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May 15, 2006

'Monozukuri' Skills Essential for Growth

Takahiro FUJIMOTO (Professor, University of Tokyo)

Despite business recovery, solid earnings, this is no time to rest on laurels

At a time when Japan's economic outlook is brightening, companies should get back to the basics of manufacturing and hasten to build their organizational capability. If they ease up, they will inevitably pay the price in the next recession.

Retiring workers in the baby-boomer generation can be tapped as instructors of workshop skills for younger workers. Faddish management models should be avoided when they are found to hinder the building of manufacturing capacity.

Bullish sentiment is spreading around Japan's economy, industry and companies, thanks to robust business activity that is generating earnings growth and share price rises, centering on large corporations. The phenomenon is similar to one last seen in the final stage of the bubble economy.

Shop-floor ops
It is not my intention to slight such bullishness, which is coming around after a long while. But I wish to emphasize that with financial positions improving at many companies, now is the time for corporate executives in Japan to get back to the basics of monozukuri, which can be translated into "manufacturing" in a broad sense, focused on genba (work-site or shop-floor) operations.

Whether they are in the manufacturing or service sector, company leaders should keep in mind the importance of consistent management policies, with the building of organizational capability at the core.

During boom times, gaps are liable to widen between two different types of companies - those that become too complacent with their strong earnings to seek higher ground in their capability, and others that remain alert and constantly try to upgrade their genba.

As an academic specializing in genba management, I place special emphasis on organizational capability for monozukuri over other factors in determining the real strengths of companies. Monozukuri here refers to the entire scope of industrial activity for satisfying the customer through designed objects.

The essence of broadly defined monozukuri lies not in material, but in design. Design in this case comprises creating design information aimed at customer satisfaction (development), transcribing design information on a medium (production), and transmitting such information to the customer (marketing). In other words, monozukuri covers the entire process of creating the flow of design information bound for the customer.

If the medium on which design information is transcribed is tangible, its field is in manufacturing; if the medium is intangible, it is in services. Whichever the sector, the basics of creating the flow of design information remain the same, meaning that broadly defined monozukuri can be applied to both manufacturing and services, and to both hardware and software.

A chain of high performance is needed for monozukuri efforts to generate earnings, and it comprises the following four stages: (1) organizational capability for monozukuri, (2) invisible competitiveness or genba performance, (3) visible competitiveness or market performance, and (4) earnings power.

Organizational capability for monozukuri concerns a company's routine for the flow of design information, which is rooted in its history. Typical examples include the production methods of Toyota Motor Corp. and total quality control.

Visible vs. invisible
Invisible competitiveness means the strengths of the monozukuri genba invisible to the customer, including productivity, the rate of defects in the production process and development period.

Visible competitiveness covers aspects of competitiveness visible to the customer, such as the attractiveness of a product and reaction of the market to a product. More specifically, it includes price, brand and market share.

Finally, earnings power concerns the capital market's evaluation of a company, and includes profit margin and share price. Corporate earnings take shape in the order of this chain of performance.

Caution is needed because these indicators of corporate strengths tend to show divergent movements. For example, organizational capability evolves cumulatively and is driven by capability-building competition - competition among different genba over enhancement of organizational capability and invisible competitiveness - and the evolutionary capability of a company, or the ability to build capability in an emergent manner.

On the other hand, earnings are subject to short-term fluctuations due to such factors as overall business activity, exchange rates and strategic mistakes made by company headquarters.

In other words, the movement of the "fluctuating surface layer" does not synchronize with that of the "evolving deep layer." Thus, in order to ascertain the real strengths of a company and its business, there is a need to measure all of the above-mentioned four stages and give a balanced evaluation.

However, we tend to pay our attention mostly to the surface-layer strengths, such as share price, earnings and market share. As a result, we have been apt to lose sight of long-term directions of a company and be influenced more by short-term swings.

What is needed at a time like now when the tides are changing is unwavering management revolving around building monozukuri capability.

Excellent companies such as Toyota show what it takes to make the ideal monozukuri management. It starts from practices of long-term employment and long-term transactions rooted in history.

Then, through competition for building capability, an organizational capability for integration-based manufacturing is developed, supported by multi-skilled workers and teamwork.

At the same time, efforts are concentrated on products with integral architecture (design concept), which fits well with integration-based manufacturing. Thus, an accurate and smooth flow is put in place for design information, bringing their invisible (genba-based) competitiveness to the top level of the world.

Then, the strategic capability of the company headquarters is enhanced in such areas as brand-building capability and business model-building capability, so the company can aim for earnings power commensurate with high competitiveness.

