Japanese Business Model Evolved under Long Term Recession and Global Pressure

The new mainstream business model of Japanese firms in the 21st century is not the conventional model lasting for half a century, but evidently an

4 Many arguments were made for why Japanese manufacturers or engineering firms could not win in many biddings in BRICs, for instance. It proved to be due to so-called "over-specification". Most importers in BRICs tended to put more emphasis on price as lower-priced products did not incur serious problems often. We cannot simply conclude in such cases that Japanese firms' competitiveness is gone.

5 The concept was initiated by Prof. Shigenobu Ohara. His paper is included in this book (Part 1, Papers 1 and 2).

6 P2M was also developed with the initiative of Prof. Ohara. This concept has been crucial in Japan, where more than 95% of business leaders are not "professionally" educated in business schools or law schools. In the US, the business norm is different from Japan, as business leaders, many of whom are "professionally" educated or sent from outside the firm, would aim at targeting total optimization for shareholders as a matter of course though temptations by stock options; ignorance on foreign market/practices and overconfidence sometimes distort their decision making. While many US executives have been given stock options, few Japanese executives in the "old economy" have been given stock options.

evolutional one. I define it as a hybrid model,7 mixing its own organizational competitiveness with new ingredients derived from the Anglo-American, "Shareholder Wealth Maximization" (SWM) model8 (Eiteman et al, 2007).

What was Japan's conventional model which had enabled Japanese firms to be global winners for decades? First, the shareholder's interest was not prioritized like in SWM model. Second, the so-called Japanese way of management was adopted; namely, the seniority system, the lifelong employment system (until the retiring age, say 60 years old) and the in-house trade union, associated with the "main bank system". Cross-sharing of a firm's stock with banks used to be very popular and it was regarded normal, as the deal was legal and they could expect utmost stability in managing firms. There were some exceptions, though, such as venture businesses or some sorts of service industries like IT software industries whose business model has a similarity with the Anglo-American model. Japan's conventional model facilitated the teamwork leading smooth OJT and better quality control, and reduced labor disputes like strikes, through acquiring high loyalty of the employees to the firm and better human relations or mutual trust from the viewpoint of corporate discipline, though it may not be the best model for innovation.

Kaizen has been a child of the Japanese way of management based on the model. It was supported by the main stakeholders of a Japanese firm, or the management and employees. The following three conditions supported such a system: (a) continuous high growth of Japanese economy under the relatively free, open and ever-expanding international trading system; (b) majority of their shareholders, which largely consisted of banks, insurance companies and many keiretsu companies in Japan with smaller share of Japanese individuals and foreign investors, preferred stability of

7 Few Japanese top executives admit, however, that they have adopted part of the Anglo-American model for revival. Sure, they did not induce it willingly, but were forced to do so together with others. In the same context, many of them dislike the phrase "a hybrid business model" which I am using in this paper. Some of them told me in the summer of 2006 that what they were targeting is neither a traditional Japanese way of management nor an Anglo-American's, but "good management". No one can expect that their perception would change. My analysis is conducted by more objective cross-border comparisons over a long period to forecast the future.

8 Some use the phrase "stockholder capitalism", not "shareholder capitalism".

transactions with firms to high dividends; and (c) it fitted with the traditional sense of value of the common, local people, or of the vertically rooted society. One is promoted slowly but steadily over time through competition and cooperation, and one's basic salary/wage rises basically in accordance to the gradual promotion, which matches one's lifestyle, namely, one that is married, with children and owns a house requires more money in aging. It is interesting that many people have regarded it as "the most successful socialistic system in the world" or "a one-country capitalism".

With the advent of the post-Cold War period, such conditions had to change, which eventually forced the Japanese conventional business model to reform to a new one. The biggest pressure originated from overseas, a thrust of globalization. The other pressure arose from a burst of the bubble economy, though it was related to changes in the international business environment. How so?

Until the middle of the 1990s, the US economy and the competitiveness of US firms seemingly continued to fall in the world standard. The US initiated the Plaza Accord in 1985, devaluing the US dollar substantially against major currencies, the Japanese yen in particular. Then, the US government advocated the imminent need to strengthen the competitive power of its private sector, in such ways as: (a) conducting good macroeconomic policies; (b) adopting new science and technology policies, among others, promoting information technology (IT); (c) encouraging better education in schools and intra-firm education and training; and (d) adopting effective international economic policies such as "modernizing" the GATT to the WTO to include services and investments, and to protect intellectual property rights (IPR) (Dertouzos et al., 1989). The US-led IT age began to blossom internationally in a few years under such a strategy.

