The Evolving Japanese Business System: Opportunities and Challenges

1
The Evolving Japanese Business System
Opportunities and Challenges

• Professor D. Eleanor Westney
• Japan Trip Briefing
• Feb. 20, 2002

2
Looking Ahead A Decade Ago

• If the gambling casinos of Las Vegas had
  economic, as well as sports, betting, Japan would
  be the betting favorite to own the twenty-first
  century. One hundred years from now, historians
  looking back are most apt to say that the
  twenty-first century belonged to Japan.
• Lester Thurow, Head to Head (1992) p. 251.

3
Re-assessing -- 2001

• Japan as champion of 20th century industries
  Japanese production system as model for much of
  the world, including the US
• United States as cradle of emerging 21st century
  industries (e.g. Internet, software,
  biotechnology)
• US business system seen as the template for the
  future -- imprinting emerging models of enterprise

4
Japans Role in the Emergence of Americas New
Economy

• The Extended Enterprise model
• Close links with suppliers, customers without
  information technology Human networks
• Human networks base of extended enterprise
  difficult in US context therefore search for IT
  solution to networking challenge
• Focused enterprise based on core competences

5
Strengths of Japans Business System seen from
1991

• High investment levels (plant equipment, RD)
  Financial System (patient capital)
• High investment in training employees,
  developmental career structures Human Resource
  Management System
• Spin-off of non-core activities into
  closely-linked subsidiaries Network Enterprise
• Strategies oriented to long-term competitiveness
  rather than immediate returns Managerial
  Capitalism

6
Weaknesses of Japans Business System seen from
2001

• Inadequate financial discipline on investment
  Financial System (patient capital)
• Unwillingness to reduce workforce, heavy reliance
  on internal labour markets Human Resource
  Management System
• Exploitation of subsidiaries to conceal
  weaknesses of parent firm Network Enterprise
• Strategies oriented to long-term competitiveness
  rather than immediate returns Managerial
  Capitalism

7
Weaknesses of U.S. Business System seen from
1991

• Focus on quick returns, short-term gains
  Financial System (impatient capital)
• Unwillingness to invest in training, heavy
  reliance on external labour markets Human
  Resource Management System
• High levels of vertical integration and unrelated
  diversification
• Strategies oriented to enriching top management
  team

8
Strengths of the US Business System seen from
2001

• Discipline of financial markets linking company
  value to performance profits and growth
  (Financial System)
• Flexible, mobile labour force (Labour Markets)
• Large firms quick to expand product range and
  enter new business through acquisition (Market
  for corporate control
• Strong incentives for top managers to make
  companies efficient and growth-oriented

9
So what?

• Experts have short memories?
• Best practice is hard to identify?
• Times change?
• Change is hard?
• Be prepared your turn is coming (to see key
  success factors change to failure factors without
  changing)?

10
From Star to Dog in less than a Decade

• What is being changed? Understanding the models
  of the Japanese business system factory, firm,
  networks
• What are the drivers of change?
• Changing resource environment?
• Changing interests and power of key stakeholders?
• De-institutionalisation of the system?
• What are the emerging patterns?
• Do they create new opportunities for foreign
  business in Japan or the next generation of
  difficulties?

11
The Japanese Business System in its Prime

• How we saw it in the late 1980s-early 1990s

12
Workplace level Japanese Employment System

• Recruitment of managers and core white and blue
  collar workers directly after graduation,
  provision of all 3 categories of employees with
  employment security
• Minimisation of differences across white and blue
  collar workers, embodied in seniority-based
  reward systems, extensive training, semi-annual
  bonuses linked to company performance
• Cooperative and densely interactive industrial
  relations system (enterprise unions, annual wage
  negotiations)
• Managerial ideology of Enterprise as community

13
Workplace level Japanese Production System

• Flexible work organisation (group-based, rotation
  across activities, multi-skilling)
• Tapping knowledge base of all employees (QC
  circles, etc.)
• Just-in-time logistics and demand pull
  production
• Close integration of production and product
  development design

