Japan’s impressive economic performance (Japan’s GDP grew from one quarter to one half of the US GDP during the period 1985 to 1991) could not hide the fact that many of Japan’s domestic businesses (accounting for almost 80% of the economy) were quite uncompetitive: “Without the challenge of international competitors to press them into shape, the majority of Japan’s domestic companies have become complacent.  This is especially true in the service, construction and food-production sectors.  One could say that there are in effect, two Japans, which are operating under two fundamentally different economic codes.”

 The book quickly explodes several myths.  Contrary to popular belief government supported cartels have not boosted Japan’s competitiveness.  Cartels are common in uncompetitive industries but rare in competitive ones.  Cooperative government initiated R&D projects have also had a marginal role to pay in boosting competitiveness.  As the authors put it: “Despite conventional wisdom and the fact that the Japanese government has fought hard to preserve its approach, the great preponderance of evidence points to the Japanese government model as a cause of failure, not the source of the Japanese Miracle.”


                                  The key ideas in this book

  • Government intervention undermines an industry’s global competitiveness.
  • Micro economic rather than macro economic factors determine the competitiveness of a nation’s industries.
  • Strategy is about making trade-offs, deciding what to do and what not to do.
  • Imitating competitors does not pay in the long run.  Sustainable competitive advantage results from unique strategies that provide value to customers in a different way.
  • In the long run, a nation can prosper only by sustained productivity growth.
  • In any industry, there is scope for innovation.
  • Profitability, not market share, is the ultimate test of any strategy.

 

In a subsequent chapter, the authors revisit the Japanese corporate model, whose main features can be summarized as follows:

·        High quality and low cost

·        Wide array of models and features

·        Lean production

·        Employees as assets

·        Permanent employment

·        Leadership and decision making by consensus

·        Strong inter corporate networks

·        Long-term goals

·        Diversification into high-growth industries

·        Close working relationship with government

 In the 1970s and 1980s, all these unique management practices helped several Japanese companies to improve significantly their operational effectiveness and get ahead of their counterparts in the west.  But gradually, western companies began to catch up.  Also, many American companies, through the use of  outsourcing, information technology and the internet redefined best practices.  They also restructured themselves quite fast.  Some such as Motorola led new revolutions like Six Sigma to set new benchmarks in quality management.  The obsession of Japanese companies with operational effectiveness led to what the authors refer to as competitive convergence. 

 In many of his papers, Porter has emphasized that sustainable strategy has to some degree be different from that of competitors.  But many Japanese companies have tended to offer a wide product range with various features, serve all market segments, sell through multiple channels and copy one another’s manufacturing strategies.  The companies which have been bold enough to be more creative and unique have clicked.  A good example is Sony which has emphasized originality, whatever, be the cost.  Similarly, Honda in automobiles and Nintendo and Sega in Video games have done well.  The authors explain: “Japanese companies remain highly successful when they have strategies.  The challenge is that only a handful of large, established Japanese companies have one.   Moreover, both the Japanese government model and the Japanese corporate model work against a strategic approach to competing.”

 While analyzing Japan’s competitiveness, the authors mention a point which is well known but is often overlooked by policy makers.  It is not tinkering with interest rates or money supply that creates any lasting impact on a country’s competitiveness.  Ultimately, it is productivity growth, the way companies add value, which influences wealth formation. The authors emphasise the importance of boosting productivity: “Productivity, rightly understood, encompasses both the value (prices) that a nation’s products command in the market place and the efficiency with which they are produced. Improving efficiency alone, or producing more units per unit of labour or capital does not necessarily elevate wages and profits unless the prices of the products or services are stable or rising.  As global competition places greater pressure on the prices of standard goods, efficiency alone is insufficient.  Advanced nations improve their standard of living more by driving up the value of their products and services and moving into new fields through innovation than by producing standardized products at lower cost.”

To improve productivity, the authors emphasise that the key issue while formulating a corporate strategy is choosing how to compete.  Even in the most seemingly low tech industry, there is scope for value addition by choosing sophisticated methods of production and by differentiating the products and services.  This is an argument for which Porter is quite famous.  He has often emphasized that the scope to innovate and differentiate is limited only by one’s imagination.

Understanding the Japanese style of management  

 

                                                                                                                               
Richard Pascale and Anthony Athos, in their classic book, “The Art of Japanese Management” (1981)  developed the 7 S framework.  They identified three ‘hard’ elements of management  – Strategy, Structure and Systems and four ‘soft’ elements – Staff, Style, Skills and Super ordinate goals.  Traditionally, American companies unlike Japanese companies have paid less attention to the soft aspects.  But there have been exceptions.  For example, IBM has paid as much attention to the recruitment and indoctrination of staff and the inculcation of super ordinate goals, as Matsushita.  (Till its downsizing in the 1990s, IBM has also been famous for its life time employment practices.)  The authors concluded that American companies had to link corporate purpose and ways of realizing it to human values as well as to economic measures like profit and efficiency.

