Japanese corporations should forget the monozukuri myth and work on refining management capacity

Will the Toyota- and Honda-led Japanese automobile industry wind up watching Korea’s Hyundai overtake it in much the same way that the Japanese electronics industry, represented by Sony and Panasonic, saw Korea’s Samsung and LG surpass it in market value? This unpleasant notion just happened to cross my mind.

Here’s how we used to explain it. There are two types of monozukuri (the act of making something): modular and integral. The electronics industry involves a modular manufacturing process in everything from PCs, TVs, digital cameras and “white” appliances to semiconductors; so monozukuri is fairly simple. In this process, companies in countries with low labor costs (like Taiwan and South Korea) have an advantage, and competition is determined by economies of scale. But making products such as automobiles and precision instruments requires integral monozukuri with a higher level of complexity and demanding the unique craftsmanship qualities of the Japanese; so Japan is more capable of seizing the advantage.

But is this really so? Whether monozukuri is modular or integral, the bottom line is that Japanese companies found themselves able to emerge from the post-war chaos more quickly and take an advantageous position as pioneers. They employed the experience curve and economies of scale to fortunately come out ahead of Korean companies. But when you lose these pioneer benefits and advantages in the experience curve, isn’t it logical to think that everything will come down to a simple competition of management capacity?

The automobile industry in particular will eventually see its main product shift to electric vehicles. When that happens, it will be much like the modular manufacturing processes seen in PCs, and Japan will lose the advantage in its unique style of monozukuri. If that’s what’s going to happen, it seems natural to, right from the start, think about it as I said.

Japanese companies should forget the monozukuri myth and work on refining management capacity. Now, I’m not saying Japanese companies shouldn’t do monozukuri. This is one of Japan’s strengths and Japan should retain it. I’m saying let’s stop believing in this myth that says, “We can win as long as our products are high-quality.” It’s not that easy in the real world. That’s because there are so many cases where a company performs winning monozukuri but has losing management capacity. Management capacity is the measure of a company’s advantage over others.

So then what is management capacity? An easy way to think of it is that it is the capacity to conduct necessary Reform, draw up a Strategy , and Execute it. Let’s look back at the case of the electronics industry. Until the Asian Financial Crisis in 1997, Japanese companies had advantages over Korean companies in both quality and quantity. But when Korea accepted IMF aid in 1997, Korean companies fell into a financial crisis and had to undergo exhaustive and almost bloody reforms. As a result, when the Korean economy recovered, its companies sped past Japanese ones in a matter of a few years.

So what were these “almost bloody reforms”? Under the name “Big Deal,” Korea first worked to promote M&A among its conglomerate firms and enforced a policy of detaching unnecessary, non-core businesses and strengthening core ones. Companies expanded business scale while strengthening their core businesses. On that basis, major layoffs accompanied this. Excess labor was cut in the middle-age class and there was insistence on rejuvenating management and middle management. Extensive work was then made on improving quality, literally burning defective products in front of employees.

In terms of strategy, since Japanese companies were ahead in the U.S. and Europe, Korean companies allocated their resources to newly developing countries such as China and India. They took the strategy of laying the groundwork in future, potential markets that they still could compete in and aiming to win an advantage in such markets. And they directed the financial resources they obtained from strict economization to investments that improve production capacity. In particular, they exercised such capital enhancement every time the silicon cycle entered a recession. I heard from the president of a manufacturing device/machinery company that Samsung and LG were extremely active in their capital investment moves under the global economic crisis last year.

And in terms of executing, they strengthened their human resources and organization. They learned exhaustively also from Japanese companies. They sent numerous employees to Toyota to receive training, and invited technicians from Sony and Panasonic. Intensive training was conducted to develop global human resources, and the ability to speak English was now a prerequisite. To heighten brand value, Samsung adopted every measure available to heighten the loyalty of its employees (who would embody the corporate brand). Stressing new recruit training and creating a sense of unity through means such as sports, they strictly enforced a method quite close to that of Japan.

In essence, the question is whether a company makes ceaseless efforts to strengthen management capacity in terms of Reform, Strategy and Execution. That is what determines a winning or losing company; nothing more, nothing less. Only a company that sustains that effort can hold an advantage on the global stage.

One industry in Japan that took such ceaseless efforts is general traders. In their “winter age” of the 1990s, they adopted the early retirement system for middle-aged employees and enforced strict cost cuts, allocated money to human resource training, and evolved from general traders to general business corporations. Their recurring profit of several dozen billion yen in the prime of the 1980s bubble is now at a scale of several hundred billion yen as they now make ten times the profit they used to. But general traders aren’t stable either. If they let up on the ceaseless effort to strengthen management capacity they will immediately drop out. That’s management for you.

Are today’s Japanese companies making such ceaseless efforts? They themselves have to answer that question. What concerns me with Japanese companies is that they are introverted, lack speed, and lack the spirit to take bold risks. When questions like, “Can’t we think about this more carefully?” or “What if we fail?” come up in meetings, they create an atmosphere of hesitation toward driving things forward.

I’ve always felt the sense of speed in Japan is somehow different from that of the world. Sensitivity to risk also feels different. I’m thinking that now is the time when we really need the spirit to enthusiastically take risks and challenge the global market boldly and with speed. Aggressive trade against the trend tends to maintain a low profile in times of economic crisis such as the current one, when now is in fact the perfect opportunity to make a move.

As far as I know, I haven’t heard of any case in which a Japanese company today failed in its main business because it acted too fast or did too much. The frequent cases are those that lack speed, don’t do things on the global level, and thus are beaten by competitors and find themselves in dwindling of business. How should we view the case of the electronics industry? In your core business, you make a bold, all-out offensive; that aggressive attitude leads to heightening your management capacity. Some people explain the latest Toyota issue being caused by its rapid expansion, but I don’t buy that. Rather, I’m worried that this latest issue will slow Toyota’s sense of speed in the future.

I sincerely hope Japanese companies will conduct strict reform, draw up clear strategies and enforce them steadily and persistently, and strive to ceaselessly heighten their management capacity. And I hope that by doing so they make aggressive moves quickly and by taking bold risks, and seize the advantage in the global market; because the ambitions of leaders who enforce necessary reforms and the daily efforts of each and every employee who exercise them are what ultimately determine a company’s position in the global market.

I want Japanese companies to discard the monozukuri myth and work on keiei-zukuri (building management capacity). That’s the only way to survive this age of great global competition.

February 25, 2010
Yoshito Hori