A Japanese woman and an American man discuss different business models on paper and mobile phone
iStock/Ababsolutum

On the surface, the Japanese economy and the US economy look quite different. The US economy is a dynamo, endlessly spawning new corporate titans like Apple and Google, which ranking higher in market capitalization and Fortune‘s 500, despite being fairly young companies.

Japan is different.

Yes, there are a few huge corporate newcomers like ecommerce giant Rakuten (founded 1997) and IT conglomerate Softbank (founded 1981). But the majority of the country’s biggest and best-known firms date back to before World War II. For example, Canon and Toyota were both established in 1937. Panasonic dates back to 1918.

But given that there are seven Japanese firms which are over one thousand years old, a centurion company is actually relatively young. The most ancient of these seven companies, the building firm Kongo-gumi, was established in the year 578, making it almost a century and a half old (that’s almost one hundred times Google’s age).

Does the presence/dominance of long-lived enterprises like these mean that the Japanese economy is unable to renew itself through creative destruction, as some Western commentators argue?

Absolutely not.

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Stealth Transformation: The Fujifilm Adaptation

In the US, you certainly get a lot of very visible churn. Old companies die; new and innovative ones spring up to take their place. In Japan, meanwhile, nothing much seems to change on the surface, but in fact the old companies are quietly evolving into completely different businesses.

The best recent example of this is Fujifilm and the way it responded to digital photography. Digitalization was an existential threat to its old film-based business model. That wasn’t a theory—old film-based companies that tried to stick to their roots were actually dying left and right. Kodak, for example, stood paralyzed in the face of change. Fujifilm, on the other hand, actively diversified into new fields: cosmetics, chemicals, and components. It also bought full control of the FujiXerox joint venture to expand its presence in document management and print solutions.

In 2012, The Economist, which usually likes nothing better than to blast Japanese companies as slow-to-change stick-in-the-muds, lavished praise on Fujifilm and its visionary CEO Shigetaka Komori: “Kodak acted like a stereotypical change-resistant firm, while Fujifilm acted like a flexible American one.”

Recent proof of Fujifilm”s extreme adaptability was the news that its Instax mini, a Polaroid-like instant film camera, is actually outselling its digital cameras in Asia. How’s that for a bold and counterintuitive gambit!

A similar “stealth transformation” happened with Japan’s big trading companies.

I worked for one of them—Sumitomo—in the 1980s. True to its “trading company” moniker, Sumitomo then made 90% of its $300–400 million in annual operating profit through trade. But in 2014, the same firm made between $3–4 billion, and 90% of that came from investments. Sumitomo is no longer a trading company. It’s an investment company. The name’s the same, but the business isn’t.

I attribute Japanese companies’ ability to self-transform in this way to two things:

  • Heavy investment in R&D
  • Employee education

1. Japanese companies invest heavily in research and development.

Jesper Koll, former head of Japan equity research at JP Morgan and head of WisdomTree Japan, likes to point out that even during the depressed 1990s, corporate Japan invested the equivalent of 3.4% of GDP in investment. It’s worth mentioning that, in Japan, 80% of R&D is conducted in the private sector. In the US, however, around half of R&D is military/government related.

Japan’s heavy R&D spend produced new technologies like Toyota’s hybrid cars and Toray’s carbon fiber—as well as Fujifilm’s ability to make anti-aging creams or optical films for LCD displays.

2. Japanese invest heavily in educating all their employees.

Japanese firms like to hire people based on personality and potential, rather than professional qualifications/experience for the job. The companies then spend time and money educating these people internally. This has a double benefit: it makes employees more loyal and helps create a genuine “learning organization” that’s able to change as radically as Fujifilm and Sumitomo did.

As the founder of a business school, I know about this difference first hand. At my school, the MBA program accounts for between one-quarter and one-third of revenue, just as it does at Harvard or any other US business school. It’s in the rest of the business where Japan’s model diverges from the American one.

GLOBIS University generates the bulk of its turnover from delivering in-house educational programs tailored to specific company needs. These programs are taught two days a month over ten months to groups of 30 managers. Only after everyone has benefited from the program are a few members of the group selected for the CEO and general manager positions. This democratic approach fosters a sense of inclusion and helps spread a high level of skill and knowledge throughout the firm.

American companies, by contrast, tend to preselect a few stars for promotion to the upper echelons of management and send them—and them only—off to business school for intensive management courses. These so-called “executive open courses” account for the bulk of non-MBA revenue at American business schools.

Japan vs. US: Apples and Oranges

I am not going to argue that one approach or the other is better. These are two quite different economic models in two very different countries.

In the US, R&D and education are generally handled externally. As a consequence, older firms can have trouble with radical self-transformation. New companies, however, always spring up to replace them and do the things they can’t do.

In Japan, R&D and education tend to be handled internally. That means that old companies, despite appearing monolithic and slow, can often be nimble, flexible and capable of change.

That said, I do wish we had more venture businesses in Japan!