CHAPTER 1

JAPANESE MANAGEMENT SYSTEMS

 1. JAPANESE MANAGEMENT SYSTEMS

In order to understand Japanese Management, it is imperative to understand the

historical, social, cultural, and economic factors that influenced its conception and

evolution.

1.1 Historical Review of Japan

Japan is a country with the population of about 128 million (UN, 2005). Its total

area comprises of a number of islands covering 377864sq/km. It is in size, 1/9^^ the

size of India and 1/25"^ the size of U.S.A. Japan is a leading exporter of vehicles,

computer parts, watches, scientific instruments and chemicals to various countries

in the world. The GNI per capita of Japan is US$ 34510 (World Bank, 2003).

"Nothing similar may be found in foreign lands," wrote Kitabatake Chikafusa when

he described Japan in his fourteenth century Jinno sh t ki (Chronicle of the Direct

Descent of the Divine Sovereigns). Although Japanese culture developed late in

Asian terms, and was much influenced by China and later by the West, its history,

like its art and literature, is special among world civilizations. As some scholars

have argued, these outside influences may have "corrupted" Japanese traditions, yet

once absorbed they also enriched and strengthened the nation, forming part of a

vibrant and unique culture.

Early in Japan's history, the ruUng eUte of powerful clans controlled society. The

most powerful emerged as a kingly line and later as the imperial family in Yamato

(modem Nara Prefecture or possibly in northern Kyushu) in the third century A.D.

An imperial court and government, shaped by Chinese political and social

institutions, was established. Often, powerful court families effected hereditary

regency, having established control over the emperor. The highly developed culture

attained between the eighth and the twelfth centuries was followed by a long period

of anarchy and civil war, and a feudal society developed in which military

overlords ran the government on behalf of the emperor, his court, and the regent. In

the late sixteenth century, Japan began a process of reunification followed by a

period of great stability and peace, in which contact with the outside world was

limited and tightly controlled by the government.

Confronted by the West, Japan emerged gradually as a modem industrial power,

exhibiting some democratic institutions by the end of World War I. Beginning in

the mid-nineteenth century, phenomenal social upheaval, accompanied by political,

military, and economic successes, led to an overabundance of nationalist pride and

extremist solutions, and to even faster modernization. Representative government

was finally replaced by increasingly authoritarian regimes, which propelled Japan

into World War II. After the cataclysm of nuclear war, Japan rebuilt itself based on

a new and earnest desire for peaceful development, becoming an economic

superpower in the second half of the twentieth century.

Source: U.S. Library of Congress

1.1.1 The Economic Story

Since the mid-nineteenth century, Japan has gone through two periods of economic

development. The first began in earnest in 1868 and extended through World War

II; the second began in 1945 and continued into the mid-1990s. In both periods, the

Japanese opened themselves to Western ideas and influence, experienced

revolutionary social, political, and economic changes and became a world power

with carefully developed spheres of influence. During both periods, the Japanese

government encouraged economic change by fostering a national revolution from

above and by planning and advising in every aspect of society. The national goal

each time was to make Japan so powerful and wealthy that its independence would

never again be threatened.

In the Meiji period (1868-1912), leaders inaugurated a new Western-based

education system for all young people, sent thousands of students to the United

States and Europe, and hired more than 3,000 westerners to teach modem science,

mathematics, technology, and foreign languages in Japan. The government also

built railroads, improved roads, and inaugurated a land reform program to prepare

the country for further development.

To promote industrialization, the government decided that, while it should help

private business to allocate resources and to plan, the private sector was best

equipped to stimulate economic growth. The greatest role of government was to

help provide the economic conditions in which business could flourish. In the early

Meiji period, the government built factories and shipyards that were sold to
entrepreneurs at a fraction of their value. Many of these businesses grew rapidly

into the larger conglomerates that still dominate much of the business world. The

Government emerged as a chief promoter of private enterprise, enacting a series of

pro-business policies, including low corporate taxes.

Before World War II, Japan built an extensive empire that included Taiwan, Korea,

Manchuria, and parts of northern China. The Japanese regarded this sphere of

influence as a political and economic necessity, preventing foreign states from

strangling Japan by blocking its access to raw materials and crucial sea-lanes.

