The Japanese School of Management: Harmony 和

I.1) The Japanese school, Prioritizing harmony and operational efficiency

The Japanese executive is a gardener when the western one is an architect*.

This sentence is a good summary of the differences between the two managing system which I call the first two roads of management. When the western executive defines centrally a detailed plan, his Japanese counterpart will prefer to plant a seed and wait to see until the tree starts growing. The detailed plan of the western manager is made of strategy, business plans and a set of tools such as KPI’s. To a non-Japanese debarking in a Japanese corporation, the way the company is managed is a huge mystery. Western style tools generally simply do not exist and the way decisions are made is sometimes difficult to understand not to say that it is often almost impossible to say if the decision has been made, when and by whom. Things simply evolve like a tree growing. The gardener sometimes cuts a branch or adds some fertilizer but the tree follows its own way. What is the seed and what are the roots (the invisible part) made of?

The first element is that the values are the most important elements of Japanese corporations. The values are what the company stands for, what its contribution to society should be and what employees should prioritize in their daily life. In her remarkable book about cultural differences, “The Culture map” Erin Meyer describes Asian environment and particularly Japan as cultures with high context. What does this mean? It means that one does not need to express most things to be understood. In Japan, common understanding is high and people can easily read between the lines. Japanese language is therefor relatively unclear with a limited number of sounds that can lead to misunderstanding, as many words sound alike. In fact it is the language that is the poorest in the number of possible sounds when English is the richest. Erin Meyer explains that the main reason of this high context culture is that Japan has never experienced immigration and that the cultural homogeneity is high. In Japan there is nothing worst than been called a KY. KY Is an acronym of Kuki Yomenai (空気読めない) or « who can’t read the air ». In Japan you read the air, or understand the unwritten rules of the group. Common sense makes you being part of the group. You should understand things even if they are not said. What is true at country level is even reinforced for the values of the company. Homogeneity in the management level is the rule more than in any other country. Most are Japanese males having graduated in the same university, of the same age bracket and have followed similar career path in a single company. It is for example striking in Japanese companies that many meetings seem not to have any clear agenda. In many cases, particularly when involving senior executives, the discussion will stay at relatively general level or reversely go into a surprising direction with relatively low connection with the purpose of the meeting itself. Then, after the meeting the “working level” staff will gather to try to draw conclusion of next step based on the common understanding of the meeting. In reality, decisions are rarely made in the meeting itself. The comparison with the roots of the tree, the invisible part that never happens in a meeting, is well illustrated by the concept of “nemamashi” which literally stands for turning around the root. It is the process of visiting one after another all stakeholders before the meeting to explain about the project that will be discussed and hear about their recommendations and concerns in order to amend the proposal. Not surprisingly, in the meeting itself, the proposal should reflect most executives’ direction. Then the discussion or the successive remarks by executives are the comments on the project itself. The only questions show whether the proposal was understood. Other comments are made on some details to be amended or suggested changes to be taken into consideration if possible. The meeting is more like an advisory board showing in which direction to work rather than a decision authority. After gathering and agreeing on the direction to follow, the “working level” will start a new round of discussions before implementation. When the decision was made and who made it is therefore difficult to define.

The second important point reflected by this notion of “planting the seed” is the HR policy of most big Japanese corporations. Employees are hired one year before graduation from best Japanese universities. They join the companies in April to start, in most cases, a lifetime career. Except in most technical fields, they will rotate within the company to understand the logic and concerns of each area of the company. They are not expected to take any initiative but to understand and learn from their “sempais”. They should also take advantage of this rotation to create a network of relations and mentors. In turn, those mentors will help them to progress in the company. Based on the seniority system if their mentors support and if they have not committed any mistake, they will eventually get promoted. When there is no more visible possibility of promotion in the company, senior managers of 50 years old or above are transferred to an affiliate company. This allows keeping the room for younger generations coming, particularly since the growth period of most of big Japanese corporation is over. Those affiliate companies can be or not, capitalistically linked with the main company. They are generally suppliers, vendors or clients of the main company. They enjoy from a double benefit: first it secures the business relation. Indeed the link that is established becomes much tighter than a conventional or contractual business relation. It almost becomes a moral contract. Second, those generally smaller if not completely domestic affiliate companies can benefit from well-educated and trained executives. It is then more difficult, as it would be the case in a western company, to switch partner. This career management creates in the company and with its main stakeholders a network of mutual obligation.  In Japanese, the word “Shigarami” (柵)expresses rather negatively this sense of been restricted in its choices by ties and conventions.

