The Japanese have had phenomenal impact on world markets. Many industries, such as electronics, cameras, watches, motorcycles, machine tools, automotive products, shipbuilding, and even some aspects of aerospace are either dominated by Japanese firms or are heavily impacted by them.
Many people mistakenly attribute this phenomenon strictly to cultural differences. The vision of dedicated Japanese workers giving their life to the company for substandard wages surely accounts for the difference, they reason. Of course, this view doesn’t always square with reality. First, Japanese factories have some of the highest wage structures seen outside the United States. Second, this “Japanese miracle” is also happening outside Japan. Most Japanese automobile manufacturers have successful plants located within the United States; all of them manufacturing quality automobiles utilizing American workers. When Matsushita bought a U.S. television plant in Chicago, they managed to maintain the 1,000 hourly employees while trimming the indirect labor by half. Utilizing the same workers employed by the U.S. firm, Matsushita doubled daily production while improving quality 40-fold. Outside warranty costs fell from $16 million per year to $2 million per year while selling twice as many sets.
Word of these success stories soon aroused considerable interest from U.S. firms. Interest in Japanese management was first generated in the U.S. with the appearance of a book by William Ouchi entitled “Theory Z”, and later a book by Richard J. Schonberger entitled “Japanese Manufacturing Techniques: Nine Hidden Lessons in Simplicity”, and the broadcast of an NBC television white paper entitled “If Japan Can, Why Can’t We?”
William Ouchi’s book “Theory Z” detailed much of the success being realized by the Japanese manufacturing firms. The Japanese style of management (as opposed to McGregor’s Theory X and Theory Y) mystified many U.S. businessmen with its talk of cultural differences and notions such as lifetime employment.
In his book “Japanese Manufacturing Techniques: Nine Hidden Lessons in Simplicity”, Richard Schonberger presented nine “lessons” the world could learn from the Japanese. These lessons included:
- Management technology is a highly transportable technology.
- Just-in-time production exposes problems otherwise hidden by excess inventories and staff.
- Quality begins with production, and requires a company-wide “habit of improvement.”
- Culture is no obstacle; techniques can change behavior.
- Simplify, and goods will flow like water.
- Flexibility opens doors.
- Travel light and make numerous trips, like the water beetle.
- More self-improvement, fewer programs, less specialist intervention.
- Simplicity is the natural state.
For many American business executives this was their first encounter with the concepts (and even just the terms) of just-in-time, kanban, Total Quality Management, and quality circles.
The NBC documentary “If Japan Can Why Can’t We?” introduced Americans to the progress made in Japanese manufacturing and served as a “wake-up call” for American businesses that manufacturing had entered a new generation. For many viewers, this was their first introduction to W. Edwards Deming, statistical process control (SPC), and quality circles.
By the early 1980s it was evident that Japan was well on its way to the position as a worldwide dominant force in manufacturing that it enjoys today. Japan’s rise to economic dominance sent ripples throughout the industrialized world. Since the early 1960s Japan has systematically increased its share of world trade in industrial and consumer goods, although persistent economic problems during the 1990s have arrested its rapid growth.
A number of reasons have been tendered to explain the success of the Japanese. When Japanese automobile manufacturers’ market position began to strengthen in the 1970s it was easy to suppose that the 1973 Arab oil embargo and subsequent escalation in gas prices was the antecedent. Customers were sent searching for small fuel-efficient vehicles. Since the Japanese were already entrenched in the small car market, they had a considerable natural competitive advantage. However, it was expected that this advantage would wane as the Big Three automakers had time to react by incorporating small cars into their product line and as oil prices began to decrease.
However, as the Big Three were able to produce smaller cars and gas prices fell, the Japanese market share of the automobile industry continued to increase. Nor did this reasoning account for the simultaneous surge in Japanese market share in areas such as steel, consumer electronics, copiers and heavy equipment. After all, if the oil embargo was responsible for the increase in Japanese market share why didn’t other traditional small car manufacturers such as Renault and Volkswagen have comparable success? Manufacturers began to realize that the Japanese success story was more than simply a matter of timing.
