Business Models and Talent Management Practices of Japanese
Multinational Companies: 1970-2018
By Kazuaki Oji
LL.B, Tokyo University (2005)
SUBMITTED TO THE MIT SLOAN SCHOOL OF MANAGEMENT IN PARTIAL FULFILLMENT OF THE REQUIREMENTS FOR THE DEGREE OF
MASTER OF BUSINESS ADMINISTRATION
AT THE
MASSACHUSETTS INSTITUTE OF TECHNOLOGY JUNE 2018
2018 Kazuaki Oji. All rights reserved.
The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part
in any medium now known or hereafter created.
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MIT Sloan School of Management May 11, 2018
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MASSACHUSTT ISITUTE
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Johanna Hising DiFabio Director, Sloan Fellows and EMBA Programs MIT Sloan School of Management
Business Models and Talent Management Practices of Japanese Multinational Companies: 1970-2018
By Kazuaki Oji
Submitted to MIT Sloan School of Management on May 11, 2018 in Partial Fulfillment of the requirements for the
Degree of Master of Business Administration
ABSTRACT
Few other countries have experienced as much rapid economic change as Japan. In the 1970s and 1980s, Japan was praised as "global number one" because of its extraordinary
economic growth. However, from the early 1990s, the Japanese economy began to decline, and the global presence of major Japanese companies also started to diminish. Today, Japan is again on the track toward economic growth, and Japanese companies are recovering their growth momentum.
During this period, Japanese companies began to change their global business strategies. During the earlier years, their core capabilities were centralized in Japan, but they have
gradually shifted their R&D and marketing functions from Japan to overseas subsidiaries. Some companies are now optimizing their value chain without regard to entity and/or location limitations. These changes in global strategy should also align with changes in their talent management practices. However, I believe some Japanese companies are not making the needed changes in a timely manner.
In this thesis, I explore the transition of business and talent management practices of Japanese companies, mainly manufacturers, and discuss the challenges they now face. Further,
I provide suggestions to help facilitate the transformation of human resource management
practices in Japanese companies.
ACKNOWLEDGEMENTS
I would like to express my gratitude to all those who helped me complete this thesis:
First and foremost, I especially appreciate my thesis advisor, Professor John Van Maanen, for his thoughtful support and for sharing his wisdom and experience, which guided me
precisely toward my thesis goal. I am also grateful to Cherie Potts, my thesis editor, for her patience and support in helping me complete this manuscript.
I would like to thank my wonderful classmates: Nobuaki Goto, Masatoshi Ishikawa, Susu
Jiang, Takashi Kiryu, Hiroshi Kurihara, Takahisa Nakai, Akira Oichi, Masami Omuro, Kenta Ohshima, Hidekazu Taoka, Rei Yamaguchi, each of whom shared his/her knowledge and
experience about the company. I also grateful to my colleagues who agreed to be interviewed: Masato Shirai (Partner, representative of Japan Talent Consulting Group), Kenichiro Nakamura (Principal), Takahiro Maekawa (Principal), Atsushi Fujino (Principal), Masayuki Shinagawa (Senior Consultant).
I am thankful to the staff of the Sloan Fellows Program who took great care of all the
international students, including myself.
Finally, I am greatly indebted to my partner, Eri. With her unconditional support, I was able to focus on my studies for this entire year.
Kazuaki Oji Cambridge, Massachusetts April 26, 2018
TABLE OF CONTENTS
CHAPTER 1. INTRODUCTION ... 9
1 .1 B a ckg ro u n d ... 9
1 .2 T h e sis P ro b le m ... 10
1.3 Thesis Questions and Proposed Solutions... 11
1.4 Thesis Structure and Methodology ... 12
CHAPTER 2. "Japan as Number One" (1970s and 1980s) ... 15
2 .1 Eco no m ic Situatio n ... 15
2.2 The Business Model of Japanese Companies ... 16
2.3 Talent Management Practices... 20
2.4 Foreign Subsidiaries ... 24
2 .5 S u m m a ry ... 2 7 CHAPTER 3. Japan's Lost Two Decades (1990s and 2000s)... 28
3 .1 Eco no m ic Situatio n ... 28
3.2 The Business Model of Japanese Companies ... 29
3.2.1 Ove r-Spec/Over-P rice Problem ... 30
3.2.2 Commoditization of Core Technologies ... 33
3.2.3 Large Domestic Market ... 34
3 .2 .4 S u m m a ry ... 3 5 3.3 Talent Management Practices... 36
3.3.1 Practices That Changed ... 36
3.3.2 Practices That Remained Unchanged in Foreign Subsidiaries... 37
3.3.3 Practices That Remained Unchanged in Japanese Headquarters ... 40
3 .4 S u m m a ry ... 4 3 CHAPTER 4. Japan's Current Economic Situation and Signs of Revival ... 44
4.1 Recent Economic Situation... 44
4.2 Business Transformation ... 45
4.2.1 Transformation from Manufacturer to Service Provider ... 45
4.2.2 Progress Toward Global Value Chain Optimization... 48
4.2.3 Acceleration of Mergers and Acquisitions... 52
4.3 The Transformation of Global Talent Management...54
4.3.1 Specialized Expertise Required for Key Positions in Foreign Subsidiaries... 54
4.3.2 More Specialties are Required for Key Positions in Headquarters... 59 4 .4 S u m m a ry ... 6 2
CHAPTER 5. How Should Japanese Companies React? ... 64
5.1 How Should Japanese Companies Change Their Talent Management? ... 64
5.2 Companies that Maintain Their Japanese-Centered Organization ... 69
5.2.1 Aggregating Core Resources and Functions in Japan ... 69
5.2.2 Develop Competitive Advantage Based on the Cultures of the Japanese ... 71
5.2.3 Source from Japan to Attract Talented Japanese Employees ... 73
5.2.4 Doing Businesses Primarily with Japanese Clients in Foreign Markets... 74
5 .3 C o n c lu sio n ... 7 5 CHAPTER 6. Changing Japanese Talent Management Practices ... 77
6.1 Typical Talent Management Practices for Japanese Companies...77
6.2 How Should Japanese Companies Change Their Talent Management Practices?...80
6.3 Even M ore Change M ay Occur... 84
6 .4 C o n clu sio n ... 8 5 CHAPTER 7. Conclusion: What Comes Next?...87
7.1 The Effects of Advanced Technologies... 87
7.2 A Talent M anagem ent Strategy for Japan... 90
INDEX OF FIGURES AND TABLES
Transitions of Exports from Japan ... 16
Determ inants of National Advantage ... 17
Typical talent management practices in Japanese companies... 21
Transitions of number of M&As involving Japanese companies ... 53
Examples of M&A deals done by Japanese companies ... 53
Specialized functions that could be enhanced at headquarters ... 59
Framework for appropriate talent management ... 64
Summary for historical transitions of Japanese companies ... 65