                Since Pascale and Athos wrote their book, much water has flowed under the bridge.  The traditional dividing line between Japanese and American style of management is disappearing.  Globalisation has led to diffusion of best practices.  .  Companies in these two most economically powerful nations in the world are learning from each other.  While American companies have realized the importance of operational efficiency, quality control, better relations with vendors and better human resources management, the Japanese companies are realizing that it is important to have a strong bottom line orientation that will reward the shareholders.

                A point which needs to be emphasized is that many of the practices followed in Japan are to some extent exaggerated.  Take life time employment.  In the late 1990s, only 20% of Japan’s workers enjoyed life time employment.  The remaining workers were employed in smaller enterprises with no such job security.  Moreover, according to a Labour Ministry Survey, 19 percent of Japan’s high school graduates and 8 percent of college graduates left their first jobs within a year.

                Another point which is not appreciated by westerners is that life time employment has not been as much of a hindrance to downsizing as is commonly assumed.  Many large companies pay a substantial portion of their compensation as bonus.  The gives them the flexibility to cut the wage bill during a bad year.  The use of temporary workers has also created more flexibility.

                According to Gregory K Ornatowski,[3]  in his article, “The end of Japanese-style human resource management,” “Japanese-style lifetime employment never has been lifetime for anyone and has coexisted with systems allowing early retirement and intragroup transfers for selected older workers, contract employment for a part of the labour force and mid-career hiring for specialists.  As such, the system is flexible enough to adjust to most environmental changes without eliminating the principle of lifetime employment for core employees.  In addition, while the system clearly has contributed recently to higher white-collar costs and a lack of productivity growth, these problems seemingly can be resolved to a great degree by the introduction of performance-based wages and the federal retirement of excess baby boomer employees currently in their forties and fifties.”

Nakato Hirakubo[4] in his influential article, “The end of lifetime employment in Japan” has argued that employee loyalty in Japan is vastly exaggerated.  Many workers in large companies do not leave, not because of loyalty but simply because they have nowhere else to go.  A survey conducted by the Economist of 47 graduates hired by Sony in 1994 revealed that not one intended to remain with the company till retirement.    A 1995 survey revealed that 64% of the workers were prepared to change jobs instead of staying on and getting frustrated by the existing job.

Not all of Japan’s strongly employee oriented Japanese management practices have paid off. Take the example of training. While Japanese companies do invest heavily in training, workers often fail to develop specialized expertise because of frequent jobs rotations.  As Hirakubo puts it, “Japanese corporate training is aimed at creating a better company man who knows much about internal affairs.  The world market is filled with mass-produced Japanese cars and electronic products, but the country has never been able to foster world-class retailers, information/communication service providers, security firms or insurance companies.  In fact, almost all the break-through technologies, new financial products and new types of services that require creativity and specialized knowledge are developed outside Japan.”                                   

 

To analyse the competitiveness of Japan’s industries, the authors use the diamond framework, which Porter introduced in his book, “The Competitive Advantage of Nations.” In this framework, four sets of factors shape the micro business environment in which firms compete:

·        Context for firm strategy and rivalry.

·        The nature of domestic demand for products and services.

·        The depth of clusters – availability and quality of suppliers and related industries.

·        Factor conditions – natural, human and capital resources and the quality of infrastructure.

When applying the diamond to Japan, the authors have found that the intensity of local rivalry has been the main reason shaping the competitiveness of an industry.  Trade protection and cartel formation have only served to undermine competitiveness.  Factors such as capital and labour intensity and size of the home market have not played a significant role in this regard.  The authors have carefully analysed the strengths and weaknesses of the Japanese business environment.  Some of these are mentioned below:

 Strengths

  • Railroad infrastructure
  • Domestic suppliers
  • Public investment in R&D
  • Schooling
  • Buyer sophistication
  • Quality of R&D institutions & scientists

  Weaknesses

  • Hidden trade barriers
  • Legal barriers
  • Financial market sophistication
  • Air & road transport infrastructure
  • Quality of business schools
  • Antitrust policies
  • Bureaucracy
  • Inadequacy of legal recourse

Based on the analysis of the factors influencing Japan’s competitiveness, the authors emphasise that the government’ role has to change: “Now government must work to improve the inputs available to business, facilitate competition and encourage innovation. Improving the quality and dynamism of the business environment, not managing the competitive process, should be the government’s new goal.” In other words, the Japanese government has to allow more free play of market forces to ensure that only the most competitive companies remain. It should also build a safety net to ease the impact of restructuring on workers.  The government can also improve corporate governance by stricter disclosure norms.  There is one area where the Japanese government has done good work in the past, i.e., strict quality, safety and environmental regulation.  The authors argue that this should not be diluted.