Japan's large military force was regarded as essential to the empire's defense.

Japan's colonies were lost as a result of World War II, but since then, the Japanese

have extended their economic influence throughout Asia and beyond. Japan's

Constitution, promulgated in 1947, forbids an offensive military force, but Japan

still maintained its formidable Self-Defense Forces.

Rapid growth and structural change characterized Japan's two periods of economic

development since 1868. In the first period, the economy grew only moderately at

first and relied heavily on traditional agriculture to finance modem industrial

infrastructure. By the time the Russo-Japanese War (1904-5) began, 65 percent of

employment and 38 percent of the gross domestic product (GDP) was still based on

agriculture, but by the late 1920s, manufacturing and mining contributed 23 percent

of GDP, compared with 21 percent for all of agriculture. Transportation and

communications had developed to sustain heavy industrial development. In the

1930s, manufacturing and mining came to account for more than 30 percent of

GDP, more than twice the value for the agricultural sector. Most industrial growth,

however, was geared toward expanding the nation's military power.

World War II wiped out many of the gains Japan had made since 1868. About 40

percent of the nation's industrial plants and infrastructure were destroyed, and

production reverted to levels of about fifteen years earlier. The people were

shocked by the devastation and swung into action. New factories were equipped

with the best modem machines, giving Japan an initial competitive advantage over

the victor states, which now had older factories. As Japan's second period of

economic development began, millions of former soldiers joined a well-disciplined

and highly educated work force to rebuild Japan.

Japan's highly acclaimed postwar education system has contributed strongly to the

modernizing process. The world's highest literacy rate and high education standards

were among the major reasons for Japan's success in achieving a technologically

advanced economy. Japanese schools also encouraged discipline, another benefit in

forming an effective work force.

Major investments were made in electric power, coal, iron and steel, and chemical

fertilizers. By the mid-1950s, production matched pre-war levels. Released from

the demands of military-dominated government, the economy not only recovered

its lost momentum but also surpassed the growth rates of earlier periods. Between

1953 and 1965, GDP expanded by more than 9 percent per year, manufacturing and
mining by 13 percent, construction by 11 percent, and infrastructure by 12 percent.

In 1965, these sectors employed more than 41 percent of the labor force, whereas

only 26 percent remained in agriculture.

The mid-1960s ushered in the international competition in some industries and

developed heavy and chemical manufactures. Whereas textiles and light

manufactures maintained their profitability internationally, other products, such as

automobiles, ships, and machine tools, assumed new importance. The value added

to manufacturing and mining grew at the rate of 17 percent per year between 1965

and 1970. Growth rates moderated to about 8 percent and evened out between the

industrial and service sectors between 1970 and 1973, as retail, trade, finance, real

estate, information, and other service industries streamlined their operations.

Japan faced a severe economic challenge in the mid-1970s. The world oil crisis in

1973 shocked an economy that had become virtually dependent on foreign

petroleum. Japan experienced its first postwar decline in industrial production,

together with severe price inflation. The recovery that followed the first oil crisis

revived the optimism of most business leaders, but the maintenance of industrial

growth in the face of high energy costs required shifts in the industrial structure.

Changing price conditions favored conservation and alternative sources of

industrial energy. Although the investment costs were high, many energy-intensive

industries successfully reduced their dependence on oil during the late 1970s and

1980s and enhanced their productivity. Advances in micro-circuitry and

semiconductors in the late 1970s and 1980s also led to new growth industries in

consumer electronics and computers and to higher productivity in already

established industries. The net result of these adjustments was an increase in the

energy efficiency of manufacturing and the expansion of so-called knowledge-

intensive industry. The service industries expanded in an increasingly post-

industrial economy.

Despite more petroleum price increases in 1979, the strength of the Japanese

economy was apparent. It expanded without the double- digit inflation that afflicted

other industrial nations and that had bothered Japan itself after the first oil crisis in

1973. Japan experienced slower growth in the mid-1980s, but its demand- sustained

economic boom of the late 1980s revived many troubled industries.