When Japanese industry was in its infancy stage, the Japanese market was too small to absorb the increasing domestic production. Japan needed a global market in order to further develop. By creating an export market, Japan was able to structurally transform its economy, thereby granting it access to the technology it needed to develop.
The Japanese goal became one of full employment through industrialization. This called for dominating the market in very select product areas. They carefully chose areas in which they had the confidence to dominate and concentrated on them rather than diluting their efforts over many areas.
A number of tactics were utilized to support this strategy. First of all, the Japanese imported their technology, thus avoiding the risks involved with major R&D expenditures. Instead, they negotiated license agreements to make workable new products. Then the best engineering talent was directed to the plant floor rather than to the product design department, thereby concentrating their ingenuity on high productivity and low cost rather than innovative design. Finally, they strove continuously to improve quality and reliability to the highest possible levels and then beyond; to levels competitors could not or would not supply. Implementation of these tactics was guided by a solid respect for people and the belief that waste must be eliminated (these two areas are discussed in depth below).
The Japanese example of success shows that neither massive research and development investment nor abundant natural resources is necessary for sustainable industrial development. For years Japan was well known as an imitator not an innovator as they copied, borrowed, and licensed technology from other countries. By building competence in adapting existing product designs and speeding up the processes the Japanese were able to manufacture superior quality at competitive prices, giving them a distinct advantage in world markets.
Japan showed the world that efficient production and quality control methods could overcome transportation cost disadvantages and tariff costs. They proved that cultural differences could be overcome and that the critical cultural points necessary for successful production could be transferred across national boundaries.
Japan’s success as an economic superpower strongly implied that the West might lose its world dominance as the leader in technology. Emboldened by the success of the Japanese, other Pacific Rim countries began to follow their example, thus accelerating the diffusion of innovative technology through-out the industrial world. Actually, new centers of industrial superiority were created as a result.
Japan’s success is also an indicator of the importance of quality as a strategic variable. When it looked like Japan could only hope to carve out a niche as a producer of outdated Western goods for the Asian market, Japanese leadership came to the conclusion that it could play a leading role in global industry by changing its quality image; a change made by producing quality goods for a sustained period of time. The Japanese learned from the price they paid for their reputation for inferior-quality products. They learned that quality reputations are built by producing quality products with a painstaking attention to detail and craftsmanship. They were also willing to make the necessary investment in human resources and technology needed to improve their quality image.
Synonymous with the improvement in quality was a profound improvement in Japan’s position in global markets. From a weak position in the television market in the 1960s, Japan became the world’s largest producer and exporter of household television sets in the world. They are sure to dominate the market for the coming revolution in high-resolution television. They totally dominate the VCR market and are challenging companies such as Intel in the market for large-scale integrated circuits.
In the early 1960s North American, British, and German motorcycle manufacturers lead the market. Today, Harley-Davidson is the only serious competitor for Japanese made motorcycles. In fact, Harley-Davidson teetered on the brink of nonexistence until wholeheartedly adopting Japanese manufacturing techniques, most notably just-in-time and Total Quality Management. Another example, Xerox, suffered embarrassing market share losses to Japanese manufacturers Canon, Sharp, and Minolta.
The emphasis placed on quality by Japanese manufacturers has been continuous since the inspiration derived from the first visit of Dr. W. Edwards Deming. Today, Japan is certainly seen as the worldwide symbol of quality. While Western firms measure quality in parts per thousand (the acceptable quality level or AQL), the leading Japanese manufacturers are achieving defects that are barely measurable, perhaps 3.4 defective parts per million. The Japanese turnaround in quality can clearly be attributed to such variables as worker training, employee involvement, and firm wide delegation of authority and responsibility for quality. A change in attitude and vision on the part of Japanese top management brought quality to the forefront as a strategic mission, one that allowed them to liberate the creative talent and resources necessary for long-term improvement and the eventual mastery of the quality concept.
RESPECT FOR PEOPLE
There are a number of facets to the Japanese respect for and treatment of workers. One of the most prominent is lifetime employment, which gained notoriety from William Ouchi’s book “Theory Z”. When many Japanese workers are hired for permanent positions in major industrial firms, they can generally consider it a job for life. However, this kind of benefit applies only to permanent workers, about one-third of the Japanese workforce. It is felt that if workers can stay with one firm for life, they more easily identify with the firm’s goals and objectives.