14
Enterprise Level Governance Systems

• Internal Board of Directors
• Main bank as key external stakeholder
• Employees as key internal stakeholders, with
  precedence over external stakeholders

15
Enterprise Level Vertical Keiretsu

• Disaggregation of lower value-added activities
  into subsidiaries components and subsystems
  sales distribution
• Mechanisms of coordination control flows of
  people, technology information, things
  access to financial resources ownership
• Spin-off of quasi-related new business into
  subsidiaries
• Transfers of employees down the network
  (vertical keiretsu as employment network)

16
The Firm as a Vertical Keiretsu
Parent firm
Quasi-related Business
Manufacturing
Sales Distribution
17
Business-Government Relations

• Dense communications links between policy-makers
  and industry, both formal and informal (advisory
  councils, industry associations, etc.)
• Production-oriented policies rather than
  consumer-oriented policies (developmental state)
• Corporatism without labour weak political
  power of labour
• Informal guidance of industry rather than
  formal regulation
• Government role in shaping the market

18
Recipe for Foreign Companies in Japan

• Build a Japanese organization to leverage Japans
  location advantages
• Become a local insider
• Build your own (MA not a possibility)

19
What are the drivers of change in Japans
business system?

• Economic, political, cultural

20
Changes in Resource Environment

• Slowdown or negative growth in domestic market
  erosion of home market cash cow
• Strong/volatile yen erosion of home country
  location advantage
• Banking crisis gt constraints on access to
  financial resources
• Demographic change aging of work force

21
Changes in Stakeholder Interests and Power

• Changing employee commitment to employment
  system generation gap
• Growing power of shareholders, change in
  shareholder interests
• Growing power of international trade regime WTO,
  etc.
• Decreasing power of state

22
Factors in De-Institutionalisation of Japanese
Business System

• Continuance of domestic economic slowdown
• RD/innovation failure Japan as citadel of
  20th century industries, not 21st
• Challenges in enterprise internationalisation
  low profitability of foreign operations, local
  critiques of lack of true internationalisation
• Failure of governance system losses from
  Zaitech of the Bubble years
• Homogeneity from asset to liability
• Contagion from de-legitimation of political
  system, social change

23
Factors in De-Institutionalisation of Japanese
Business System

• Development of more flexible alternative
  network models in US -- vertical keiretsu as
  too tightly coupled
• Lack of model of the next generation Japanese
  enterprise

24
But..

• What to change?
• Tightly coupled systems in reality or
  perception..

25
The Context of Organizational Innovations The
Japanese Production System
Industrial Policy
Employment System
Enterprise System Vertical Keiretsu
Japanese Production System
Governance
Competition Policy
Financial System
Educational System
Labour Markets
26
What changes are we seeing now?

• Changes at all levels workplace, enterprise,
  networks

27
Workplace Level

• Employment system -- slowly growing flexibility
• temporary employment agencies
• mid-career hires (sometimes from competitors!)
• separation of seniority system and employment
  security
• Production system
• loosening of tight networks with suppliers some
  suppliers, some companies

28
Enterprise Level

• Governance system
• Outsiders on the Board of Directors but
  hand-picked by CEO
• Enterprise system
• Consolidated accounting but distinctively
  Japanese rules
• Holding companies legal emergence of new forms?
  NTT, banks, Softbank
• Multiple models key role of foreign-affiliated
  companies (Renault, financial services sector)

29
Business-Government Relations

• Fragmentation of business community multiple
  voices
• Efforts to move away from administrative
  guidance to greater formalization and
  transparency
• Political and bureaucratic rigidities make
  government a weaker player

30
So what does Japan have to offer as a business
location?

• Production system excellence now accessible to
  MA
• Financial resources subsidiary or partnerships
  can provide access to low-cost finance for
  leverage globally
• Technology resources Japan remains a world
  leader in certain technical areas, and technical
  labour can now be bought
• Enterprise innovation the Japanese business
  system of the 21st century is now taking shape