It is my thinking that this common sequence - from building monozukuri capability (which is invisible) to securing earnings (visible) - can be a general, long-term guideline for many Japanese companies that share a common history and restrictive conditions, irrespective of business sectors and operational scales.

However, how and where the emphasis is put tends to differ during recessions and booms, and between those sectors that have been long involved in international capability-building competition and others that have not.

According to my estimates, at least 10%-plus of Japanese industry, centering on manufacturing, have survived capability-building competition in the international stage (competition-driven sector), against several tens of percent, including services, financial, construction and government enterprises, which have failed to build up their competitiveness because of regulatory hindrances, collusive practices and other similar reasons (competition-dysfunctioning sector). The dual structure in productivity still persists between these two groups.

As a result, there has been a tendency that during recessions, an increasing number of companies, mainly in competition-driven sectors, lose earnings and confidence despite their high level of deep-layer strength.

This is the reason I have argued for the past several years that there are many companies in Japan that boast strong genba but lack profitability, and also that companies, while making efforts in monozukuri, must strengthen their headquarters' strategic planning ability.

I have made such arguments because companies that have lost their confidence tend to seek immediate earnings in haphazard ways and as a result weaken the genba.

On the other hand, when, like now, business activity picks up and corporate earnings and share prices go up, the number of overconfident companies that record high earnings despite their low monozukuri capability increases in competition-dysfunctioning sectors, including many in nonmanufacturing.

If they confuse higher profitability with higher organizational ability and become content with the status quo of their organizational capability, which is not high from the beginning, they will have to pay the price in the next recession.

How can the situation be avoided?

In the first place, companies that lack capability in the competition-dysfunctioning sector, many of them in service businesses, must put all their energies into building their integration-based manufacturing capability. Indeed, not a few companies have begun moving in this direction.

Needless to say, if Japan's economy is to continue developing in the face of the declining birthrate, the only way is to improve the productivity of all industries, and to do that, raising productivity in the competition-dysfunctioning sector is absolutely indispensable.

Incidentally, so-called structural reform, in a nutshell, is an attempt to get the competition-dysfunctioning sector to compete in building capability.

'Year 2007 problem'
But privatization and deregulation alone do not go far enough. In addition to them, there is a need to transfer on a large scale integration-based manufacturing capability (the Toyota way, for example) from excellent companies in the competition-driven sector.

The key to such a transfer is held by the baby-boomer generation of battle-trained veterans of genba. In what is called the "year 2007 problem," workers of the baby-boomer generation start retiring next year, endangering the passing-on of workshop skills to the younger generations.

If those retiring workers are regenerated as instructors to improve the genba in both manufacturing and nonmanufacturing industries, the 2007 problem could be turned into a blessing. Based on such thinking, the University of Tokyo has begun a trial run of a training school for monozukuri instructors.

Meanwhile, companies in the competition-driven sector, many of them in manufacturing, must not ease up on their efforts to improve. They ought to further the accurate and smooth flow of design information, hone their integration-based manufacturing capability, and train their strategic concept-planning capability and brand-building capability.

Once a company has decided to pursue a consistent management style along the lines mentioned above, it must not be distracted by pursuing new management methods even if they are in vogue, if they hinder the building of integration-based manufacturing capability.

In introducing information technology, for example, a company is advised to focus on collaboration-type technology that helps promote teamwork-based problem solving: it should be cautious about introducing the kind of information-technology oriented toward a Western-style division of labor.

Outsourcing should not be utilized unless it leads to cuts in variable costs through a three-way approach: collaborating in problem solving, securing evaluation capability, and making rigorous but realistic requests for unit cost reduction.

Corporate tie-ups and M&A deals where prospective partners offer little to gain in terms of mutual learning should also be rejected. Similarly out of the question is a kind of performance-based employee evaluation, as well as bank lending backed solely by collateral, which is tantamount to giving up on a company's or a bank's own multifaceted evaluation capability in respect to employees and borrowers.

Multiskilled workers
As for human resources, it is important to adhere to a policy of training multiskilled workers, which fits well with integration-based manufacturing. The percentage of temporary workers should be held down to a minimum only necessary to cushion against fluctuations in product quantities.

Rather, efforts should be made to turn temporary workers and seasonal employees into multiskilled workers. Easygoing dependence on temporary workers lowers the integration power of the genba.

As the economy recovers and companies grow bullish, more of them are becoming overconfident about their business. But now is the time for companies to make patient efforts to build their capability. The last thing they need is to judge their strengths from the surface layer, which can result in complacency and exaggerate their real strengths.

(Originally appeared in the May 8, 2006 issue of The Nikkei Weekly, reproduced here with permission.)

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