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Japanese management, recession style
JaDanese Manaaement.
Richard J. Schmidt
apanese business has entered a new management phase. Major corporations are changing their personnel practices by eliminating employee positions. This runs counter to a cultural foundation of Japanese business practices that has enphasized the importance of group harmony, stability, continuity, and consensus decision-making, As in a successful Japanese family, the goal has always been harmony within the group. Indviduality became second in importance to peace in the family. Although the father of the family made the major decisions, the other family members were expected to discuss potential activities among themselves and decide courses of action without conflict. The family as a group took the agreed-upon action. Thus, the Japanese family developed highly disciplined individual members who became obligated to fulfill the group’s purposes. The group harmony provided collective responsibility and the individual was judged on how he contributed to the group. After the Japanese male left the closely knit family unit of his youth, the work organization assumed the primary support role for him. Group harmony, with its stability and continuity, combined with consensus decisionmaking became the pillars of the ‘LJapanese management style” envied by the rest of the industrial warld. Just as a family provides ;I lifetime of association, Japan’s growing economy and successful major corporations have provided life-long association through employment for their professional
J
and managerial employees. Professional, technical, and managerial employees were hired at the entry level so that all employees could be trained in the one corporate way of doing business. This did require companies to spend a substantial amount of time and money in training new hires. But because the corporation replaced the parents as the all-encompassing support group for the new college gmduate employee. it was extremely important to build a group cohesiveness and interdependency within the corporate employees. A series of decade-long corporate training programs emphasized the corporate culture until it became clearly understood by all. No major corporation would think of “headhunting“ a key employee from another majol corporation, or consider employing an experienced person from any other segment of the Japanese economy. The Employment Security Law of 1947 blocked employers from advertising for labor and from hiring any worker whose job change required a change of residence. The law also made it illegal to fire employees. A person entered at the bottom of the corporate hierarchy if he wanted to join the corporate group. If an employee LXX not happy with his job, there were few opportunities to change employers. Corporate managers paid abund3nt attention to the selection, training. and development of employees. “In Japan the job is the society, and the society is the job” reported Frank Gibney (1979). “Every man who enters the company equally shares in it.” Assignments were given to teams of employees rather than to individuals. Japanese firms recognized :md felt responsible for the whole m:m, with his interrelated social, psychological, and economic needs. Managers’ commitment to uniform employment levels. even in recessions, built 21long-term perspective among all employees. Seniority became the basis for most promotions. Senior managers were protected by their seniority from being leapfrogged
by junior staff in promotion considerations. The older, more experienced staff were expected to mentor their younger staff. Over time, the obligations of belonging to such a close-knit group developed a strong loyalty to fellow employees and to the corporation.
Economic Slowdown Forces Changes Japanese economic growth from the end of World War II until the oil crisis in 1973 WZi 9 percent annually. From 1973 to 1990, the growth rate was halved to 4 percent per year. However, the economic slowdown, beginning in 1991 and continuing to this day (the Heisei Recession), has reduced economic growth to only 2 percent annually and forced Japanese corporations to evaluate ways of restoring profitable operations. For the first time since 1945, Japanese companies have not had a steadily increasing market to absorb their growing work force. A large number of workers were added to the corporate ranks during the boom years of the second half of the 1980s when companies expected to grow steadily for many years. Overstaffing of Japanese firms in 1993 has been estimated at two million employees. The objective of each business has changed from sharing the market to cost-cutting for corporate survival. Although Japanese corporations were constrained by past practices and do not change rapidly, reengineering concepts identified employee payroll costs as a major cost reduction target. These cost reduction programs have been twofold: (1) moving production facilities offshore and (2) reducing the number of employees in Japanese plants and headquarters. Both programs have resulted in reducing the number of clerical, production, professional, and managerial Japanese employees in major corporations.
Production Moved To Off-Shore Locations Moving production facilities to off-shore locations has hollowed out major corporations within Japan. As new production facilities are needed to add product lines, replace older outdated plants, move to cheaper labor sources, or respond to political pressures to build plants in major export market areas. production and professional employees directly associated with local production facilities have been dismissed. Sony, Matsushita, and Toshiba use off-shore provided parts as the basis for price negotiations with competitive Japanese parts suppliers. TDK Corporation traditionally has been a very competitive electronic parts maker for color television. S. Iwaya, TDK Executive Managing Director. was quoted as saying, “When the consumer electronics companies who are our customers move, we have no choice
Japanese
Manafpment,
Recession
Style
but to move with them.” TDK’s non-Japanese production, mostly from China, has reached 50 percent of the company’s output. Sanyo Electric built an Indonesian VCR plant half as large as its Japanese facility, then upgraded the foreign capacity in 1994to nearly match the Japanese plant. When that happened, Sanyo’s managing director Yagata was quoted as saying, “Osaka (Sanyo’s headquarters) will become completely hollowed out. There’ll be a labor surplus that extends to our affiliated plants.” Some Japanese technical assistance was moved to the new off-shore site in the form of supervisors or technical employees, but the vast majority of plant jobs were filled by nationals in the plant area. A 1994 survey of 101 major Japanese manufacturers indicated that operations moved abroad were concentrated in the mass production of general purpose or commodity items. Of this same group of respondents, 55 percent said they planned to move their general purpose manufacturing facilities off-shore within three years. The operations most likely to remain in Japan were basic research, applied research, prototype production, and design and development. The employees left in Japan were a hollow core of their former number and consisted of high-level management, central support personnel, and those involved in R&D activities. Technological developments and innovation will continue from the Japanese locations because manufacturers traditionally work closely with their suppliers in designing products and improving manufacturing techniques.