Unlike the case for American labor unions, workers who are members of Japanese labor unions identify more with the company than the type of work they are doing. Also, Japanese unions tend to share the management’s view. The better the company performs, the more the worker benefits. As a result, Japanese management believes in giving the workers more opportunity to expand their job boundaries rather than waiting until the worker proves himself. The Japanese also spend more on education and training, for all levels, than any other industrial nation. Also, because the Japanese believe that robots free people for more important tasks, they have invested heavily in robotics and automated equipment, making theirs perhaps the most automated manufacturing sector in the world.
Another area in which Japanese management has successfully tapped into worker potential is in the use of small group improvement activities (SGIA). One example is quality circles, a small group of volunteer employees who meet once a week, on a scheduled basis, to discuss their functions and the problems they are encountering. They then propose solutions and make a sincere attempt to implement real change.
Finally, the Japanese believe in what they call “bottom round” management. This concept, sometimes called consensus management or committee management, is an innate part of Japanese culture. It involves a slow decision-making process that attempts to reach a true consensus rather than a compromise. While the decision-making process is slow the implementation process is quite fast.
ELIMINATION OF WASTE
When the Japanese say elimination of waste they mean anything other than the absolutely essential minimum amount of workers, equipment, and materials necessary to meet demand. This means no safety stock, no inventory stored for use in smoothing production requirements, and so forth. If it can’t be used right now it is considered waste.
A number of concepts are central to this idea of waste elimination. Instead of building a large manufacturing plant that does everything, the Japanese tend to build small plants that are highly specialized and form them into focused factory networks. It is difficult to manage a large facility; the bigger it is the more bureaucratic it tends to be. Bureaucracy is not conducive to the Japanese style of management. Also, a specialized plant can be more economically constructed and operated.
Along with the idea of smaller plants, the Japanese make considerable use of group technology. Japanese engineers examine each operation required to make a part and attempt to group dissimilar machines into clusters designed to be work centers for a given part or family of parts, thus eliminating or at least greatly shortening the time necessary for set-up and changeover.
Just-in-time (JIT) production is an important part of waste elimination. In fact, JIT has often been defined as the elimination of waste. JIT is the production of precisely the necessary unit in the correct quantity at the correct time in order to maintain perfect performance to schedule. Over producing is considered just as bad as under producing since unnecessary inventory would be wasteful.
In order for JIT to work effectively, production must flow smoothly. Any changes can cause disturbances in the flow, which can be amplified throughout the supply chain, causing disruptions and delays. In order to ensure a more uniform flow, the Japanese adopt a uniform plant load. This means that they simply plan to build the same mix of products each day. If you run some of everything you need each day, it only takes one day before you have more (as opposed to large lot sizes which tie up capacity for lengthy periods, causing delays in shipping).
Uniform plant loading requires that everything be produced in small lot sizes, implying that the number of set-ups required will increase. The principle of economic order quantity (EOQ) states that as lot sizes increase set-up costs decrease but as lot sizes decrease set-up costs increase. Therefore, this emphasis on small lots requires that set-up times be minimized. Instead of taking established set-up times as a given, the Japanese have managed to reduce set-up times tremendously, often to the point of single digits (i.e., less than ten minutes).
The Japanese also use a self-regulating system for production control known as kanban. It uses dedicated containers and recycles traveling requisitions/cards (often known as kanbans themselves) to regulate the system. It is also referred to as a “pull” system since the authority to produce or supply comes from downstream operations.
Finally, the Japanese utilize a number of quality control techniques to ensure maximized quality and minimized waste. Among these are jidoka, bakayoke, and poka-yoke.
Jidoka is a quality concept that means “stop everything” whenever an error occurs. It is controlling quality at the source. Instead of using inspectors to find problems someone else created, the Japanese worker is his own inspector, responsible for his/her own quality. When an error or defect is discovered, the worker has the authority and the responsibility to halt the production process. Usually, this is controlled by some mechanism such as push buttons. When the line stops, lights flash, bell ring, and flags wave as all attention is directed at the problem.