T o yo ta W ay ... 7 2 Typical talent management practices in Japanese companies... 78
Examples of new tech influences on talent management...88
Declining w orkforce in Japan... 91 Exhibit 2.1 Exhibit 2.2 Exhibit 2.3 Exhibit 4.1 Exhibit 4.2 Exhibit 4.3 Exhibit 5.1 Exhibit 5.2 Exhibit 5.3 Exhibit 6.1 Exhibit 7.1 Exhibit 7.2
CHAPTER 1 Introduction
1.1 Background
Japan is regarded by many as a unique country. One reason for this perception is that until the 19th century, Japan maintained an isolationist foreign policy (sakoku) that originated with the Japanese Tokugawa shogunate whereby relations and trade between Japan and other countries were severely limited. In his book The Clash of Civilizations and the Remaking of
World Order (1996), Samuel Huntington characterizes Japan as an isolated culture, unlike any
other in the world. Japan itself is surrounded by oceans, and its population is highly
homogeneous. Even today, Japan seldom accepts permanent immigrants into the country, and virtually everyone speaks the Japanese language (although many study English in school).
Japanese companies often are similarly regarded as unique entities. In the 1970s and 1980s, Japan was praised as "global number one" because of its extraordinary economic recovery and growth. In the 1990s, however, Japan's economy began to decline rapidly when the Japanese economic bubble burst, reducing the presence of Japanese companies in the global market. I think few other countries have experienced such rapid economic changes as Japan-both positive and negative.
1.2 Thesis Problem
Japanese companies are well-known for specific talent management practices, such as lifetime employment, reliance on the firm's internal labor pool, bulk hiring of new graduates, and a seniority-based waged system. These practices were once so admired that many US and European companies sought to study them in the 1970s and the 1980s-an era when Japanese products enjoyed the lion's share of sales in numerous global markets. But, as the presence of Japanese companies started to diminish, their policies were being criticized (Westney, 2006). Japanese companies themselves began to regard their traditional talent management practices as problems that hampered their growth. From the 1990s, some Japanese companies tried to change their competency-based HR system which tightly connected to lifetime employment and seems to me among the most distinctive and symbolic policies within Japanese talent management practices; they tried to implement a job-based/performance-oriented system, which is more popular in US and European companies (Suda, 2016). A report from the Ministry of Health, Labor and Welfare in 2016 said: despite the growing number of companies that have implemented a job-based HR system, 69.2% of 437 companies still maintain a competency-based HR system for managers and 81.1% of 497 companies keep it for non-managers. It seems that Japanese talent management practices are not changing. They remain deeply rooted within many Japanese companies.
1.3 Thesis Questions and Proposed Solutions
In this thesis, I will explore whether Japanese companies should maintain or change their traditional talent management practices. I frame the discussion from the standpoint of setting a company strategy. In that light, I pose the following questions:
* What are the talent management problems that Japanese companies need to solve in order to enhance their competitive advantage(s) in the global marketplace?
* To survive severe competition with global competitors, how should Japanese companies meet the requirements for key positions? How should they source talent from the global labor markets?
* How should their talent management practices be changed to enhance the growth of Japanese companies?
I suggest three key concepts related to talent management practices that should be
considered by firms seeking to achieve sustainable business growth:
* Companies must hire and develop leaders who articulate a vision and strategy and possess the ability to lead the organization.
e Companies have to assign the right persons to each position, which means attracting the
diverse talent needed for developing and executing business strategies.
* Companies should optimize labor costs while still maintaining strong employee loyalty and motivation.
Unless companies achieve these goals, the likelihood that their old talent management practices will continue to be barriers that hinder a company's ability to achieve their goals.
1.4 Thesis Structure and Methodology
In this thesis, I explore the transition of business and talent management practices of Japanese companies, mainly manufacturers, and discuss the challenges they now face.
In Chapters 2 and 3, I briefly look at Japanese economic history. I explore why Japanese companies achieved major success but then became stagnant in the global market. Then I analyze how the Japanese talent management practices affected their performance. Chapter 2 covers the 1970s and 1980s when Japan was praised as number one. Chapter 3 focuses on the
1990s into the 2000s, which are characterized in Japan as Japan's lost two decades.
In Chapter 4, I look at the current business situation surrounding Japanese companies and analyze some of the challenges they are facing in the areas of talent management.
In Chapter 5, I suggest a framework that considers appropriate talent management practices that could work for Japanese companies facing the requirement to change. I discuss companies that should change their talent sourcing strategy by using this framework.
In Chapter 6, I propose how Japanese companies should change their talent management practices and how these changes may impact Japanese labor practices.
In Chapter 7, I discuss two further questions; (1) how technology will affect Japanese companies' talent management, and (2) how Japan as a country should develop its talent management strategy.
In preparation for writing this thesis, I gathered information and data from numerous literature sources on the subject. I also conducted interviews with five Mercer Japan
further augmented by my own knowledge acquired from first-hand experience as a business consultant.
Mercer is a global consulting leader in talent, health, retirement, and investment. More than 20,000 employees are based in 40+ countries, and the firm operates in more than 130 countries. Established in 1978, Mercer Japan's global network offers solutions to issues associated with personnel for companies in a range of industries. Mercer Japan has a rich history in the area of supporting the globalization of Japanese companies while providing a full range of consulting services related to organization and talent management.