It should also be noted that the US eventually won the 40-year-long Cold War. Then, the former Eastern Bloc began to move towards the market economy. Thus, US-led "globalization" began to prevail at all corners of the world.

However, countries in Western Europe founded the EU and created the regional currency Euro, to insulate their socioeconomic models to a large extent from the US-led globalization model. The UK has walked at its own fashion, with relatively strong sympathy for the US-led globalization though the two models are not completely identical. The US responded to the emergence of the EU by forming NAFTA with its neighbors, Canada and Mexico, soon afterwards. The new Zeit-geist of the world became regionalism open in a region but not totally open to the rest of the world as many trials of Doha Round have resulted in complete failure. Multilateralism, whose biggest beneficiary used to be Japan in the post-WWII period, has waned, and Japan could not take initiative to break through pending problems of the WTO mainly due to its own agricultural problem.

Japan, with the US as its biggest trading partner until now and the largest direct investment destination, was tossed about by such paradigm shift to global neoclassical-type capitalism from the end of the Cold War. Unluckily, the Japanese government had mishandled the economic policy in the late 1980s, when the Japanese yen-rate vis-Ă -vis US dollar overshot to less than 100 yen after the Plaza Accord. Both monetary and fiscal policies were overly eased in order to absorb the negative shock and to move its export-led economy to a domestic demand-led one, thereby reducing the trade conflict with the US. These policies invited the unprecedented "bubble economy". The government and the private sector did not concern themselves with the asset inflation for years, due to overconfidence from past success stories as well as the relatively low-level rise of consumer price index.

When the USSR was broken up, the global politico-economic environment changed dramatically. It was then when the Japanese bubble economy collapsed and uncertainty for the future brought about a vicious circle. On the political front in Japan, the one-party rule of the Liberal Democratic Party came to an end, and the era ruled by a coalition cabinet started. The politician's role increased in the national economy, and the age when the bureaucrats virtually ruled the important decisions in the Diet ended.

Japan's averaged annual real GDP growth rate dropped to only 1% in the 1990s and the expression of the "lost decade" caught on. Firms were subjected to an unprecedented and severe struggle for the fittest, but their painstaking efforts to transform their business model for the new age achieved high profits and created many winners for 10 years at maximum. New senses of value such as higher shareholder's value, global environmental consideration, respect for intellectual property rights (IPR) and corporate social responsibility (CSR) have also been stressed.

The newly set-up Japanese model seeking total optimization for the stakeholders is stronger in its competitiveness compared with the conventional model, but has weak points due to the same reason. The shareholder's status has risen, and, conversely, the employees' status has sunk to a certain degree. But their managers still believe that their human resources are the indispensable fountain of the new value added. The number of firms in many fields of the industry has decreased through competition, changing industrial structure substantially. Most of the successful companies changed their business model, not necessarily because they believed that was the best way to go, but because there seemed no other choice left. It has some similarity with their process to become multinationals. Figure 1 shows that their efforts resulted in high profits and a fall of debts in these several years, and stock prices jumped up as a whole since 2002.

Let me introduce two interesting figures to show this fact. Averaged return on equity (ROE) of the 1,424 Tokyo Stock Exchange (TSE)-listed companies reached 9.5% as of FY 2006, showing increases for five consecutive years, though not high enough in the international standard. Share of the stocks of the same TSE companies owned by foreign investors continued to rise to an all-time high 28% as of the end of FY 2006, while those owned by Japanese financial institutions, firms and individuals continued to fall for several years. This verifies the foreign investors' expectation on the improvement of the Japanese corporate performance (Shipley, 2007)

(trillion yen)

(trillion yen)

Fig. 1 Performance of Japanese firms: Profits up and debts down Note: Interest-bearing debt includes short- and long-term loans, corporate bonds and notes receivable discounted; calculations of current-profit ratio are based on annualized aggregates of released quarterly figures. Sources: Ministry of Finance of Japan statistics.

Fig. 1 Performance of Japanese firms: Profits up and debts down Note: Interest-bearing debt includes short- and long-term loans, corporate bonds and notes receivable discounted; calculations of current-profit ratio are based on annualized aggregates of released quarterly figures. Sources: Ministry of Finance of Japan statistics.

and the success of financial big ban taken by the Japanese government in the late 1990s.

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