The Japanese also believe that, whenever possible, inspection should be performed by a machine, for the sake of speed and accuracy. A technique known as bakayoke is used for this purpose. Bakayokes are devices that are attached to machines to automatically check for abnormalities in the process, such as malfunction or tool wear, as well as measuring dimensions and warning when tolerances are close to being exceeded. For manual assembly, the Japanese utilize poka-yoke or mistake proofing.
Today, all these Japanese techniques have been repackaged and are now know as “Lean” management techniques. Even though JIT, kanban, and other tools have not changed in their application, the new “lean” label has removed some of the Japanese stigma and has made the tools more palatable. With the introduction of the lean label has also come a broader application of these principles to where they are now being used in the service sector and in the front office, with the same high degree of success.
A keiretsu is an organizational structure unique to Japanese major corporations. While not all major Japanese businesses are keiretsu, most of Japan’s major corporate entities are. Moreover, the influence of the keiretsu on the Japanese business world is important even to non-keiretsu organizations. There are two types of keiretsu: the classical keiretsu and the vertically integrated keiretsu.
The so-called Big Six Japanese business groups are all examples of classical keiretsu. These are the Fuyo/Fuji Group, Sumitomo, Sanwa, Mitsui, Mitsubishi, and Daiichi-Kangyo Ginko. Classical keiretsu are bank-centered with no specific central industry.
While not considered classic keiretsu, many major single-industry companies in Japan are increasingly becoming viewed as vertical keiretsu. These include Hitachi, Toyota, Nissan, Toshiba, and Matsushita. These keiretsu are more pyramid-shaped, with a single industry or company at the pinnacle of the pyramid and the member companies collected beneath.
Japan’s keiretsu are not single entities. Each keiretsu is formed of an interdependent collection of individual firms woven into a common enterprise. In this, the keiretsu are similar to the Korean chaebol, but there the similarities stop.
The keiretsu form a type of family of member companies, each connected to the others through cross-shareholdership. In other words, each company within the keiretsu holds significant shares of stock in each of the other keiretsu members. The companies remain independent of each other, and are not subsidiaries of holding companies, as holding companies were outlawed after World War II.
Additionally, the size of the keiretsu corporate families can be deceptive. Most keiretsu have well over 100 members, while many far exceed that amount. Hitachi alone has over 680 member firms and subsidiaries. While shareholder control is coordinated, technically the stock of each member firm in the keiretsu can be traded independently.
In the classical keiretsu, member firms share in the compositions of their boards of directors or council of presidents. While legally independent of each other, the boards of directors for each member firm are largely made up of the same members.
Although a coordinating role may be given to the head of the central bank around which the keiretsu is formed, there is no central president in a classical keiretsu. For example, its Twenty Presidents Council governs Sumitomo. This is the council made up of the presidents of many companies that bear the name Sumitomo, such as the Sumitomo Bank, Sumitomo Chemical, Sumitomo Metal Industries, Sumitomo Metal Mining, and so forth. Yet not all members of the Twenty Presidents Council run companies with the name Sumitomo in it. Thus, both the Japanese giants NEC and Nippon Sheet Glass are central members of the Sumitomo keiretsu, despite the name difference. In addition to the twenty member firms whose heads comprise Sumitomo’s Twenty Presidents Council, the Sumitomo keiretsu has reach through its affiliated companies. These are often giant industrial concerns who have strong relationships to the Sumitomo keiretsu’s central members or which have close ties to Sumitomo Bank. Among Sumitomo’s affiliate companies are some of the most important companies in Japan, including Mazda Motors, Daishowa Paper, Asahi Breweries, Sanyo Electric, and Daikin Industries, among others. The relationships can be even more confusing when one takes into account that some companies bear the name Sumitomo that are not members of the central twenty Sumitomo keiretsu members. Instead, these companies are affiliated companies only despite names such as Sumitomo Precision Products, Sumitomo Rubber Industries, or Sumitomo Seika products.