The colleagues I interviewed are one Partner (a representative of Japan Talent
Consulting Group), three Principals, and one Senior Consultant. All have worked at Mercer for more than ten years and each has extensive consulting experiences that support the
globalization of Japanese companies' organization and talent management. From them, I explored how Japanese companies have changed their talent management practices and what challenges they now face.
I also interviewed 11 MIT Sloan Fellows from several industries: five from manufacturing,
two from finance, two from general trading, one from telecommunications, and one from advertising. I asked each one how their company has changed its global organization and talent management practices and what challenges they face both in their business and with human resources.
I have more than 11 years of consulting experience, including 6 years in Mercer Japan.
organization design, global HR platform development, HR system transformation, and HR system integration after mergers and acquisitions. I also work as a leader for talent strategy, organization design and workforce planning in Mercer Japan, Talent Consulting Group.
Note: The material in this thesis is based on information I gathered through interviews
and my own observations. This information applies to many Japanese companies, especially manufacturing firms, but not all of them. Examples exist where companies did not fall into the traps outlined, and in fact became very successful through a timely organizational
transformation. My objective in this thesis is to develop reasonable scenarios that help to understand the background seen today among current Japanese companies, mainly
CHAPTER 2
"Japan as Number One" (1970s and 1980s)
2.1 Economic Situation
After the Second World War, Japan began a period of tremendous economic recovery, growing faster than any other country during that post-war period. Consumer spending fostered massive economic growth. Exports bolstered the economy even further. In the 1970s
and 1980s, machinery, electronics, and transport equipment (automobiles) became the leading
exports from Japan (Ministry of Finance, 2018). In the 1980s, trade frictions with the US and Europe became a political issue because Japanese products were capturing a large share of the global markets while simultaneously depressing those nations' domestic industries (Economic and Social Research Institute, Cabinet Office, 2018). Yet, this growth enabled Japan to develop a strong footprint in the global economy.
During this time, many Japanese companies became global top players and many
Japanese brands and models could be found around the world. In the Fortune Global 500 list for
1995 (which listed non-US companies for the first time), 141 of the named companies were
Japanese. Japan's huge success was both admired and feared by the US and numerous European countries. Along the way, considerable research was undertaken to identify the "secrets" that enabled Japanese companies to be so successful. In 1979, Ezra Vogel published
Japan as Number One which popularized the phrase, "Japan as Number One" and symbolized
Exhibit 2.1 Transitions of Exports from Japan
lBillionYen)
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0.
- -- - -- -------Toxfsfld Wst* products -ma
-- 1on-mtuk WmAru Ommufaaus -Metaandlmpioaduas
- U*cbiW.ddu #on electric - 11c~ mwMc fy. eapera Oud m000101ce
-Tanot *QOu~Md -ta a uinmm
Source: Ministry of Finance, Japan, 2018
http://www.customs.o.jp/toukei/suii/html/timelatest.htm
2.2 The Business Model of Japanese Companies
During this period, Japanese companies achieved major successes with exports of finished products including automobiles, machineries, and electronics. In 1986, 95% of all goods sold by Japanese companies around the world were made in Japan and then exported (Drucker, 1987). Porter (1996) noted that operational effectiveness was at the heart of the Japanese challenge to Western companies in the 1980s. The Japanese were so far ahead of rivals in operational effectiveness that they could offer lower cost and superior quality at the same time.
Why did Japanese companies, especially manufacturers, develop their competitive
advantages? To aid in my research, I used the framework called "Determinants of National Competitive Advantage," developed by Michael Porter (1990), to analyze how a nation can achieve international success in an industry. Exhibit 2.2 shows the framework.
Exhibit 2.2 Determinants of National Advantage
stnacture, and.
Fbctor IDemand
condidons condkkon
Retd wnd idustries
Source: Porter (1990) adapted by author
Factor conditions - Factor conditions are inputs necessary to compete in any industry, such as labor, arable land, natural sources, capital, and infrastructure. During this time, Japan leveraged its lower labor costs and collective culture to increase the quality of its products (Black, 2012). Japan also had a large pool of engineers (reflecting a much higher number of engineering graduates per capita than almost any other nation) (Porter, 1990). It is evident that workers employed at cheaper labor costs and an abundant supply of experienced engineers
Factor The nation's position in factors of producion, such condillons as sidled labor or intrastructure, necessary to
compete in a given industry, such as labor, arable land, natural resources, capital, and iurkasuucture. Demand The nature of home demand for the indkstys conlions product or service.
Firm The conditions in the nation govening how
strategy, companies are created, organized, and managed, structure, and the nature of domestic rivaly.
and dvaky
Related and The presence or absence in the nadon of supplier suppodlng industries and related industries that are kudustries intemationaly competitive.
Porter (1990) also mentioned that the small amount of Japanese land contributed to
manufacturers' operational effectiveness: "Japanese companies created just-in-time and other space-saving production techniques that reduced needed inventory because of high land cost and severe factory space in Japan."
Firm strategy, structure, and rivalry - This determinant represents the context in which firms are created, organized and managed. The pattern of rivalry at home also plays a profound role in the process of innovation and ultimate prospects for international success. Porter (1990) notes that nowhere is the extent of domestic rivalry greater than Japan. For example, in the home electronic devices industry, eight companies were listed in the Fortune Global 500 list in
1995: Hitachi, Panasonic, Toshiba, Sony, NEC, Mitsubishi Electronics, Sanyo, Sharp, and Fuji
Electronics. These companies competed intensely with each other, seeking to acquire an increasing portion of a domestic market of more than 100 million people. The competitiveness of Japanese products evolved through intense competition in the domestic markets.
Demand condition - Home demand conditions for an industry's product or service is another determinant of national competitive advantage. Porter (1990) cites the television industry as a good example of demand conditions in Japan. Japanese buyers were (and are today) extremely knowledgeable and demanding about consumer electronics. This led to intense efforts to improve quality, features, and prices of the makers. As the Japanese market reached saturation, Japanese companies moved aggressively into the export markets. Their products were well accepted internationally. Thus, the demanding domestic markets encouraged Japanese companies to continuously improve their products.