Complex economic and institutional factors affected Japan's postwar growth. First,

the nation's prewar experience provided several important legacies. The Tokugawa

period (1600-1867) bequeathed a vital commercial sector in burgeoning urban

centers, a relatively well-educated elite (although one with limited knowledge of

European science), a sophisticated government bureaucracy, productive agriculture,

a closely unified nation with highly developed financial and marketing systems,

and a national infrastructure of roads. The buildup of industry during the Meiji

period to the point where Japan could vie for world power was an important

prelude to post-war growth and provided a pool of experienced labor following

World War II.

 8

Second, and more important, was the level and quality of investment that persisted

through the 1980s. Investment in capital equipment, which averaged just more than

11 percent of GNP during the pre-war period, rose to some 20 percent of GNP

during the 1950s and to more than 30 percent in the late 1960s and 1970s. During

the economic boom of the late 1980s, the rate was still around 20 percent. Japanese

businesses imported the latest technologies to develop the industrial base. As a

latecomer to modernization, Japan was able to avoid some of the trial and error

needed by other nations to develop industrial processes. In the 1970s and 1980s,

Japan improved its industrial base through technology licensing, patent purchases,

and imitation and improvement of foreign inventions. In the 1980s, industry

stepped up its research and development, and many firms became famous for their

innovations and creativity.

Japan's labor force contributed significantly to economic growth, not only because

of its availability and literacy but also because of its reasonable wage demands.

Before and immediately after World War II, the transfer of numerous agricultural

workers to modem industry resulted in rising productivity and only moderate wage

increases. As population growth slowed and the nation became increasingly

industrialized in the mid-1960s, wages rose significantly. However, labor union

cooperation generally kept salary increases within the range of gains in

productivity.

High productivity growth played a key role in postwar economic growth. The

highly skilled and educated labor force, extraordinary savings rates and
accompanying levels of investment, and the low growth of Japan's labor force were

major factors in the high rate of productivity growth.

The nation has also benefited from economies of scale. Although medium-sized

and small enterprises generated much of the nation's employment, large facilities

were the most productive. Many industrial enterprises consolidated to form larger,

more efficient units. Before World War II, large holding companies formed wealth

groups, or zaibatsu, which dominated most industry. The zaibatsu were dissolved

after the war, but keiretsu-AargQ, modem industrial enterprise groupings— emerged.

The coordination of activities within these groupings and the integration of smaller

subcontractors into the groups enhanced industrial efficiency. The postwar purge of

industrial leaders allowed new talent to rise in the management of the nation's

rebuilt industries.

Japanese corporations developed strategies that contributed to their immense

growth. Growth-oriented corporations that took chances competed successfully.

Product diversification became an essential ingredient of the growth patterns of

many keiretsu. Japanese companies added plant and human capacity ahead of

demand. Seeking market share rather than quick profit was another powerful

strategy.

Also, circumstances beyond Japan's direct control contributed to its success.

International conflicts tended to stimulate the Japanese economy until the

devastation at the end of World War II. The Russo-Japanese War (1904-5), World

War I (1914- 18), the Korean War (1950-53), and the Second Indochina War (1954
 10

- 75) brought economic booms to Japan. In addition, benign treatment from the

United States after World War 11 facilitated the nation's reconstruction and growth.

The economy benefited from foreign trade because it was able to expand exports

rapidly enough to pay for imports of equipment and technology without falling into

debt, as had a number of developing nations in the 1980s.

The consequences of Japan's economic growth were not always positive. Large

advanced corporations existed side-by-side with the smaller and technologically

less-developed firms, creating a kind of economic dualism in the late twentieth

century. Often the smaller firms, which employed more than two-thirds of Japan's

workers, worked as subcontractors directly for larger firms, supplying a narrow

range of parts and temporary workers. Excellent working conditions, salaries, and

benefits, such as permanent employment, were provided by most large firms, but

not by the smaller firms. Temporary workers, mostly women, received much

smaller salaries and had less job security than permanent workers. Thus, despite the

high living standards of many workers in larger firms, Japan in 1990 remained in

general a low-wage country whose economic growth was fueled by highly skilled

and educated workers who accepted poor salaries, often-unsafe working conditions,

and poor living standards.