Nor is Sumitomo exceptional among classical keiretsu. Indeed, it is considered the most closely unified of the Big Six classical keiretsu. A popular saying in corporate Japan is “Sumitomo for unity,” indicating that the ties and connections of Sumitomo’s member companies are the most closely knit (which also makes them the most transparent).
At the other extreme, Daiichi-Kangyo Ginko, itself formed only in 1978 through the merger of two major bank-centered keiretsu, is highly complicated and is still in a state of settling its affairs out. Nevertheless, Daiichi-Kangyo is clearly run by its own Council of Forty-Seven Presidents centered around Daiichi-Kangyo Bank.
In any case, it is the coordination of shareholderships and directorships that allows the members of the classical keiretsu to act in concert financially, since members use the keiretsu’s select bank and insurance companies. The banks, in turn, give favored treatment to keiretsu members, enabling comparatively easy access to financing of keiretsu projects.
Classical keiretsu often have no single industry on which they focus their output. Yet is their goal to create what is called a “one-set” principle. In the “one-set” principle, keiretsu members attempt to create a situation in which they would never have to rely on non-keiretsu firms to produce an end-product.
VERTICALLY INTEGRATED KEIRETSU
More common than the classical keiretsu is the vertically integrated corporate giant that focuses on a single industry. Technically these giant companies may not be viewed as keiretsu, since they have no central bank and do tend to have a specific company with a single leader as their chairperson. Yet these corporate giants are increasingly beginning to resemble keiretsu in most other respects. As a result, it is unclear as to what is and is not an actual keiretsu.
Giant Japanese companies such as Toyota have begun to control enough subsidiary companies to attain a “one-set” principle. These large companies have become a sort of vertically-organized keiretsu that have grown out of a central manufacturing company. Thus companies like Toyota can be viewed as a single-industry keiretsu.
For example, beneath the central Toyota Motor Corporation are 12 direct group companies each tied only to a specialized function in the production of Toyota automobiles. These include Toyota Central R&D Laboratories, Kanto Auto Works (car assembly), Toyota Auto Body, Toyoda Machine Works, Toyoda Automatic Loom Works (which despite its name produces car engines), Aichi Steel Works, Toyoda Gosei (resin and rubber products), Toyoda Boshoku (air filters), Toyota Tsusho Corporation (the keiretsu’s wholesaler), Towa Real Estate, Aisin Seiki (auto parts), and the giant Nippondenso (electronics).
Many of these twelve direct group companies, in turn, control several of their own subsidiaries. Thus, Nippondenso controls Nippon Wiperblade, Asmo, Tsuda Industries, and Anjo Denki, and so on. Similarly, Aisin Seiki controls Aichi Giken, Aisin Takaoka, and Aisin-AW.
In this way, Toyota’s orientation is vertical and spreads downward in a pyramid of related companies. Like the classical keiretsu, Toyota also has many closely affiliated companies it does not control directly. Thus several companies are part of the greater Toyota Group without formally being part of its actual structure. These are controlled not by bank loans, as in the classical keiretsu, but by supplier dependence. Among the many major Japanese firms affiliated in this way as part of a greater Toyota keiretsu are Kyoho Machine Works, Chuo Spring, Trinity Industrial, Tokai Rika, Aisan Industries, and many others.
Nor is Toyota in any way atypical for vertically structured single-industry keiretsu. Similar relationships exist for Nippon Steel, Nissan, Hitachi, and Toshiba, and dozens of other large Japanese concerns.
OF MEMBER FIRMS
Most keiretsu member firms act with considerably greater independence than subsidiary firms of large U.S., Canadian, or European companies. The Japanese firm that is a keiretsu member is highly specialized, and thus less able to stand as self-sufficient than its non-Japanese counterparts. Yet while this dependence in effect coordinates their actions with the keiretsu as a whole, the leaders of the keiretsu member firms make agreements and arrangements far separate from their central bank or parent company.
Indeed, several vertically organized keiretsu members, far from acting in the subservient role of the Western corporation’s subsidiary, have grown to be the dominant members of their keiretsu. Toyota Motor Corporation, for instance, grew from a dependent member of the Toyoda Automatic Loom keiretsu in 1937 to become the dominant member of today’s Toyota keiretsu, under whose umbrella its former parent company now stands.