The third meaning of seed planting is the long-term investment in practices. It is what is now well known beyond Japanese borders as “Kaizen” (改善). An illustration is the story of the beginning of the development of cars by Toyota. When Soichiro Toyoda decided to enter the automotive business in the 1920’s, American and European car makers were already well advanced and producing hundreds of thousands of car every year. Still, the company decided to start from almost scratch the development of its first model. This history is taught to all new company employees as an illustration of the “Toyota Way”. Try by yourself, analyze and improve. It is more important to grow the long-term ability of the group than to acquire know-how from outside. By making and growing yourself, you can not only deliver the output but also really understand by yourself and build a better solution than competition. This is reflected in many practices that have been since then taught outside of Japan. The first one is “Jikotei Kanketsu”  (自工程完結) or the ability to standardize, solidify and then replicate everywhere in the organization the improvements. Another famous one is the PDCA (Plan DO Check Act) or the endless loop process, which formalizes the improvements based on the gap analysis between the ideal situation and the observed one. Another important idea is to go to back regularly to the shop-floor, literally the “real place” or “gemba”  (現場). There is much more belief on the personal observation than on any other tool. Originally, those tools come the manufacturing field in what is proudly named “monozukuri” (物作り) or the ability to produce things. This philosophy that things can always be improved imply from employees a lot of humility, as all work should be considered as perfectible. All those practices are established and regularly reinforced through a series of training and particularly very pragmatically, on site, the so-called “On the Job Training” or OJT. As a result, even though it happens that Japanese companies acquire know-how from outside through consulting, M&A, hiring of experienced talents, those practices are much less current than in Europe or the US for example. Japanese corporations are much more vertically integrated than their western counterparts. And when the expertise is not in the company, it is in one of those affiliates, which we mentioned earlier and which are the long-term partners. In Japan, legal and purchasing divisions are much less important than in western companies as most links with partners are based on trust rather than one-time negotiated contracts.

The result is a great sense of harmony. Rodolphe Durand, in his book “Organizations, Strategy and Society” explains that the logic of action is the common logic that the members of an organization follow first. It is what drives the actions in the organization. It can be general interest or peace for a government, profit for a public institution, charity as for NGO or family like in a small business. In most profit driven companies, the dominant logic is the “logic of market”. It is the one that puts as top priority the profit as a way to show you can beat competition. In Japan, things are more complex. The dominant logic of most organizations is the logic of the group or the groups at large. When there are big relations of obligations inside a network, keeping harmony is the priority. For example, when Mitsubishi Motors Corporation was almost bankrupt after Daimler gave up in 2003, the eponym companies, Mitsubishi bank, Mitsubishi heavy and Mitsubishi Corporation came to rescue it. It was not that much a matter of capital link as a sense of duty to a company, which was part of the “family”.

Suchan environment is incredibly stable and smooth. As described in the famous book “The Machine That Changed The World” resulting from a 10 years study of the MIT and published in 1990, it creates a superior operational efficiency, with everyone aligned on common best practices. Those practices are themselves gradually and cautiously improved. Ideas of progress are rarely coming from the top management but from the base, after a lot of validation and testing, in a very bottom-up manner. But this system is also very homogeneous and to some extent closed. It hardly accepts any exterior element in its model. Changes or breakthrough are rare and always cautiously considered before been tested and gradually extended. This is why, Japanese corporations have been able until the 80’s to outperform their competitors in many domain such as electronics or automotive. But this success was achieved under 3 conditions: the first one is that Japan had become the second economy and domestic market in the world and was a fantastic testing ground. The second one is that the world was not really globalized, changes happened at slow pace. Therefore, the Japanese success could be exported and then gradually localized in stable markets. The third one is that most of those successful companies were still managed by their founders, who had the possibility to make strategic decisions that would be followed with a lot of discipline. This last reason explains why the three corporations almost always given as example of Japanese recent global business success stories are still managed by their founders. One is Softbank, the third Japanese telecom operator that expanded recently in the US through the acquisition of Sprint and chaired by Masayoshi Son. Another one is Rakuten, whose founder is Hiroshi Mikitani; it is expending rapidly globally through acquisition and aims at challenging Amazon globally. The most famous of all is probably Fast Retailing the mother company of Uniqlo, founded by Tadashi Yanai and one of the fastest growing brands in the apparel business in the world. The three gentlemen are the three richest persons in Japan according to Forbes. Tadashi Yanai is the richest with an estimated wealth above 20 billions US$. There is still a lot of speculation on his succession as he is already 66 in 2015. Once Yanai-san retired and he had to make a quick comeback as his company started facing problems. At least Mikitani and Yanai have the solid reputation of strong top-down leadership and control with very little delegation.

