JAPANESE MANAGEMENT
TECHNIQUES

In the post-World War II era a set of Japanese cultural patterns and managerial practices came to be known collectively as the Japanese management style or Japanese management techniques. Many of these techniques were credited with helping vault the Japanese economy to its status as the world's second largest, behind only the United States, and with making Japanese businesses, particularly in the manufacturing sector, more competitive than their international counterparts. In the wake of Japan's prolonged and arduous struggle with recession throughout much of the 1990s, however, many observers—both inside and outside Japan—have called into question the effectiveness of some traditional Japanese management practices. As a result, at the dawn of the 21st century Japanese management techniques are more than ever in a state of flux, as scholars and business leaders alike reconsider which practices work and which don't.

HISTORICAL CONTEXT

Although Japanese management techniques and economic strategies came to be recognized in Western countries only during the postwar period, their origins are considerably older. Most directly, their origins can be traced to at least the latter part of the 19th century, when a Western influenced modernization program began under the new monarchy created in the 1868 Meiji restoration. In part as a response to the bitter European colonization experiences of its Asian neighbors, the new Japanese government began to open the Japanese economy and society to controlled outside influences in order to stave off any Western conquerors.

Some recognizably modern practices arose during the Meiji period. Even then, when the Japanese economy was still shedding the trappings of feudalism after centuries of closure to foreigners and slow technological development, heavy emphasis was placed on developing domestic imitations of—and innovations on—Western goods, rather than relying on imports. The practice was summarized well under a slogan of the era, "Japanese spirit, Western technology."

This ambition to preserve the character of the Japanese culture and the autonomy of the economy can be seen in 20th-century practices at both the macro- and microeconomic levels. In the national economy it is evidenced by long-standing restrictions (direct and indirect) on imports into Japan and the concomitant trade surplus Japan has maintained for years. At the company level, the same motive helps explain the prevalence of the Japanese keiretsu, the large and complex families of interdependent companies centered around their own banks (e.g., Sumitomo, Hitachi, Mitsubishi). In theory, at least, these firms can avoid "importing" their raw materials, components, or even capital from "foreign" (i.e., unaffiliated) companies by sourcing these goods from within their extensive organizations.

PROFILE OF TRADITIONAL JAPANESE
MANAGEMENT PRACTICES

Rooted in these and other historical traditions, some of the other key practices commonly associated with Japanese management techniques include:

• in-house training of managers
• consensual and decentralized decision-making
• extensive use of quality control methods
• carefully codified work standards
• emphasis on creating harmonious relations among workers
• lifetime employment and seniority-based compensation

It is important to note that these are generalizations according to a conventional formula. There have always been variations, and, as noted above, some aspects of these practices have been increasingly reconsidered in recent years.

MANAGEMENT EDUCATION.

The education of managers in Japan traditionally takes place on a relatively informal basis within firms. The percentage of Japanese chief executives who have attended university is high, similar to that in the United States and Western Europe. However, very few Japanese executives have attended graduate schools compared to their U.S. and European counterparts. In fact, only one Japanese university offers a degree analogous to an MBA, a key credential for managers in the United States.

Formal education for managers is also not well developed at the undergraduate level. Undergraduate education is not viewed by firms as a means of attaining business skills, and firms base their hiring decisions less on a recruit's knowledge than on general attributes such as character and ambition. Firms do not hire recruits to fill specific occupations. Rather, recruits are expected to be malleable, identifying with the general interests of the firm rather than with their specific role within it. The mentor system is widely used in the early training of management recruits and involves middle-level and senior managers serving as teachers and role models.

The emphasis on in-house education is related to the traditional lifetime employment system, in which management recruits are hired each April following university graduation; they typically would stay with the firm until retirement. The lifetime-employment system makes it probable that a firm will benefit from its investment in training, and also enables the firm to develop long-range plans for training recruits.

Management training is based on regular rotation through a broad range of a firm's operations. Management recruits also frequently begin their careers as ordinary workers on a production line. The pattern of regular rotation enables managers to develop a detailed understanding of a number of varied operations, and thus over time to attain a rich general knowledge of the firm.

Linked with the lifetime-employment system is the emphasis on seniority in compensation and promotion—often over what Americans would take to be "qualifications" for the job. This results in a higher average age and less variation in age among top executives in Japan. Compared to the United States and Europe, for instance, relatively few company presidents are under age 50. This practice is believed to equip Japanese executives with an intricate knowledge about their particular business.