At a firm level, Porter, Takeuchi and Sakakibara, call for a new approach to competing.  Instead of being obsessed with operational effectiveness, Japanese companies should attempt to be more unique and more different from competitors.  Unfortunately, Japan’s traditional consensus oriented style of management encourages the tendency of trying to be all things to all people.  But as Porter has repeatedly mentioned in his other books too, strategy is all about making trade-offs.  It is not about doing everything but about making tough decisions about what not to do.  It is about doing things differently from what competitors are doing. 

When it comes to operational effectiveness, Japanese companies need to change their broad game plan.  They need to tap sources they have ignored so far.  For example, they need to understand and exploit the full potential of information technology.  The authors argue that there is substantial scope for improving Japanese white collar productivity.  Here, the American companies seem to be far ahead.  Nakato Hirakubo and Hori also emphasise this point. As Hirakubo mentions in his insightful article, “The End of Lifetime Employment in Japan,”[5]: “Japan’s white-collar workers are only two-thirds as efficient as their American counterparts… PC operations and English-speaking abilities are essential in today’s business environment, regardless of industry.  But in Japan, there are still many middle-aged who have never touched a key board.” 

Japanese companies also need to eliminate their obsession with market share, which they often pursue at the expense of profitability. This is currently reflected in the way they report their performance.  Market share data are more easily available in Japan than elsewhere in the world but profitability data are scarce and unreliable.  As the authors put it, “Profitability is the only reliable guide to developing strategy.  Pursuing the goal of profitability will require fundamental shifts in the values that underlie Japanese business practice.  Earning a good return on investment must be seen as the ultimate test of a company’s success in increasing economic, customer and social value.  Capital must be seen as a valuable resource to be used efficiently.”

The authors offer useful advice for Japanese companies. They must withdraw from unrelated businesses and sharpen their business focus.  A new breed of leaders who emphasise innovative thinking and risk taking must be encouraged.  Corporate governance practices also need to be improved, by taking specific measures such as appointing more external directors on the board.

Having said that Porter, Takauchi and Sakakibara stress that the old virtues of the Japanese corporate model must be retained.  These include a long term orientation, treating employees as assets, close relationships with suppliers, investments to improve technology and ongoing improvements in manufacturing productivity.

Many observers have become cynical about Japan’s ability to regain its global competitiveness.  But the authors remain optimistic.  They point out that Japanese companies are still competitive in many areas.  The country’s primary education system is world class. The new breed of Japanese  managers is demonstrating its ability to change.  Entrepreneurship is also on the rise.  Meanwhile, external pressures are also forcing change on the Japanese corporate sector.  Foreign investors are acquiring significant stakes in Japanese companies encouraged by low equity prices.  Foreign Direct Investment is also on the rise.

Meanwhile, the younger Japanese executives are also acting as a catalyst for change.  They are neither fascinated by nor expect to be protected by lifetime employment.  They are more comfortable with merit based compensation.  They are also prepared to accept change.  The growing use of the internet, increasing tendency for youngsters to set up their own businesses and more freedom for women are all clear signs that Japan is changing.

In the 1940s and 1950s, Japan competed mainly on the basis of low wages and low prices, selling cheap imitations of western goods.  Then, Japan changed remarkably and its companies began to compete on quality.  The challenge for many Japanese companies today is to move on to the next stage – competing on the basis of strategy and innovations.  Instead of incremental improvements and operational excellence, Japan needs a new mindset that encourages innovation.  The  authors are quite confident that Japan is ready for this change.  Here, they share the opinion of Diana Helweg[6], “The Japanese moved further and faster than anyone ever expected during both the Meiji  restoration and the recovery after World War II.  There is every reason to expect that Japan will do so again – winning the battle between status quo and reform.  But more fundamentally than even the Meiji and post war periods, this revolution will rebuild Japan’s economic foundation from the ground up. Although rebuilding the Japanese economy will be no easier now than it was during the Meiji Restoration or after World War II, the present changes are more fundamental than anything the country has ever seen.  Japan’s revolutionary growth will utterly transform it from the state-run industrial powerhouse of the twentieth century towards an innovation-driven, globalized economy of the twenty first.”

[1]                 Business Horizons, November-December 1999.

[2]               Harvard Business Review, November-December 1993.

[3]               Sloan Management Review, Spring 1998.

[4]                 Business Horizon, November-December 1999.

[5]                 Business Horizons, November-December 1999.

[6]               Foreign Affairs July-August 2000.