Additionally, Japan's preoccupation with boosting the rate of industrial growth

during the 1950s and 1960s led to the relative neglect of consumer services and to

the worsening of industrial pollution. Housing and urban services, such as water

and sewage systems, lagged behind industry. Social security benefits, despite
 11

considerable improvement in the 1970s and 1980s, still lagged well behind other

industrialized nations at the end of the 1980s. Agricultural subsidies and a complex

and outmoded distribution system also kept the prices of some essential consumer

goods very high by world standards. Industrial growth came at the expense of the

environment. Foul air, heavily polluted water, and waste disposal became critical

political issues in the 1970s and again in the late 1980s.

1.1.2 The Evolving Occupational Structure

By the late 1970s, the Japanese economy began to move away from heavy

manufacturing toward a more service-oriented (tertiary sector) base. During the

1980s, jobs in wholesaling, retailing, finance and insurance, real estate,

transportation, communications, and government grew rapidly, while secondary-

sector employment remained stable. The tertiary sector grew from 47 percent of the

work force in 1970 to 59.2 percent in 1990 and was expected to grow to 62 percent

by 2000, at which point the secondary sector employs about one-third of Japan's

workers.

Source: U.S. Library of Congress

1.1.3 Managerial Style in Japan

To gain a deeper understanding of the Japanese management, we have to describe

some of the many cultural peculiarities of this nation, which yield high influence on

Japanese society and as a result also on the Japanese business.

 12

First and foremost, to be mentioned is a strong sense of belonging to a group. The

reason for the Japanese group behavior and collective values sharing is definitely

the basic unit of society in Japanese minds - "house", meaning group that bind

people together, such as families, companies, schools, unlike the West, where

emphasis tends more on individuals. This is the basis for the lifetime employment

system in most organizations; where the belonging feeling is important and

employees tend to identify themselves with the organization. This in fact means

loyalty and devotion for common corporate goals. This system requires recruitment

right after finishing the school and retirement at the age of fifty-five; The graduate

enters at a low position, his/her career path is non-specialized (rotates through

almost all jobs) and is promoted and evaluated according to the service length -

unlike in Western organizations, which employ workers on armual basis and the

promotion and evaluation is based on one's performance. The group principle can

be also found in the collective decision-making based on consensus of everyone

involved, and in its result - collective responsibility.

Another specific feature of the Japanese society is its high emphasis on the human

factor (in fact the only resource Japan has), which stems from both historical

concept and underlying social and cultural process, and resuhs in the companies'

holistic concern for their employees. This implies that the Japanese organization

forms an inclusive relationship with the worker, provides a social, emotional, and

economical support and takes part of the responsibility for the employee; and

basically, becomes his/her second family. In order to achieve this, the process of
 13

maintaining of healthy social and working relationships does not allow for any

conflicts and refusals, which would disturb the harmony of the working process;

and that is why the Japanese are known for not expressing their opinions, for non-

commitment and for having double standards, all of which is considered to be a

necessity in this kind of society in order to solve problems without hurting anyone.

A specific characteristic of the Japanese approach is also a leadership by influence,

which means a leading process without formal authority involved. The manager has

to know how to motivate people, how to win them for his idea and intention, which

he achieves by using his charisma and personal qualities instead of his formal

designation.

Japanese Employment Practices

The Japanese Management System is a general term for management practices or

managerial styles commonly adopted by Japanese enterprises. European and

American scholars created the word after World War II when Japanese economy

had a miraculous recovery.

Management styles in Japanese companies have been changing a great deal during

recent years. For instance, many leading companies in electric appliance and

automotive industries have abandoned the periodical pay raise system and have

reviewed traditional welfare programs. Instead, performance-based wage system

and cafeteria benefit plan have been adopted while the rate of part-time and
 14

temporary workers is increasing. This means that the concept of "lifetime

employment" has been deteriorating and both Japanese companies and employees

are trying to have a new psychological contract regarding a job/wage/promotion

relation. Some of the features of the "Japanese management system" are

enumerated below:

1. Lifetime employment is a practice of long-term employment. In Japan, a

majority of new college graduates join a company right after their graduation, and

work for the same company until they reach their retirement age. This means that

people work for the same company for thirty or forty years. Changing jobs is not so

popular in Japan as it is in Europe and America.

Legally, however, Japanese labour contracts are the same as European and

American ones. Employee has contract with his or her company on an individual

basis and people are free to leave the company whenever they want to do so.

