Toward A More Effective "Japan Model" in Global Business
Toshihiko KINOSHITA (Professor, Waseda University)
This article is based on Prof. Kinoshita's presentation at the IAP2M Fall Conference, which was held at Nippon Institute of Technology-Jinbocho Campus on September 28, 2007.
As I pointed out in my previous paper "Japan's Political Chaos and Economic Strength," the Japanese economy as a whole seems to be growing steadily, despite some political chaos for the last few months. This achievement is at least partly due to the global competitiveness of many large Japanese companies, and the active participation of some small/medium companies in global niches, and this aspect may be considered the only bright spot in otherwise dismal trends concerning Japan such as shrinking population, aging society, widening income disparities, declining influence in the world, etc. It might be pointed out that Japanese companies have undergone severe restructuring during the so-called "lost decade," and more recently have been fortunate in having favorable external economic conditions such as expanding markets in China and resource-rich countries, as well as the emergence of new leadership in business management (especially in big businesses), if not in other fields including politics in Japan.
It is needless to say that not all Japanese companies are excellent or internationally competitive. In order to identify "excellent companies" for further examination, let us use such criteria as (1) the stock price above 2000 yen in mid-2007, (2) ROE above 10% as of March 2007, and (3) ROA above 5% as of March 2007, and apply these to 74 major manufacturing and trading companies. The result has turned out to be somewhat counterintuitive, because naturally such global companies as Toyota, Honda, Nintendo, Kyocera, FANUC, Takeda, Mitsubishi Corp., etc. are selected, whereas Nippon Steel, JFE, Matsushita, Sharp, Toray and some other seemingly excellent companies are not selected. In a sense, a more intuitively reasonable result is obtained in "Nikkei Excellent Company Ranking for 2007," which is partly based on the subjective image of excellent companies on the part of business reporters, backed by objective data about profitability, scale, stability and growth. In this approach, Nippon Steel, JFE, Matsushita, and some other seemingly excellent companies are highly ranked, contrary to the result obtained by the former approach.
This discrepancy is mainly due to the stock price factor, which is apparently subject to its own logic and not necessarily to the same principle as we use to select "excellent" companies. The problem here is that firms may well behave so as to raise stock prices rather than trying to be "excellent" companies. Regrettably, such behavior is quite frequently observed in Japan these days, as stock prices tend to influence corporate decision-making in an important way. If all equity investors fully supported corporate missions and management objectives, there should be no such discrepancy. But in reality many investors including foreign investors, which have been major buyers of Japanese stocks since 2003, tend to behave "independently," to say the least.
In the meantime, it is often said that Japan needs more innovative venture businesses with high growth and profitability, while taking high risk, to revitalize the stagnant Japanese society, rather than depending heavily on traditional big companies with stable but relatively low growth and profitability. Although there may be some truth in this kind of argument, we should be careful in evaluating the strengths and merits of Japanese management from global perspectives, and it would be a mistake to destroy its own strengths by trying to seek unattainable objectives such as the realization of Anglo-American-style innovations overnight. Rather, we should be more confident of our achievements such as efficient and flexible production systems and high rates of R&D investment and patent acquisition. In this context, the concept of IR (investor relations) is quite important in order to inform investors, including foreign investors, of management strategies and business objectives, possibly leading to higher stock prices for mutual benefit.
What we should emphasize is the fact that the "Japan model"(a kind of stakeholders capitalism) is by no means the same as the "Anglo-American model" (shareholder's wealth maximization capitalism). Japan's excellent companies have been undergoing "reform" to evolve into ‘hybrid' management organizations, maintaining their strengths such as the approach of bottom-up and team work with less specialization, etc., and partly absorbing some good practices as speedy management, frequent M&As, use of profit indicators such as ROE, ROA and EVA, etc., from the Anglo-American model. In Japan, this reform approach is widely adopted, rather than breakthrough innovations in business and technology. Here, the "reform" not only means "kaizen" in production processes such as Total Quality Control (TQC) and Just-In-Time (JIT), but also "reorientation" in corporate strategies such as inclusion of energy-saving, environmental and other social responsibilities. What we need to do is to make this renewed "Japan model" more effective and persuasive internationally so that foreign investors would be willing to support excellent companies in Japan.
In order to achieve management objectives based on corporate missions of the 21st century, we should pursue a total optimization approach, not a vertically divided project management approach which has often been adopted in the past. This can only be done by fostering excellent human resources and introducing foreign specialists in a systematic way. At the same time, more serious IR activities must be adopted in order to understand investors' value judgment and communicate with them for mutual benefit and satisfaction. Furthermore, excellent companies should be aware of their global positions in terms of quality, market share (M&A strategies), and niche markets (for small business), and try to improve overall productivity by balancing the weights for hardware and software, production and services, standardization and non-standardization, as well as concentration and risk diversification in a newly emerging world order.