Related and supported industry - Being part of a nation of supplier industries or related industries that are internationally competitive is also a determinant of national advantage in an industry. Japanese companies developed an "extended enterprise" system that enabled the parent firm to focus on core activities by relying on a dense network of closely affiliated firms and subcontractors for lower value-added activities (Westney, 2006). Vertical integration was a popular strategy with Japanese companies, particularly in the electronics industry, where many firms considered manufacturing process improvement to be an important competitive
advantage (Derek, 2015). I believe strong relationships with suppliers stabilized a firm's production levels and expedited the speed of new product invention.
During this period, these four factors mutually complemented one another, creating an environment that encouraged the development of a highly competitive manufacturing industry in Japan. Japanese companies leveraged the country's human resources, both workers and engineers, to create high-quality products at cheaper prices. A demanding domestic market, combined with intense domestic competition, encouraged Japanese firms to improve their products, while tightly connected supplier networks supported their effective production efforts.
In the 1970s, as the Japanese yen became stronger, Japanese companies transferred their production sites to other Asian countries where labor costs were cheaper than in
developed countries. In the 1980s, as trade frictions with the US and Europe became a political issue, Japanese companies began to move their factories into developed countries such as the
their core functions, including R&D and product development, in Japan. They created simple but strong export models that enabled them to succeed in global markets.
2.3 Talent Management Practices
Some believed that talent management practices of most Japanese firms at that time contributed to their economic growth. James Abegglen (1958) pointed out several strengths of Japanese firms, all related to talent management practices, including lifetime employment, seniority-based wages, periodic hiring of new university graduates, in-company training, and enterprise unions. Exhibit 2.2 (in two parts) shows talent management practices typically found in Japanese companies. I developed the exhibit based on my consulting experiences and the relevant literatures (Abegglen, 1958; Drucker, 1971; Westney, 2006). During my own consulting experience, I saw many Japanese companies still retaining these elements as basic components of a company's HR system.
Exhibit 2.3 Typical talent management practices in Japanese companies Lifetime
employment Employees shouldchange their jobs
frequently based on company's general rotation policy
canpany trains
employees internally by the combination of OJT and Off-JT
Decided based on competencies each employee possess
Base salary is decided
based on competencies and bonus is decided based on annual performance
'Typical working practice for Japanese firms; many employees work at the same company from
new grads to retirement age.
-Practice derived from government regulations which strictly limit dismissal, and management
attitudes that lay-off should be the last resort for the company. Permanent employment is not, however, guaranteed for any employee in labor contracts.
a Mainly hire junior employees, especially new grads.
* Mid-career hiring is rare.
'General rotation policy; all employees should be transferred to a variety of positions for an interval of average two to five years.
In principle, employees can't turn down positions offered by company because of labor contract.
*Company internally trains employees by the combination of OJT(on the job training) and Off-JT
(off the job training).
' Retirement age is set in the organization; in Japan, company must employ all employees until 65
due to government regulations.
" Grading system based on competencies which employees possess.
' System was proposed to replace the seniority-based system. However, because of the difficulty with evaluating employee's competency, it became similar to a seniority-based system.
'Many companies evaluate both employee's competency and annual performance; result of
competency is reflected in promotion and annual salary increase; result of annual performance
is used for bonus allocation.
Compensation ' Base salary is decided based on grade. Bonus is determined by annual performance. HR System Grading - -compensation People Management .a eAssignment Policy
Hiring Evaluation Retirement
Mainly hire junior - Training - J Many cor panies Retirement age Is set;
employees, evaluate e -ployee's
companies should
especially new competen les and W al e
grads annual pe formance emdl oe 65 due o
regulations I~~gl - 000_____ I ' Hiring Assignment Training Retirement Grade Evaluation --- T
--Among these factors, I believe lifetime employment resting on a competency-based HR system is the fundamental premise on which other policies are built.' Historically, it is widely considered that lifetime employment cultivates employee loyalty toward the company with the promise of secure employment. Such a policy creates an environment in which employees build strong relationships and develop similar values through spending long periods of time together. This makes consensus-based decision making much easier and encourages employees to
challenge difficulties and take risks without fearing failure or loss of their job (Drucker, 1971). A homogeneous and uncontentious workforce is considered a great advantage for working to standardize products and processes, improve quality, reduce deficits, and cut costs (Black 2010).
Many Japanese firms pioneered management practices such as total quality management and continuous improvement (kaizen) during this time. The resulting operational effectiveness gave the firms a strong competitive advantage (Porter, 1996). I believe that Japanese talent
management practices including lifetime employment based on a competency-based HR system worked as competitive advantages for many Japanese companies.
Generally speaking, the practice of lifetime employment derives from both government regulation and management policy. National labor regulations strictly limit the ability of firms to lay off employees but companies still have ways to reduce the number of employees, even when a firm's financial condition is healthy (e,g,. companies can recruit employees who voluntarily retire with an additional severance payment). Thus, in many cases, lifetime employment continues because of long-standing management policy. I have watched some
As employees are promoted on the basis of their competencies, a competency-based HR system encourages employees to spontaneously develop their skills over a long period of time. Therefore, this system is considered to be compatible with lifetime employment.
Japanese executives who tried to protect their employment despite the fact that the company was on the brink of bankruptcy. Many Japanese people, including corporate executives, believe that the protection of employment is a priority for managers. Layoffs are considered a last
resort for companies. As a result, lifetime employment remains a basic principle for many Japanese companies even today.
It is notable that Japanese talent management practices have not always been praised in Japan. Prior to the 1970s, lifetime employment was publicly criticized in Japan. It was even suggested by the government that Japanese companies should transform their workforce from a "membership"-type of labor community to a jobs-based labor community, more like the US and European countries (Hamaguchi, 2014, p. 33). However, during the period of Japanese economic growth, this suggestion paled in light of a more generalized belief that the traditional membership-based community was superior to other systems. And lifetime employment should be maintained as a source of competitive advantage.
I believe Japanese talent management practices work well when a company's
performance is good. When a company is growing, promoting employees based on their competencies does not cause a problem. The number of management positions may increase because of organizational growth. Incremental labor costs are compensated by greater profits. Younger employees accept the fact that seniority-based promotions for older employees will occur, even for those whose performance is less than satisfactory, because younger employees expect that they too will be promoted in the future. Thus, during a period of growth, both lifetime employment and a competency-based HR system work well to maintain organizational
order and overall employee motivation. This creates an environment that urges all employees to contribute as a team to operational improvement.