2. Ringi System

The essence of the Ringi system is that decision is to be based on consensus. Every

proposal is widely discussed in informal groups and a consensus is evolved before

it is formally approved by the competent committee. This consensus decision is

considered qualitatively better as it embodies the experience and knowledge of a

number of employees.
 15

If the group is small, personal face-to-face discussion is preferred. However, for a

large group, a written document is considered essential.

The disadvantage of this system is that decisions take a longer time to be reached.

Moreover, the decisions can be pedestrian and not creative.

3. The Seniority System is composed of Seniority Promotion System and

Seniority Wage System.

The Seniority Promotion System is actually not a system but a practice in which

people are promoted according to their length of service. Most new college

graduates are treated the same. Even if you have an MBA degree from Harvard,

you have to start at the lowest position. Managers are gradually promoted up from

the lowest ranks and need many years of experience before reaching senior

managerial positions.

However, this promotion practice does not always work on a pyramidal

organization hierarchy, as the higher one is promoted, the fewer positions you have

in the hierarchy. Then, the Seniority Wage System works in compensation for this

promotion practice.

The Seniority Wage System is more systematic rather than a practice. It is a pay

scale based on seniority. The Seniority Wage System is composed of a life wage

concept and a present yearly pay raise.

 16

4. Japanese labour unions are not organized by occupation or industry, but by

enterprise. Therefore, there is only one union for each company.

For example, Toyota has a single labour union of Toyota Labor Union within the

company. Similarly, Nissan has a Nissan Labor Union and Honda has Honda Labor

Union, one each within each company. All the employees belong to the same

enterprise union until they are promoted to manager level. Managers leave the

union to join the management side.

These enterprise unions are federated by industry, but the function of such industry-

wide organization is different from that of European and American organizations.

For instance, Confederation of Japanese Automobile Workers' Union (JAW) is

merely a national center, or political lobbying unit for the automotive industry.

Unlike the United Automobile Workers' Union (UAW), the Japanese national

center organization, JAW, for example, does not go into the details of wage and

labour conditions. Each enterprise union takes full responsibility of collective

bargaining within each company.

5. The fiscal year of most Japanese companies begins in April and ends in March.

As a result, almost all of the employees are recruited at one time and join the

organization simultaneously in April. Compared with Europe and the USA where

people are hired throughout the year based on the employment needs, most

Japanese companies do not hire people midway through the year. New graduates
 17

from university or high school are major source of new employment.

6. Many Japanese companies provide a wide range of fringe benefits and

welfare programmes for employees. In Europe and USA, companies usually do not

provide housing facilities. However, companies in Japan provide furnished housing

to younger employees who do not have their own houses. In addition, companies

finance a large part of the purchasing cost when an employee wants to buy a house.

7. The Japanese Management System works effectively in the large corporations

engaged in the mass production in the secondary industry. Usually the large

corporations can provide excellent employee welfare programs and a high level of

in-house education. The enterprise union generally does not demand too much, and

this is a great benefit especially for the large mass-production companies.

The Japanese Management System worked well in a labor-intensive industry. The

steel and coal industries were given a first priority, followed by shipbuilding and

automobile industries. The Japanese Management System was adopted by large

corporations in such industries and contributed to the success of such industries.

Figure 1.1: A Diamond of Japanese Management System

Seniority System

Welfare Programs Family-oriented

nagement

Life time employment Enterprise union

One-time
Bottom-up
recruitment
decision-making

Source: Management Japan, Vol 36.2004

 18

1.2 SOCIO-ECONOMIC AND CULTURAL ASPECTS

1.2.1 Increase in Population: There is a direct relation between the total increase

in population and the total labour cost as the latter is relatively held down when

younger employees join the company. It is generally believed that the ability and

performance of the employees increase along with the number of working years.

Younger employees often gain skills and knowledge soon after they enter the

company and maintain a high level of performance, while the output may go down

along with the years of service. As shown in the figure, the company can enjoy the

relatively low labour cost when the new younger employees continue to join the

company.