Japanese managers typically take a more long-term interest in their firms than do their American counterparts, partly a result of the lifetime employment and seniority systems. In the United States, managers are typically compensated on the basis of their divisions' performance. This bonus system is not used for Japanese managers, as it is considered detrimental to a long-term perspective and an interest in the firm as a whole.

CAPITAL AND PRIORITIES.

The long-term view of Japanese managers is also based on sources of finance. While American firms rely heavily on capital from the stock markets, Japanese firms tend to rely more heavily on borrowing from banks and generally have much higher debt-to-equity ratios. Consequently, Japanese managers are under less pressure to maximize short-term earnings to please shareholders. By contrast, in the United States there is intense market pressure for companies to meet quarterly earnings expectations—even exceed them—or else face a sell-off of their shares. In general, Japanese firms are more likely to focus on productivity, growth, and market share, whereas U.S. firms are more inclined to concentrate first on profitability.

CORPORATE GOVERNANCE.

While directors from outside the company are common in the United States, they are rare in Japan. The decision-making process in Japanese firms is highly decentralized. In publicly held U.S. corporations, power is concentrated in a board of directors, with each director having one vote. In Japan, both middle and senior management serve as directors. Japanese directors typically retain production-line responsibilities. For example, in the early 1970s, 14 of Hitachi's 20 directors were engineers. This represents another facet of the strong production orientation of Japanese management.

THE RINGI SYSTEM

The traditional decision-making process in Japanese firms is referred to as the ringi system. The system involves circulating proposals to all managers in the firm who are affected by an impending decision. Proposals are generally initiated by middle managers, though they may also come from top executives. In the latter case, an executive will generally give his idea to his subordinates and let them introduce it. Managers from different departments hold meetings and try to reach an informal consensus on the matter. Only after this consensus is reached will the formal document, or ringi-sho, be circulated for approval by the responsible managers.

The ringi system requires long lead times, and thus is problematic in a crisis. In recent years the focus on speeding up decision making has made this approach unpopular at many firms. Nonetheless, one of its underlying principles remains prevalent. That is, when a decision proves beneficial, the middle-level managers who initially advocated it receive credit; when a decision proves unsuccessful, responsibility is taken by top-level executives. This practice is intended to promote aggressiveness in younger managers.

ENTERPRISE UNIONS

One distinctive characteristic of labor-management relations in Japan is the enterprise union, which is organized around a single plant. Consequently, any given company may have several enterprise unions representing various portions of its workforce. Enterprise unions generally belong to a larger federation, but the balance of power is at the local level. Japanese unions are distinct not only because of their highly decentralized nature, but also because they represent both white-collar and blue-collar workers, with union membership open to managers up to the section chief level. The fact that many upper-level managers have moved up through union ranks and may have even served as union officials highlights the generally less antagonistic relationship between labor and management in Japan. Combined with a relatively narrow income gap between managers and workers and the willingness of manager recruits to work on production lines as part of their training, the open membership policies of Japanese unions contributes to the fairly harmonious interaction between unions and management.

Union membership is generally associated with lifetime employment guarantees. Membership varies widely by firm size, and relatively few workers in firms with fewer than 100 employees receive lifetime employment guarantees. Nonetheless, in large firms the lifetime employment guarantee creates an environment in which workers are less likely to feel threatened by technological change. As a consequence, changes in the production process are likely to be undertaken by management and workers on a cooperative basis. More generally, since semiannual bonuses and annual wage negotiations are based on a firm's competitive strength, workers have a large stake in their firm's long-term success.

QUALITY CIRCLES

The extensive use of quality circles is another distinguishing characteristic of Japanese management. The development of quality circles in Japan in the early 1960s was inspired by the lectures of American statisticians W. Edwards Deming and J.M. Juran, in which they discussed the development of wartime industrial standards in the United States. Noting that American management had typically given line managers and engineers about 85 percent of responsibility for quality control and only 15 percent to workers, Deming and Juran argued that these proportions should be reversed. Production processes should be designed with quality control in mind, they contended, and everyone in the firm, from entry level workers to top management, should be familiar with statistical control techniques and undergo continuing education on quality control. In general, Deming and Juran argued that quality control should focus on prevention, with the ultimate goal being to improve the production process until no defective parts or products are produced. Quality circles were one method of reaching these goals.

In Japan, quality circles consist of groups of about 10 workers who meet weekly, often on their own time. The groups typically include foremen, who usually serve as circle leaders. Quality circles focus on concrete aspects of the operations in which they are directly involved, using tables and graphs to communicate the statistical details of their quality issues. In one common format, problems are categorized by materials, manpower, and machines.