However, if business growth slows or stops, those companies using a competency-based HR system still need to continue promoting employees despite fewer supported positions and lower budgets to pay for the promotions. As a result, the organizational structure soon
becomes distorted. The cost of labor becomes a burden for company. If the company begins to limit promotions or salary increases because of its poor business performance, employees who waited for their expected promotions (especially younger people) may decide they are not being treated fairly. In this scenario, companies lose their healthy organizational balance and employee morale declines.
During the 1970s and 1980s, Japanese companies maintained their competency-based HR system in conjunction with lifetime employment because they were enjoying great business success. These talent management practices contributed to the company's operational
effectiveness which enabled them to create competitive products for global markets which, in turn, led to big financial successes for the companies.
2.4 Foreign Subsidiaries
During this time, many Japanese companies opened their foreign subsidiaries in order to sell their exported products. After trade frictions with the US and some European countries became apparent, Japanese companies quickly began to establish manufacturing sites in
developed countries. Many companies believed that part of the firm's success lay in its superior operations and that the key to growth in new foreign sites was to transplant the company's
successful operations precisely as they functioned in Japan (Black, 2012).To that end, Japanese companies sent large teams of Japanese expatriates to foreign sites in order to transfer the home company's operating policies, management ways and culture. On average, they sent twice as many expatriates to foreign operations as did their peers from the U.S., UK, Germany, and France (Black, 2010). A Japanese Sloan Fellow, who works for a manufacturing company, told me his company's policy. When it sets up foreign manufacturing sites, the company sends executives-including a CEO, head of finance, and head of engineering-all of whom hold key roles in transplanting Japanese manufacturing operations into the new site. Then, in most cases, the sales, administrative, and operational positions are filled with local employees.
As the basic strategy of Japanese companies was to implement their home country's operation in overseas locations, they preferred to hire only local employees who were able and willing to function simply as operators who followed directions from Japanese expatriates (Black, 2010). They were reluctant to hire local employees who had strong aspirations to do something different from the home country's instructions. As a result, workforces in foreign subsidiaries were filled with local employees who adopted the norms of home company and felt comfortable with the Japanese corporate culture.
Some Japanese companies regarded their talent management practices as important factors for their successes and tried to implement them in overseas locations. A good example
is the case of NUMMI (New United Motor Manufacturing, Inc.), an automobile manufacturing company based in Fremont, California, and jointly owned and operated by General Motors and Toyota. NUMMI was Toyota's first US manufacturing site in which the company tried to
transplant its Toyota production system. Toyota's website homepage notes some of the challenges the company faced:
Toyota articulated the vision to manage NUMMI: the company would realize high productivity with transplantation of the Toyota production system and provide high-quality automobiles at cheaper prices. To transplant its production system, the company considered that developing a stable relationship with employees was the key. Toyota implemented many HR policies derived from its home-country's system: job descriptions describing multiple tasks for each worker, hourly wage system which enabled flexible transfers of employees, corporate's right to decide promotions and transfers for each worker, and a labor agreement that prohibited strikes by laborers. These HR policies became the foundation for implementing Toyota production system (Toyota, 2018).
As a result of this transformative effort by Toyota, NUMMI became GM's most
productive manufacturer just one year after the cooperative launch with Toyota-despite the fact that the old GM Fremont plant was considered an extraordinarily "bad" one (John Shook, 2010). John Shook observed that among the many changes brought by Toyota, the cultivation of employee involvement was the key to transforming the organization. He noted: "Toyota clarified its policy that the last thing the company wants to do is lay off employees. Through such a policy, real trust can develop between the company and employees, along with
motivation for employees to accept responsibility and take ownership." It is clear that Toyota tried to transplant the concept of lifetime employment into the US factory. Through my own observation and analysis of this case, I believe that Japanese talent management practices play key roles for Japanese companies aiming to develop their highly productive production system.
2.5 Summary
In the 1970s and 1980s, many Japanese manufacturing companies achieved major successes in the global market by exporting products from Japan to other developed markets. Operational effectiveness was an important factor in this success, as were traditional Japanese talent management practices, which were deeply rooted in most Japanese companies. These factors contributed to developing strong organizational capabilities that led to continuous improvement in the product quality of the companies.
During this time, Japanese companies opened sales and manufacturing sites in locations outside of Japan and virtually all important management positions were occupied only by Japanese expatriates. Every effort was made to transplant domestic Japanese operations and
policies to the foreign sites. The only local people hired were those who were willing to accept the Japanese management style and corporate culture. Japan became "Number One" during this time because of its product quality and production efficiency. "Made in Japan" products were developed based on their homogeneous Japanese-centered organizations.
CHAPTER 3
Japan's Lost Two Decades (1990s and 2000s)
3.1 Economic Situation
During the 1990s and 2000s, Japan experienced long-term economic stagnation, a period known as Japan's "Lost Two Decades." Beginning in the late 1980s, abnormalities within the Japanese economic system fueled a speculative asset price bubble that burst in early 1991. This caused rapid depreciation of equity and stock prices. Some large Japanese financial
institutions went bankrupt and financial unrest prevailed throughout the market. During this time, many Japanese companies suffered from excessive employment, excessive capacity, and excessive debt, with some of them going so far as to lay off employees. Consumer consumption slumped and deflation occurred as the Japanese economy entered a long and gloomy period of economic stagnation.
In 2001, Junichiro Koizumi was appointed prime minister of Japan, and he soon began to ease the monetary policy. Banks cleared out the bad loans that lingered from the economic crash, and financial systems began to return to normal. The government intervention in the currency markets weakened the Japanese yen and led to more exports from Japan. A moderate economic recovery, called the Izanagi boom, continued for more than five years. However, in
2008, a more generalized global financial crisis began, triggered by the collapse of the US
subprime home mortgage market. This crisis rocked the Japanese economy, which soon fell into another slump. As the Japanese yen began to appreciate rapidly, it had a negative impact on
exports, and many of Japan's largest companies, including Toyota, Panasonic, and Hitachi, recorded huge deficits.