More Temporary Employees In addition to moving plants off-shore, making permanent employees into temporary ones has been expanded in Japanese industry. Since World War II, most major corporations have used temporary or short-term employees for most clerical and lower-level professional and technical positions even more extensively than in the United States. These employees have no implied lifetime employment guarantee rights, nor are they extensively trained by the corporation. In fact, they are specifically exempted from the non-firing provisions of the Employment Security Law of 1947. Now in many corporations the permanent, middle-level, long-term professional and managerial employees have been added to the temporary employee category. This personnel shift away from lifetime employment guarantees has been a major change in Japanese business practices.
Employees Moved To Suppliers A third payroll reduction technique involved shifting employees from major corporations to
their component suppliers. Major corporations, called first tier in Japan. have required their main supply companies, the second tier, to add the excess employees to their own payrolls. The second tier corporations include many small and medium-sized firms who have never practiced lifetime employment for their employees. Many of these companies supply the major first tier corporations with components, parts. or service and work closely -with their first tier customers. The first tier corporation may be the only principal customer of the dependent and smaller second tier company. Strongly supported “just-intime” inventory techniques ha\,? reinforced the close corporate working relationships. When the large corpol-rations realized costcutting measures were necessary. one of their early personnel responses was to transfer current employees to their suppliers. Because of the close dependent relationships. the suppliers \\rere obligated to add these shifted employees. gencr-
These people were workers from curtailed production from ~~fe#~me employment lines, middle manguarantees has been a agers over 55, and surplus technical major change in Japanese managers. When business practices, ‘I suppliers were not available, Nippon Telegraph and Telephone created independent subsidiaries and transferred 5,000 employees to them as the initial staff. Takecia Chemical Inciustries has tried to avoid early retirement pressure and employee transfers to subsidiaries. K. Takeda. the new company president. said, “Our whole tradition is to avoid personnel adjustments.” He pledged to reduce 3,500 positions by attrition from the work force of 11,000. Reduced hiring of new employees was conbined with this practice at the first tier corporz tion. The second tier company often eliminated new hiring entirely hecause the company had acquired a significant number of employees from the first tier company they didn’t really want. Automakers have modified this technique. Koji Endo, first vice president at Lehman Brothers Japan. stated, “Automakers have nearly eliminated all seasonal workers and are transferring employees to affiliate dealerships. But that strategy is reaching its limit.”
“Thispersonnel
siwawuy
Forced Early Retirement
A fourth new Japanese personnel practice is requiring middle managers over 55 years of age to retire if jobs are not available in associated second tier companies. Traditionally, if a person’s 72
long-term performance record was poor, Japanese corporations would consider him for early retirement-even as early as in his late 40s. One Japanese nationwide chain store, the Nagasakiya Company, has begun to demote incompetent managers based on the company’s performance evaluation system. The corporate headquarters’ personnel division prepares a list of the managers who score in the bottom 25 percent in the annual evaluation. The number of managers targeted for demotion could reach 10 percent (870) of the total number of rnanagers in the company. Some first tier corporations have tried to maintain the illusion that managers are never fired. Over a tn-o-)‘ear period, for example, Nissan managed to find jobs for each of its 2.000 employees working in the now closed major Japanese automobile assembly plant. Nissan has tried to adhere to the lifetime employment policy, even though such adherence helped \viden carporate financial losses over the two-year period. Stories are told about other Japanese staff reduction practices. One manager reached 57 years old and was told to quit. He replied. “I have plans which involve retiring at 60. I can’t quit for another three years.” His IXY+Ssnapped back. “I don‘t gix-e a damn about your personal plans. Just quit! We don‘t need you any more.” Other tactics have been used to induce employees to quit or take early retirement. Making them do jobs for which they have no talent or expcrience, demoting them. transferring them to the company‘s most remote location without their family, and giving them meaningless \vork or no work at all also have been used. Losing one’s job mczms an employee must relinquish his company subsidized housing and go looking for a new home. The increased use of these new personnel practices create serious repercussions in employee morale that have just begun to be felt in Japanese industries. After a period of lost conpany sales and layoffs. 3 1993 early retirement solicitation at Alps Electric resulted in the majority of its skilled workers quitting. Forced retirements and lay-offs have been described as trcating long-term employees not as human beings but as commodities. The demise of lifetime employment in first tier corporations and the techniques Japanese firms have used to reduce payrolls have seriously weakened the ties employees have to the corporation. besently, Japanese employees work long days--often 14 hours regularly-without overtime considerations, six-day work weeks, and more or less mandatory participation with fellow employees in nightly after-work festivities. This leaves little time for private or family activities. Leisure activities are concentrated on Sunday and during the periodic company picnics. Because