* This image was given by Wataru Kageyama, then President and CEO of JWT, at a conference of the Waseda University Marketing Forum in October 2012 on the theme of brand management.

 

 

For example, I was struck when I joined Toyota, to see that the organization was structured in silos without any transparency on how each element would perform. Since then, under the management of Akio Toyoda, things have considerably changed and improved.

Each entity in the supply chain was judged on its own local objectives such as cost, quality, turnover, profitability and so on. As a result each part of the organization was trying to solve a large number of problems, at local level and with its own internal resources, individually.  In some cases, the solutions could be detrimental for other areas of activity and eventually for the whole organization. The sum of local optima does not make the global optimum.

And this created a lot of frictions and administrative and useless work.

Let me give three examples of such a system:

A plant is responsible of its own cost and might take a decision that will decrease the time needed on the assembly line –one of many targets- even if it increases the cost of the parts or decreased the attractiveness of the product.

In the same way, as National Sales companies had to optimize their own local profit, they would spend additional marketing expenses to increase the sales of the cars that are the easiest to sell. Those attractive models are not necessary the most profitable on a consolidated level. And as they are more successful, there is more chance that they are in short supply. As the total sales volume of those attractive variants was capped by production capacity, additional sales are done at the expense of another sales company in a different country. As a result, the marketing expense to promote the sales of those levels on the short term could only result in a deterioration of the profit at global level.

In such a system, a plant itself has to optimize its relative profit level. The most important factor to determine this profit is the transfer price to the sales to the regional sales organization. To be accountable, it was therefore logical that it gives its approval for any retail price change. Indeed, any retail price change would be immediately reflected into the transfer price. Those approval processes would lead to endless meetings and discussions between sales and manufacturing. Sales had indeed to convince manufacturing of any line-up or price adjustment. The same discussion took place with Japanese headquarters and with national sales subsidiaries. As a result, the organization had become a big bureaucratic machine trying to manage at the same time many contradictory and redundant objectives that were neither transparent nor prioritized.

At Toyota, the cross functional optimization is not achieved through a clearly defined strategy but thanks to the combination of processes and HR practices that ensure the communication between departments and entities.

Those practices are lifetime employment, seniority promotion and job rotation that ensures that every manager or above has a network of relations in the company and a good understanding of other divisions. Concretely, with very few exceptions, all Japanese executives started their career from university graduation and their career are managed in the way they have some experience in a big variety of different functions of the company. As a result, when they arrive at an executive level they have a good understanding of every part’s issue and priorities. They can them advise and train the young employees until they in turn get this broad experience. One of the consequences of this HR structure is that traditional Japanese management is generally made of generalist and not specialists. This last point is less the case in technical areas as manufacturing or R&D but much more than western companies.

understanding of other sectors of the company and enough connections to ensure that any decision will not create any disruption in those areas. In the overseas operations, this “network” is ensured through the existence of “coordinators” who are the “double” of local executives and whose role is not operational in the hierarchical line but to check with other operations and in particular Japan headquarters that all decision are acceptable from the group point of view.

The down side is that local executives might feel disengaged and demotivated.

The recent trend under the leadership of Akio Toyoda with the help of Didier Leroy its number 2 in charge of operations is to reduce this double command structure, give more responsibility to the local executives and clarify accountability. The incredible change that Toyota is operating since the chapter was written in 2015 would deserve in itself a book. This transformation includes strategy definition, sense of urgency, internationalization, business model disruption, opening to partnership… while keeping the Japanese harmony.


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