The financial presence of many Japanese companies in the world markets also dropped during these two decades. The number of Japanese companies listed on the Fortune Global 500 decreased from 141 in 1995, to 107 in 2000, to 79 in 2010. The evaluation of Japanese
companies in other markets also reversed. Eleanor Westney said: "The aspects of the business system that were most distinctive and admired in the late 1980s and early 1990s quickly became targets of criticism as barriers to much-needed corporate restructuring, once the extent of Japan's economic difficulties became apparent by the mid-1990s" (2006, p.3). She
also pointed out that many Japanese companies began to acknowledge that some of their obsolete management practices should be transformed.
3.2 The Business Model of Japanese Companies
At the time Japan was suffering economic stagnation, the global market also changed. Before the 1990s, the global market was comprised of a limited number of companies from a few developed countries. Demand among these countries was similar. However, during this time, new markets like the BRICs (Brazil, Russia, India, China) emerged, with demands that were much more diverse. Additionally, new companies from developing countries like China and South Korea made global competition even more intense. Advances in new technologies drastically decreased the cost of communication and many new and innovative IT companies appeared. Many Japanese companies including those in the manufacturing industry, which had
sustained Japanese economic growth so well in previous decades, struggled to capture a piece of the global markets.
During this time, Japanese manufacturers shifted more of their production bases overseas for reasons such as "local production for local consumption" and "production in an optimal location" (Ministry of Economy, Trade and Industry, 2015). Many companies also began to transfer their marketing and product development capabilities to locations outside of Japan in order to capture more local market needs. In general, however, they still retained their core R&D functions in Japan for inventing new technologies and/or products and kept their "mother factories" in Japan for developing production technologies.
Why did many Japanese companies lose their growth momentum and find themselves
unable to compete in the global markets? I will explore some of the explanations given in Japan.
3.2.1 Over-Spec/Over-Price Problem
One reason, often voiced in Japan, is referred to as the "over-spec/over-price" problem. Several Japanese Sloan Fellows and Mercer consultants explained why this problem hampered many Japanese companies and I found several commonalities in their stories. The problem was related to the success of Japanese companies in the previous decades. In the 1970s and 1980s, as discussed in Chapter 2, because of intense competition and demanding buyers in the
domestic market, Japanese companies produced high-quality products for that market and then acquired a larger market share by exporting these products to developed countries where consumers shared similar preferences. However, this model no longer worked well because of the differences of market characteristics. In emerging markets, lifestyle, standards of living, and
cultural values were very different from Japan. Even in developed countries, more
modifications to the products were needed in order to capture unique needs in each market. One Japanese Sloan Fellow said, "In many cases, Japanese products were regarded as really good but the price was too expensive. Excessive pursuit of product quality was considered unnecessary." Black (2010) also noted that one reason why Japanese companies failed in key markets was that they tried to apply elsewhere what had worked in Japan (and with arguably technologically superior products). I believe the homogeneous markets that enabled Japan to leapfrog to the top in the 1970s and 1980s, gradually disappeared. But Japanese companies continued preceding their high "made in Japan" quality.
In contrast to the struggle experienced by many Japanese companies at this time, new companies from emerging markets were able to capture value. They produced good-quality products at cheaper prices, and quickly increased their share of the market. One of Mercer's clients who worked in a Japanese large manufacturing company told me about the atmosphere in his company which faced the growth of competitors from emerging markets:
We had technology and operating know-how that was superior to our
competitors. We were producing better quality products than our competitors. Therefore, we believed there was no reason why we sold fewer of our products compared to theirs. If our products did not sell in the new markets, it was not our fault, it was the market's fault.
This client acknowledged his company was arrogant and lacked respect for the
competitors. On the other hand, he said his company's reaction was normal for many Japanese companies at that time. Because of successes in previous decades, many Japanese companies
prevented them from seeing and accepting reality. I believe this misperception of the market needs caused many Japanese companies to fail to make the adjustments in their marketing strategies needed to grow and thrive in the new markets.
Once Japanese companies understood that successful products in Japan were not necessarily successful in other markets, the companies generally responded by selling a degraded version of the latest product or an older-generation version in order to adjust the price to a level that would appeal to other markets. They gradually shifted product
development capabilities to outside of Japan, although their core capabilities, including R&D and mother factories, still remained in Japan. However, Japanese companies were unable to create products that captured local market needs immediately due to a lack of insight about those local markets. Black (2010) noted competing primarily with foreigners at arm's length via exports provided few insights into what capabilities were needed for direct combat with global competitors.
At the same time, Japanese companies strongly resisted degrading their products. A Japanese Sloan Fellow told me how strongly his company resists, even now, when it releases products that are not their best:
Both managers and employees are proud of our technologies, and we do not feel comfortable releasing second-rate products carrying the company's brand name. We know how hard our employees worked to invent new products and
technologies. We also prefer to release the latest products rather than older products, in order to expedite returns on their recent R&D investments.
The policy of "over-spec/over-price" is well-known among Japanese companies. Yet resistance toward releasing degraded products remains strong.
3.2.2 Commoditization of Core Technologies
Another explanation for why many Japanese companies experienced a step-back during this period was that companies could not keep up the commoditization of technologies. The semiconductor and liquid crystal industries are typical examples of this pattern. In these industries, Japanese companies realized greater market share because of their high-quality products based on leading technologies. However, these technologies became rapidly commoditized, and the sources of competitive advantage shifted to other factors, such as timing and scale of investment (Toyama, 2013, P37). Many Japanese companies did not respond fast enough to catch the change in markets because they had neither sufficient preparation nor the know-how to manage it.
The watch industry is another example of this pattern. Pierre-Yves Donez observed that in the 1980s, the main source of profit for the watch industry shifted from mastery of the technology and production of watch movements to the marketing and sale of finished goods. Swiss watchmakers, another set of dominant players in the 1980s, became luxury watchmakers
by changing their core competitiveness from technological excellence to marketing. On the
other hand, Japanese companies sought to regain cost effectiveness by relocating their low value-added activities in China and elsewhere. But their profitability continued to depreciate year after year (Donez, 2015).