Figure 1.2: The Difference in Seniority Concept and Real Performance

Performance
Reality

Concept

Length of Service

Source : Management Japan, Vol. 36.2004

1.2.2 Expansion of Total Market

When the economy and market keeps expanding, the unemployment ratio is very

low and the labour market outside the organization is very limited. Then, one-time

recruitment of new graduates is effective. Lifetime employment is necessary to

 19

secure the labour force. In-house education works to utilize the limited internal

labour force more flexibly. Japanese economy was completely shattered after the

World War II. After the postwar reconstruction was achieved, the Japanese

economy continued to expand by exporting products to international markets,

which kept the economy growing steadily.

1.2.3 Cultural Change: Value and Life Style

Japanese Management System has been supported by the people's anxiety about

unemployment. It was most important to obtain a job right after World War II when

there were severe food shortages and rampant inflation. Thus, lifetime employment

was most attractive and welcomed by Japanese people.

Once the lifetime employment practice became popular among large corporations,

the labour market outside the company did not grow, and people were more afraid

of unemployment. The ratio of changing jobs is increasing and the labour market

outside company is gradually growing. The values that are emphasized by the

Japanese are presented in a chart in Figure 1.5 at the end of the chapter.

1.2.4 Social Change: Aging Society

The change in the demographic structure has also affected the Japanese

Management System. With the Japanese society aging and birth ratio decreasing,

the average age of total employees is rising and the company has more difficulty in

hiring new employees.

 20

Consequently, the organization hierarchy of Japanese companies is being deformed

from a normal pyramid into an inverted pyramid as shown in the figure below. This

has an affect not only on the financial cost but also on the motivation of each

employee.

Figure 1.3: Deformation of Organization Hierarchy.

Wien economy
is expaiding
inagirig soday "

C new employees M— Less younger employees

V
Source : Management Japan, Vol. 36.2004

1.2.5 Economic Change: Recession

The recent economic recession has made it difficult for Japanese companies to

maintain the large number of employees who are promoted every year according to

the seniority system. This has resulted in higher unemployment ratio since World

War II.

Organizations are also faced with a difficult financial situation due to the increasing

labour cost according to the seniority wage system within the framework of

lifetime employment.
 21

1.3 FUTURE OF JAPANESE MANAGEMENT SYSTEM

Economic, social and cultural changes have affected the Japanese Management

System. A decade long economic recession has prevented Japanese organizations

from growing enough to keep the lifetime employment. The social and

demographic changes have made it more difficult for Japanese organizations to

maintain the ideal organization hierarchy for the traditional seniority system. In

addition, the system was affected by the change in the lifestyle and value of

younger generations that want to change their jobs more frequently.

The lifetime employment is not always a closed employment system. It is actually a

long-term employment practice to develop human resource capabilities while

reducing the risk of unemployment. By securing the long-term commitment, the

organization provides a variety of services and the employees contribute to their

organizations' from a long-term perspective. A chart that incorporates this is given

in figure 1.4.

Therefore, it may hurt the Japanese economy to destroy the Japanese Management

System. Today's recession has resulted from the people's anxiety about the future.

The question is whether the Japanese can improve on the system while dealing with

the social and cultural changes.

The market-oriented aspect of the Japanese Management System is another

advantage. Long-term customer service is often realized because of the lifetime

 22

employment. In this regard, there is a possibility that the Japanese Management

System will effectively work in the tertiary industry.

The Japanese economy achieved remarkable growth especially in the labour-

intensive secondary industry. This is because that the so-called Japanese

Management System worked most effectively in such industry.

Figure 1.4: Key features of Japanese Management Style

jArAMtst MAMACCMCNT P M A O I C W

Parod 5trat«9i«s T»chni9<MS

1 1
1
1 Slew promotion
1
1 1
1
I
1 Complex apprAift*! tyMem
1
1
LjonQ'1»rm •mployinvnt t
f
1 Emphasis on woik groups
Cooc»rn t9r T
numJin rvtouroes Uni^u* onni^ny philosophy 1
1
1
1 Opon commufl lest ion
1
1
iniegrstioB the etnployae 1
1
J Consuttvtivo decision maxing
1
1 1
1
1 \
I
Concorn fot |h« e<nf loyee
1
1 i
 tn c a> w> c
1^
tl I 1
o o
1 GO
1, E
1 s E 1 i
fl o

1t!
1 a>

if
5
li E "»
to
o
u
tn

il
iS s s
II g-ffi i
tl
S S