Because so many keiretsu members act independently, there is considerable overlap of commitments within industries. This is compounded by the fact that most keiretsu have strong commitments to reaching beyond the borders of Japan to integrate more fully into the global economy. Perhaps this is nowhere better illustrated than in the automotive industry. For example, IBC Vehicles is a joint venture between Isuzu Motors and the U.S. automaker General Motors. Subaru-Isuzu Automotive is a joint venture between Fuji Heavy Industries and Isuzu Motors. Fuji Heavy Industry, to point out just one cross-affiliation, is a major components supplier to the Italian company Fiat. Fiat is a supplier to Mazda while Mazda is tied closely to the U.S. automaker Ford. This brings one around full circle since Ford and General Motors are major competitors. The web of relationships can go on for dozens of other ties as well.
ORIGINS OF THE KEIRETSU
Whatever the direction of the classical and vertically integrated keiretsu, it is in the past that the keiretsu as an organizational structure has its source. The keiretsu have a long history in Japanese society. The keiretsu evolved directly from Japan’s pre-World War II industrial groups called zaibatsu. These zaibatsu were family-dominated, and resembled the chaebol structures that dominate South Korean industry today. Most of the leading zaibatsu families came to power during Japan’s rapid industrialization following the Meiji Restoration in 1868; however, the companies’ corporate organization and even some of the key families had their roots in Japan’s feudal period. By 1945, four zaibatsu (Mitsui, Mitsubishi, Sumitomo, and Yasuda) controlled fully one-fourth of all Japanese business.
After World War II, U.S. occupation forces dismantled the four main zaibatsu as well as six smaller ones, blaming them for Japan’s militarism. The zaibatsu members, in turn, simply came together again to form new entities centered on common business needs and relationships. The keiretsu that took their place were essentially identically to the pre-war zaibatsu with one main difference: the keiretsu centered on a bank and common financial resources in place of the earlier kinship ties of key individuals. Ironically, when reformed as keiretsu, the former zaibatsu members were given an excuse to drop the less profitable member firms, thus making the punitive measures imposed by the American occupation forces a sort of blessing in disguise. Three of the four leading pre-war zaibatsu reformed under the same name. The last of the four great pre-war zaibatsu, Yasuda, joined with many firms from the smaller dismantled zaibatsu (such as the Asano and Nezu zaibatsu) to form the Fuyo Group centered around Fuji Bank.
NEGATIVES OF JAPANESE MANAGEMENT
Despite their success, some do not see Japanese management techniques as the panacea others credit them as being. Even though research has shown that management techniques developed in Japan can be successfully applied in other countries with remarkable results, critics claim that their success comes not from catering to intrinsic values but to an array of stifling constraints unlikely to be tolerated in the West. Rather than a carefully nurtured atmosphere of trust and common enterprise, they see a restrictive system of internal controls. Much of this criticism has come from labor unions. It has been noted that workers in JIT systems have more stress than their counterparts in more traditional systems. Stress is seen to originate not only from additional authority and responsibility, but also from the fast-paced system where there is little slack and a continual push to improve. Apparently, some see the authority and responsibility delegated to the worker as a way for management to further burden the worker without a comparable increase in take-home pay. Constant improvement through use of kaizen, just-in-time, and Total Quality Management is felt to be within the purview of management not the worker.
There is really no mystery to the success attributed to Japanese management. The Japanese were convinced that a shift, caused by natural competitive forces, was taking place worldwide. They then rode this change, which was international in scope, to financial success by becoming the premier producer of products known for quality. They were prepared to sacrifice short-term financial results in order to invest for the long-term in superior quality; a variable consumers would soon demand.
Consumers are still showing their confidence in Japanese goods by purchasing what they see as commensurate quality at a fair price. Japanese produced television sets, for example, have an average life span that is twice that of similar sets produced in North America. Any country that can manage to achieve this kind of quality and parlay it into a strategic weapon should continue to have a competitive position within the markets in which it competes.