Japan at a crossroads: How open organization principles aided the country's economic resurgence

At the start of the millennium, Japan was at an economic crossroads. Japanese firms urgently needed to rethink their business strategies and approaches in order to adapt to changing geopolitical and market conditions. In The Business Reinvention of Japan, author Ulrike Schaede describes how Japan succeeded in doing this.

And in this second part of my review of Schaede's book, I'll explore how open organization principles were key to the success of some Japanese companies' transformations.

The aggregate niche strategy

As Schaede explains, an important part of Japan's move to in-product component supply is its investment strategy. A combination of strategic joint ventures and alliances, foreign direct investment (FDI), mergers and acquisitions across Asia, and the growing trade dependencies through what Schaede calls an "aggregate niche strategy" have made Japan the anchor of global supply chains and central in Asia. I'll explore that concept in more detail here.

Japan has evolved into a critical collaborator on technological innovation globally. Schaede explains Japan's impact in Asia, the United States, and Europe in terms of exports, imports, FDI, operation site numbers, travelers, and students. Japan excels in many of those categories (and I personally think Japan's emphasis on FDI has helped it build a multinational community; it also opens up more inclusivity and transparency).

All the above is what Schaede calls an "aggregate niche strategy," which has two components:

1. "Strategic repositioning": Choosing certain core businesses and focusing only on upgrading them. Simply, adapting to a new business model.
2. "Organizational renewal": Creating a coexistence of mature and new businesses that are conducive to creativity and deep-technology innovation. Namely, collaborating between people in established product lines with people developing products for future needs.

This "aggregate niche strategy" has not been easy for many Japanese companies, according to Schaede, and many have failed. Let me explain each dimension in a little more detail, as open organization principles are fundamental to both.

Strategic repositioning

Many Japanese firms have had to strategically reposition their business models to generate both incremental and breakthrough innovations, as well as adopt new, high-tech manufacturing techniques. Schaede notes they had to do four things:

1. Define core business to participate in.
2. Exit businesses they could not compete in long-term. This is where transparency became critical. In 1998, two major laws were changed. First, public companies had to publish financial statements on a consolidated basis; hiding massive losses in subsidiaries was no longer possible, and losses were now exposed and couldn't escape attention. Second, constraints on foreign trade and cross-border financial transactions were cut, which forced Japanese companies to be more globally competitive, or they couldn't get financing.
3. Abandon organizational capacities with no future.
4. Develop new capacities, either by internal, organic investments or outside global acquisitions. Schaede explains that many organizations 1) determined the new—but critical—tasks necessary for moving in new directions, 2) found people to learn and perform those new tasks, 3) designed organizational structures that set metrics/incentives on a daily basis to incentivize those tasks, and 4) created a corporate community that generates buy-in and encourages new behaviors.

As Schaede writes, these companies had to "choose and focus"—divesting or gradually phasing out what they expected would not produce results in the future.

Organizational renewal

Japanese firms had to break with traditions in order to develop new internal processes to gear the organization toward innovations, new cultures, and new workflows. But they needed to do this in a way that allowed new tactics to co-exist alongside successful current operations and create synergies with a company's traditional strengths. Simply put, they had a dual strategy: 1) running maturing operations and 2) establishing future businesses simultaneously.

Unfortunately, many firms weren't successful at it, as making these changes ran counter to their corporate cultures. But others were successful, and the rewards were great (I talked about this successful dual strategy in a presentation I gave on managing innovation). Firms had to build a culture of quick execution, reasonable risk-taking, and creative research and development while complementing existing strengths with breakthrough innovation—a challenge of adaptability.

Schaede calls this a dual strategy: "exploit" (current internal strengths like scaling, learning, cutting costs, etc.) and "explore" (innovative external technologies and new global business collaborations). Some companies are encouraging more outside research sabbaticals, tours of other companies, outside collaboration, and more. In some cases, companies have offered staff to quit their current position and start up promising development projects with the company's funding to promote more outside collaboration and inclusion on development. This is very much an adaptive measure, as they couldn't keep quality researchers any other way. Some are calling this the "J-Startup" strategy, with funding coming from large corporations with plenty of cash. This is an approach that aims to 1) maintain employee loyalty, dedication, teamwork, comradery, and knowledge sharing while 2) add more innovation, inclusivity, diversity and creativity into the culture.

Cultural shifts

Meritocracy in these "New Japan'' companies is now becoming a function of increased performance transparency. It involves collaboration which impacts on their management and organizational structure, adaptation to a changing world, increased transparency between foreign and Japanese companies and builds a global community to address a wide range of issues. Simply, they had to invest to rapidly put all open organization principles to work.

As I mentioned above, change is hard for Japanese companies because of what Schaede calls a "tight culture," a term she borrows from Michele J. Gelfand's book, Rule Makers, Rule Breakers. Summarizing it, Schaede writes

Tight cultures, such as Japan's, are characterized by strong norms for what constitutes the "right" behavior, as well as strong mechanisms for ostracizing deviants. In contrast, loose cultures, such as that in the United States, have a much wider definition of what is acceptable and do not sanction noncompliance to nearly the same degree.

In this kind of "tight" corporate culture, introducing a more flexible and creative work environment must be done in a highly regimented, methodical way to encourage employees to embrace less structured work approaches. Tight cultures also lend themselves to what Schaede calls "soft law" approaches to regulation, where exposing problems, nudging, and shaming are the primary levers driving activity. For Japan, using social transparency of actions and then applying shaming, exclusion, peer pressure, and what Schaede calls "nudging" are all that is needed for change to occur. 

Changes were also necessary at the board level. In terms of Japanese public corporations' boards of directors, the structure, amount of disclosure and management rights and responsibilities have changed to become similar to the The Organization for Economic Co-Operation and Development (OECD) practices. Currently, most of Japan's major companies now have outside board members, and have increasingly proactive shareholder participation. Only five to 10 years ago, 90% of boards were made up of company employees and closed to outsiders. This added level of inclusivity, transparency, and collaboration have strengthened their corporate management and exposed concerns and opportunities quicker.

Change and social stability

What's important about making changes in Japan is social stability and safety. Japan is a country that is susceptible to natural disasters. Therefore, safety and social stability are a very high priority. If one openly and transparently speaks in terms of potential risks, collaboration will be smoother. While the United States and China are mainly competing in platform businesses, e-commerce, social media, AI, the sharing economy and the cloud, Japan is quietly focused on shop-floor strengths like supply chains, global manufacturing, production machinery, robots, sensors, and production system technologies. After all the internet of things (IoT), industry 4.0, big data, AI (artificial intelligence), and 5G cloud technology will all require hardware. Thanks to its aggregate niche strategy and significant shifts to more open cultures and processes, Japan now excels at producing that hardware—meaning its future remains bright.

Read the first part