Japanese Leaders: Have the Spirit to Adapt to Change!

Electronic Arts (EA), a U.S. game software company, acquired the British social gaming company Playfish last November for approximately 30 billion yen. That was not surprising, but I was shocked to learn that the company cut 1,500 employees at almost the same time. It acquired a new company while executing severe layoffs. Some Japanese companies would say that they operate under the same policy, but I wonder if they can do it to that extent.

In the days when stable growth was anticipated, maintaining employment stability was a virtue. But to adapt to today’s rapidly changing times, we sometimes have to let go off the ways of the past. We may even need to refute what we did just a year ago. The game industry changes especially quickly. The main battlefield of the industry today is shifting toward essentially free social games for PCs and cell phones. The conventional game software market for Playstation and Wii is rapidly contracting. How should we deal with this?

EA decided to abandon sluggish business areas and shift resources to developing ones. To do this, it cut excessive employees within the company while conducting M&A and internalizing external and foreign skills for fields in which the company cannot independently adapt to change. In other words, it stripped itself of the old stuff while acquiring new skills through M&A. It slimmed down the company and at the same time exercised aggressive management. In times of dramatic change, the keys to survival are speed and the capacity to adapt to change. I don’t need to refer to the theory of evolution; the EA case explains it.

But in Japan, the public will not allow you to stage a huge M&A while laying people off. That’s because you need a very good reason to lay off your employees. You basically cannot cut employees for the sole purpose of “allowing the company to adapt to the changing times and survive amid global competition” (which may basically be the most important reason). To further complicate matters, companies will principally be prohibited from using temporary staffing. There will be less flexibility in employment styles and companies will be required to principally retain hired employees for life. This will strip Japanese companies of their flexibility and adaptability.

One non-Japanese once said, “Japanese companies are like a person running with heavy shackles.” Social security costs are high and they face high taxes. They lack employment flexibility and they have higher compliance demands than in other countries. Then you have a government that is anti-corporate. I wonder if Japanese companies can emerge as winners in this era of great competition while wearing all these shackles?

But even under these circumstances or in any business environment, companies need to make ceaseless managerial efforts. Otherwise, Japanese companies may end up starting their reforms after they have filed under the Corporate Rehabilitation Law, as Japan Airlines did. When that happens, shareholders face huge losses, banks and business partners are forced to drastically cut debts, brand value drops and many employees ultimately lose their jobs. I once saw a research finding in the U.S. that noted, “There have only been a few cases where a company that files for bankruptcy protection reemerges as a top company.” It is very difficult for a company to regain momentum once it is lost.

In such a state, and in today’s turbulent age, Japanese companies will have to face the following ultimatum. I wonder which one Japanese citizens will choose:

1) A company that secures employment but does not undertake drastic reforms, and gradually declines (though jobs will eventually still be lost)
2) A company that does not treat employment as such a sacred cow, conducts ceaseless managerial efforts and is potentially a global winner

I’m sure some idealists would say, “One or the other is too extreme. There will be strong Japanese companies that secure employment.” But reality will bitterly rebuff this idealism. In the last ten years Japanese companies have lost their relative standing. According to a Financial Times study, only four or five Japanese companies rank among the world’s top 100. Close to 30 companies used to consistently turn up in this list. Now the figure is in the single digits. Some may lament that Japan only brought home a few medals from the Vancouver Winter Olympics, but on the economic frontline, Japan is already losing.

I would guess that citizens naturally want to see option 2: Japanese companies that don’t treat employment as such a sacred cow, conduct ceaseless managerial efforts and are potential global winners. But the truth with today’s Japanese companies is that they will not dare cut their official employees, when they have in fact been criticized for cutting temporary staffing. Citizens should not seek assurance in the fact that the unemployment rate dropped. Unless Japanese companies regain their fundamental strengths, they cannot escape the scenario of long-term decline described in option 1.

I am in no way saying that Japanese companies should treat employees like tools, the way that U.S. companies do. I only wish they would avoid making employment sacred, slim down their organizations as necessary and create strong companies, while sustaining community-type management, which is a virtue of Japanese companies.

There is no use protecting employment if the company becomes weaker for doing so. A company must be a global winner, or else it will not sustain perpetual growth. It is quite clear that problems await those that cannot survive on the global stage. Companies around the world are dynamically and speedily adapting to change, as is EA. Seeing this climate and envying American companies will not make anything happen. We have to feel the level of crisis and do everything we can within the framework Japan is provided.

Any corporate leader who lacks that spirit to fight should step down from his post. A risk-nothing corporate owner who likes to think that things will be safe during the several years he is in his post can only harm the company. He should hand his position to a young and ambitious leader. This goes for politicians as well. This current age of change demands new ideas. I want to entrust the steering wheel of companies and of Japan to people who have the spirit to take bold and aggressive action with ideas and creativity. Japanese leaders – have the spirit to adapt to change!