As Christensen (1997) said, it is generally difficult for leading companies to stay at the top of their industries when technologies or markets change. I believe Japanese companies
difficult for managers to understand that the source of competitive advantage had been changed.
3.2.3 Large Domestic Market
Several Japanese Fellows and Mercer consultants suggested another view as to why many Japanese firms were slow to adjust to foreign markets: The Japanese market was so large that their foreign business was affected by the domestic market situation. The Mercer Principal
I interviewed said:
Around year 2000, my client (a manufacturing company) embarked on serious efforts to expand its global businesses, especially given its belief that the
Japanese market would start to shrink in the near future because of falling birth rate and aging population. However, a large portion of corporate revenues still came from the domestic market. Consequently, the company could not allocate the resources required to enhance its global business.
Even for Toyota, the proportion of car sales in foreign markets was only 50% of total aggregated sales in 1990 (Toyota, 2018). The proportion of sales in foreign markets for Hitachi fluctuates around 50% in 2018 (Hitachi, 2018). While Japan's economic growth has slowed, the country still maintains the world's third-ranked GDP in 2018. One of Mercer's clients told me: "As foreign business increased from year to year, many executives sought to accelerate the growth of their overseas business. But, the main concern of middle managers in Japan (including myself, in charge of daily operations) is focused on how to protect or grow the
company's business with Japanese customers." It seems clear to me that while companies want to expand their business horizon to include foreign markets, the need remains to continue focusing on their domestic markets as well.
3.2.4 Summary
In 2005, the phrase "Galapagosization" appeared as an explanation for the deadlock
being experienced by many Japanese companies at the time.2 Take, for example, the Japanese
mobile phone market. In the early 2000s, Japan-made mobile phones incorporated many new advanced technologies. These were praised as among the best in the world, both in
functionality and usability. However, they did not sell well outside of Japan because they did not capture local market needs, technology trends, and regulations in the rest of the world outside of Japan. This phenomenon symbolizes the problems facing many Japanese companies during this period. Many Japanese companies paid too much attention on their domestic market and failed to modify their overseas products. There was a certain "stickiness" towards their own products and technologies.
In the 1970s and 1980s, their winning strategy was straightforward. But, that winning strategy became ineffective in the 1990s and 2000s. The different market demands between Japan and other countries (especially in emerging markets) became apparent. The products that became a hit in Japan did not sell well in other markets. Furthermore, due to the commoditization of technology, some Japanese companies were unable to maintain their competitive advantage.
Despite their stagnation of growth, many Japanese companies were unable to change direction rapidly. Self-confidence, derived from previous successes and a desire to persist with current products and technologies, prevented companies from developing their overseas
strategy separated from their domestic strategy. At the same time, they felt they had to pay more attention to the domestic market than foreign markets because their domestic market was still so large. As a result, I believe that they fundamentally did not change their strategy from the pattern established in the 1970s and 1980s. They insisted on their technologies and
attempted to only partially customize their products to fit with local market needs, expecting that eventually the markets would start to buy more Japanese products because of their superior products quality.
3.3 Talent Management Practices
During this period, Japanese companies opened more foreign subsidiaries, and the amount of locally hired talent increased. The proportion of foreign employees in Japanese companies increased from 10% in 1990 to close to 30% in 2010 on a consolidated employee basis (Cabinet Office, Government of Japan, 2014). Does this mean the companies' talent management practices changed? The answer is "partially, yes." However, I believe there were many Japanese companies that did not fundamentally change their Japanese-centered
organization, which means Japanese employees still occupied most of the important roles in both headquarters and subsidiaries. They made most of the key decisions within the Japanese community.
3.3.1 Practices That Changed
During this time, for example, Mercer's some of clients tried to evolve their Japanese-centered organization into more multi-cultural organization leveraging talent all over the world.
They started to hire local skilled managers and/or accelerate the promotion of locally hired employees in order to replace Japanese expatriates in key positions in their foreign subsidiaries. There were several reasons for this change. Some companies wanted to modify their products to better capture local tastes. Other companies faced the risk of turnover among locally hired employees, so they had to promote them to higher positions which had been previously occupied by only Japanese expatriates.
The expected role of Japanese expatriates also gradually changed. In some of Mercer's clients, as they promoted local talent to higher positions, Japanese expatriates took positions called Coordinator or Specialist that did not appear on the official organization chart and supported local managers' work behind the scene. For instance, in a client organization I observed, locally hired general managers were charged of the daily operations of the local subsidiary including the management of local talent while Japanese expatriates managed the Japanese aspects of the business-such as communications with headquarters and relationship management with Japanese clients and partners.
In the 2000s, Mercer supported many Japanese firms which were trying to develop a globally integrated HR system in all subsidiaries. This would make cross-border talent
management easier and would enhance governance from headquarters. In many cases, these companies developed a job-based integrated HR system usually accepted in the US and European companies rather than a competency-based HR system found in many Japanese companies. This was done apparently to catch up with the more general practices in the world.
Despite their efforts, some of Mercer's client companies did not (or could not) significantly change their Japanese-centered organization in any fundamental way. Many
important decisions were still made only by Japanese managers, whether in headquarters or in local subsidiaries. Employees at headquarters were still treated as special and there was a thick glass ceiling, sometimes called the "bamboo ceiling", which non-Japanese talent were unable to
penetrate (Black, 2012).
Why did their organization remain unchanged? Mercer Partner told me that one reason
is associated with how they proceeded with their business in the foreign markets. Some of them tried to adjust its products to meet more local market needs. However, the approach taken was first to develop its products to capture the market needs in Japan and second to customize or degrade these products to capture the local norms. The original business plan was developed in Japanese headquarters. The technology needed to develop and modify the
products also resided in Japan and was implemented mainly by Japanese engineers. Almost all manager positions in headquarters, including board members, were occupied only by Japanese. Black (2012) found that among 68 Japanese firms on the 2009 Fortune Global 500, nearly 98% of the listed corporate officers were Japanese. Thus, almost all products were planned and developed in Japan under the direction of Japanese executives. Virtually all important communications were written or spoken in Japanese and seldom translated into English.
