1

INTRODUCTION

The Reinvention

In the late 1980s, Japan was on everyone’s mind. The successes of the kaisha—the Japanese company—with its very different management practices, and their astounding capture of global consumer markets, challenged many U.S. industries and triggered a trade war. Brands like Sony, Panasonic, Hitachi, Toshiba, and Sanyo were prominent in U.S. homes, followed by Toyota, Nissan, Honda, and Mazda on the roads. Then, as the global trade order changed, Japan fell into a 20-year-long slump, with sluggish economic growth and an ongoing struggle with deflation and debt. Japanese electronics have largely disappeared from our radar, and what little news we read about Japan tends to be negative, usually peppered with adjectives like lost, low, or lagging.

Yet, while we were not looking, Japanese business has launched a great process of reinvention, and the results are beginning to show. As of 2020, Japan is the third-largest economy in the world. Japanese companies anchor Asian supply chains with advanced materials and components and are key players in cutting-edge technologies for the digital transformation, occupying dominant global market shares in hundreds of critical global input products. For example, Japanese companies provide one third of the world’s semiconductor manufacturing equipment, and more than half of that industry’s most critical materials. Japan has long recorded the lowest unemployment rate in the industrialized world, and recently labor and total factor productivity have been rising in ways that would make many parts of the U.S. envious. Profitability is back, and Japanese companies have accumulated large amounts of cash that are fueling strategic global acquisitions and investments in Southeast Asia, the United States, and Europe.¹ According to a 2018 Morgan Stanley report, Japan’s ongoing reinvention is also reflected in “the most interesting and underrecognized turnaround story in global equity markets.”²

Driving this reinvention is the emergence of a new business strategy to compete through deep-technology leadership in a series of small yet critically important materials and components segments. Over time this has gelled into what I call an aggregate niche strategy. This strategy requires change in two domains: (1) a strategic repositioning into a series of critical technology niches, achieved by building new competencies at the technology frontier; and (2) internal management and organizational change, to structure new processes that foster breakthrough innovation. Strategic repositioning means redefining the businesses that the company will compete in, and management renewal means building a new mindset for global competition. Success in these domains depends upon a company’s ability to shift its traditional corporate culture, which has long prioritized certainty, predictability, and due process, toward a new mindset that fosters risk-taking, innovating, and achieving speed and agility in fast-changing global markets. This reinvention has begun to transform Japan’s workforce, work processes, and employment patterns—so much so that the outcome has been deemed the “end of the kaisha,” the prototypical Japanese company of the 1980s.³

Importantly, this reinvention is not so much about replacing old with new as it is about, ideally, creating a type of New Japan corporation that can augment the competencies built in the past with new capabilities that afford competitive advantage in the digital economy. The traditional strength of making things well, consistently, and reliably with continuous improvement (kaizen) is still key to Japan’s reinvention. In sharp contrast to companies in the United States and China that are betting on dominating the cloud with data mining and artificial intelligence (AI) applications, Japanese companies are positioning to compete in digital manufacturing. Already, Japanese companies, together with Germany’s, are leading the world in the hardware needed for the digital transformation, and they operate at the frontier of the advanced systems solutions and edge computing that will shape the future of digital manufacturing. From there, some companies will then attempt to build out into the cloud. The future of the digital economy is far from written, and Japan will undoubtedly be an important part of that story.

Meanwhile, great attention is being paid to reducing externalities for society and minimizing the disruption associated with this reinvention. From the outside, the slow pace of change in Japan can be frustrating, mistaken for stagnation or even confused with incompetence. But upon closer examination, it is clear that this slow pace is by design: being slow is the price Japan is paying for stability. The orderly transition to the new system cushions the blow to society and doesn’t allow the few to win at the expense of the many. This is why employment reform has taken almost 20 years—long enough to allow an entire generation to adjust. Similarly, as large companies had to downsize and move production abroad to create global supply chain networks, government loan programs were extended to small-firm suppliers to curtail bankruptcies and job losses.⁴ While these “welfare in disguise” policies can obscure some of the country’s corporate successes, they are widely preferred to the slash-and-burn approach that has come to characterize the United States. Japan’s reinvention is showing that corporate reorganization and adjustment need not be messy or destructive.

Since the destruction of World War II, Japan has gone from failure to success to failure and now quietly back to reemergent success. Its return to global relevance has flown under the radar of many U.S. business observers but represents a new path already becoming widely admired by other Asian countries. In 2020, Japanese companies anchor global supply chains, and their reinvention is invigorating Japan’s domestic markets as more and more new global competitors are emerging from Japan. How Japan has reinvented quietly without upheaval—and what business lessons it holds for other countries—is the focus of this book.

NOTES

1. Ando (2018); “Japan Inc. sitting on ¥506.4 trillion mountain of cash,” Japan Times, September 3, 2019.

2. Morgan Stanley Research (2018).

3. “‘Fukugyō kaikin’ de kowareru Nihon no ‘kaisha’: Shain no ‘honrai gyōmu’ no meikakuka ga fukaketsu ni” [The introduction of “dual jobs” means the end of the Japanese “kaisha”: The necessity to lay out future expectations for employees], Nikkei Business, April 27, 2018.

4. Kent Calder (2017) labeled this the “liberalize slowly, compensate generously” approach; see also Schaede and Grimes (2003) on Japan’s “managed globalization.”