Quality circles provide a means for workers to participate in company affairs and for management to benefit from worker suggestions. Indeed, employee suggestions play an important role in Japanese companies. Two associations, the Japanese Association of Suggestion Systems and the Japan Human Relations Association, were developed to encourage this process. Japanese employee suggestions reportedly create billions of dollars' worth of benefits for companies.

SCIENTIFIC MANAGEMENT

Japanese management techniques have been strongly influenced by the tenets of scientific management. Like quality circles, scientific management originated in the United States, only to be more systematically adopted in Japan. The pioneering figure of scientific management is Frederick Jackson Taylor (1856-1915). Taylor is best known for his time and motion studies of workers as part of an effort to optimize and standardize work efforts, but he also argued for a system of bonuses to reward workers based on productivity. These ideas were implemented by Japanese firms as early as 1908, and a translation of his Principles of Scientific Management sold 2 million copies in Japan.

In the post-World War II years, carefully codified work standards and the use of semiannual bonuses for workers became common practices in Japan. Consistent with the Japanese emphasis on teamwork, bonuses are generally allotted to a work group rather than an individual worker. Scientific management emphasizes the role of management in the production process. This is reflected in the more hands-on approach in Japanese management training, as well as the relatively high share of managers directly involved in the production process.

PERVASIVENESS OF ENGINEERS

As with managers, Japanese industrial engineers are more directly involved with production processes than their counterparts in the United States. In his book The Japanese Industrial System, Charles J. McMillan explained that most Japanese companies make few distinctions between engineers and blue-collar workers, although engineers do tend to earn more. They work closely alongside production workers. In addition, Japan produces up to three times as many engineers a year as the United States. Japan's emphasis on production oriented engineering is consistent with its dominant competitive strategy in the postwar years—indeed, since the Meiji era—of focusing on improving existing products or processes rather than developing completely new ones.

NEW DIRECTIONS

While many of the patterns just described continue unabated at some Japanese companies, a variety of forces have caused them to change, often toward Western practices. Since the 1980s, for example, the predominance of seniority-based raises has been gradually giving way to a Western style regime of merit-based pay. Indeed, as of 1995, three-quarters of Japanese companies surveyed allocated at least some of their reward pay based on skills or achievements as opposed to tenure. And more than a few Japanese companies have attacked seniority more directly, explicitly revising policies to diminish or even eliminate it as a criterion in the compensation structure. This trend may be evidence of a cultural shift from valuing length of service to valuing quality of service.

Also mirroring Western trends, labor union membership in Japan has dropped considerably since the 1970s, falling from 35.4 percent of the workforce in 1970 to just 22.4 percent by 1998, according to figures compiled by the Japanese Ministry of Labor. Union participation remains the highest in large companies (those with 1,000 or more workers), where in 1998 membership was still nearly 57 percent. This share was down from 68 percent in 1987, the first year statistics by company size were kept.

Other traditional Japanese practices appear more enduring, notably lifetime employment. Although Japan's economic troubles have meant that some employees have lost their jobs, a continuing commitment to the principle of lifetime employment seems to remain at many companies and in the society as a whole. Still, younger workers (e.g., those under age 30) are decidedly less loyal to companies than in decades past, and there is growing evidence of a rise in professional identification over corporate identification among workers (i.e., "I'm a tax accountant" instead of "I'm a Toyota worker").

Nonetheless, even at the depths of the Japanese recession during the late 1990s Asian financial crisis, companies went to great lengths to avoid outright layoffs. One of the most common practices instead was to reassign workers, either within the corporate family or to other companies, such as vendors the company does business with. These transfers (known as shukko) could be temporary, in which case the worker is still officially employed by the company that has loaned him or her out, or permanent, where the company essentially finds a new job for the employee at another company. Employees who were never considered part of the lifetime staff, such as part-time help, usually didn't enjoy such privileges.

Although most agree that Japanese management has been moving in new directions, academics who study Japanese management practices are divided on how profound the shifts in the Japanese business paradigm really are. Indeed, the gamut of opinions has ranged from declaring the death of the Japanese management system to asserting its overarching continuity and strength. A number of observers see a continued convergence with Western practices, but many believe that, as in the past, the adoption of Western principles and practices will never be wholesale, but will blend with prevailing norms and beliefs in Japanese business and the broader culture.