A client of Mercer who was the CEO of local subsidiary in a large manufacturing firm told
me: "Under such circumstances where all important information was managed by the Japanese in the Japanese language, how could a Japanese company change its Japanese-centered
products, many employees at headquarters were unwilling to help local managers because they believed that current products should be adapted or customized for the local markets rather than creating something new.
As discussed before, although their business was still managed by Japanese managers both in headquarters and local subsidiaries, some Japanese companies including some client companies of Mercer tried to hire and/or promote local talent to higher positions in their subsidiaries. I leaned cases where local managers were quite dissatisfied with their lack of authority since important decisions were still made only by Japanese managers. In a consulting project I led, some non-Japanese managers working in a large manufacturing company
complained about their restricted situation. They pointed out:
* Most of the important information and decisions are distributed directly to Japanese expatriates in the Japanese language.
e Management direction from headquarters is given suddenly and without any advance
consultation. If local managers resist or question such directives, headquarters responds
by saying that this directive has been already approved by board members and there is
no way to make changes.
* Local managers cannot make any decision without the approval of Japanese expatriates. In many cases, they must have approval from Japanese headquarters.
* Decision making at headquarters is lengthy and the response is always negative, especially when local managers propose new projects based on their own ideas.
* Local managers proceed carefully when advancing a project, seeking frequent approval from the current CEO who is an expatriate. However, once this CEO returns to Japan and a new Japanese CEO arrives, all plans must begin again from scratch.
HR manager in this company told me about the worst scenario his company has experienced:
As a result of these conflicts between Japanese headquarters, expatriates, and local managers, locals confirmed that no authority was given to them and would not be given in the future. In some cases, they became so angry and
disappointed that they left the company, even transferring to competitors. If they did not leave the company, some began to resist direction from Japanese
management or tried to initiate their own projects without communicating with the Japanese. Japanese expatriates and managers at headquarters who
witnessed these situations began to view locally hired managers as arrogant or selfish. Thus, they did not delegate more authority to them. Some Japanese division managers in headquarters appointed Japanese expatriates instead of
locally hired talent for vacant positions.
I have heard more or less similar stories from other Mercer colleagues and Japanese
Sloan Fellows. Taken altogether, they reflect a general failure of Japanese organization to hire and/or promote local talent to higher positions in foreign subsidiaries.
3.3.3 Practices That Remained Unchanged in Japanese Headquarters
After the economic bubble burst in the early 1990s, the Japanese management system was being criticized. Japanese companies partially lost confidence in their management system and tried to change their talent management practices (Takahashi, 2010). In particular, many companies introduced a performance-based HR system based on job evaluation while some of
them maintained their competency-based HR system as well (Suda, 2016). Their main purpose was to stop salary increases caused by a competency-based HR system and reduce labor costs.
I highlight here that although many companies aimed to change their talent
management practices, they still retained a competency-based HR system as their foundation.
A Mercer Partner and a Principal, each of whom had broad experience with supporting their HR
transformation during this time, told me why they remained with their competency-based system even as they implemented a new job-based/performance-oriented system:
* The companies tried to ease the impact on employees, taking into consideration the large gaps between a new job-based/performance-oriented system and a previous competency-based system.
* The companies aimed to maintain the current system that enabled them to develop and motivate employees from a viewpoint of long-term career development.
* Some companies needed a system that allowed them to flexibly transfer their
employees to any position.3
It must be said, however, that in the 2000s, many companies regarded their new HR system-a job-based/performance-oriented system-as a failure (Takahashi, 2010). One reason was that the job scope of each employee was not clearly defined. Many companies could not develop job descriptions for every employee because in a competency-based HR system there was no need to limit each employee's job scope. In fact, some companies apparently believed that strictly defining each employee's job would prevent flexible co-working among employees. As a result of their loose definition of the job scope, many employees were unable to set
reasonable annual performance objectives, so their performance was not objectively evaluated in many cases (Suda, 2016). Consequently, some companies restored their previous
competency-based system. Other companies operated their HR system as if it was a
competency-based HR system while explicitly maintaining their new job-based/performance-oriented HR system (Takahashi, 2010). As a result of these transitions, many companies (including my Mercer clients) still utilize a competency-based HR system.
In the late 2000s, there was another opportunity for Japanese companies to change their traditional competency-based HR system. At that time, Mercer supported some companies as they implemented globally integrated HR system. In many cases, these companies selected a job-based HR system as a platform for the newly integrated system because of its popularity in US and European companies. They tried to change the competency-based HR system used in headquarters. But, in the end, many did not give up that system because it was useful for rotating Japanese employees. As discussed earlier, many companies failed to change their Japanese-centered organization at the most fundamental level. In many cases, Japanese employees still took important roles both in headquarters and foreign
subsidiaries. To continuously dispatch appropriate people to fill open positions, a competency-based HR system was useful. In other words, while some companies still heavily relied on Japanese expatriates to manage their foreign subsidiaries, the HR system at headquarters often
3.4 Summary
The global market had changed from a world in which a few companies competed for a limited number of developed markets, to a world in which more diversified competitors fought for greatly diversified markets. The traditional Japanese export model enabled economic prosperity for many Japanese companies in the 1970s and 1980s. But, during the 1990s and 2000s, this model did not work well and many companies had to look for new competitive advantages. However, these companies did not adjust well to changes in the business environment. Instead they adhered to a pattern of customizing or degrading their products created in Japan in order to sell them. Their presence in the global market declined.
Japanese companies did not change their basic strategy. Their Japanese-centered organization remained. Japanese headquarters were occupied mainly by Japanese managers who made all important decisions. Some companies hired and/or promoted local talent to local management positions, but sometimes those managers were not allowed to participate in important decision making process. As a result, some local managers left the company and some resisted direction from Japanese management.
During this time, many Japanese companies considered changing their traditional competency-based HR system into a more job-based/performance-oriented HR system. However, many companies failed to change their headquarters' system. As a result, many Japanese companies still remain a competency-based HR system as the foundation of their HR system which sometimes causes problems similar to a seniority-based wage system.