the husband is usually the sole salaried employee in a family, the wife is left to raise the children with little help from her husband. For the first time, the new personnel practices have made the Japanese employee question the practice of total commitment to the corporation. Reengineering has been praised for setting goals, but it has also sanctioned layoffs as a means for change. Japanese have described this U.S. technique as destroying workers’ spirit. Yet the absence of lifetime loyalty to workers is being personally questioned by both white- and bluecollar employees in all age groups. Because loyalty is viewed as a two-way street, laid-off employees have begun to raise the question, “Is my life more than just work?” Effects of Personnel
Policy Changes
Forced Retirement. A possible fallout from these altered personnel practices is a shortened performance horizon for the Japanese business executive. Forced early retirement has not yet affected the executive ranks as it has the middle manager level. However, the selection of who will be forced to retire raises the question of individual performance evaluations. Evaluations. Up to now, groups of employees hired together were treated similarly with raises, job assignments, and promotions for a training and development period that often lasted 10 to 15 years. Frequent job changes within the same age group to broaden career backgrounds softened the importance of slightly higher assignments. Social events within the company even included an annual celebration of the group joining the corporation. Only at the very high corporate levels did significant selection take place. Now individual performance measurements for promotion, retention, and merit pay have introduced competitive factors between employees. This is the Western style of business that had not been considered before in the Japanese policy of group cohesiveness and harmony. In the past, Japanese have viewed competition between workers as undesirable. Personnel tests after World War II showed that Japanese worker performance deteriorated under competitive conditions. Emphasis was placed on developing and improving an individual’s skills, rather than on competition with each other. But corporate merit competition has shifted the emphasis to individual performance and away from employee group success. Asahi Breweries, for example, has introduced a revised personnel evaluation system to include more levels of management and to tie evaluations and promotions closer together-an idea that most of Asahi’s younger employees have calmly accepted. The company’s chairman has used the system to
Japanese
Management,
Recession
Style
double the number of internal promotions each year. Matsushita Electric Industrial also converted its employee system to one based on merit. Professional knowledge, skills, and performance affect 90,000 employees-excluding management. Merit Pay. In 1992, Honda Motor introduced a merit pay system for its 4,500 managers. Although it was not well received at first, the company and employees found there were only minor discrepancies between a person’s self-evaluation and his supervisor’s evaluation of him. At Nippon Steel this year, managers will begin a procedure whereby they will have to prove in a lengthy interview that they achieved their goals if they want an increased bonus (as much as 25 percent of a worker’s salary). The new system is targeted toward the 50 percent of the 8,000 managers who are in their 30s and 40s. Seniority for pay and promotions will be gradually phased out. However, in an effort to assure office harmony, everyone will still receive a basic bonus. A 1995 survey by the Japan Productivity Center for Socio-economic Development found that 67 percent of the 242 sampled employees working under discretionary pay systems said they were satisfied with the salary arrangements. Reasons companies listed for not adapting merit systems included not having a method of evaluating results (61 percent) and legal restrictions (44 percent). Of the 334 publicly traded companies who responded to the survey, only 3 percent had adopted a merit pay system, but 70 percent of those without such a system said they were interested in adopting merit pay. A second survey conducted by two business newspapers, the Nihon Keizai Shimbun and the Wall StreetJournal, showed a less optimistic outlook of the Japanese worker. When asked about job satisfaction, 15 percent of the Japanese respondents said they were very or fairly satisfied with their jobs, whereas 53 percent in the U.S. responded favorably to the same question. When asked about the current business climate, 49 percent of the Japanese and 36 percent of the Americans thought business conditions were bad in their home country. Short-term View. Japanese first tier corporate executives have the reputation of viewing corporate success over the long term. With lifetime employment guarantees until they chose to retire, yearly corporate results did not have a
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direct bearing on their personal success. The emphasis was on long-term accountability because the results of decisions made today could be answerable only in the future when the same group of executives were still in the corporation, Now, however, will up-and-coming executives make decisions to benefit the short term and make themselves look especially good? Or will they continue to think of the long-term strength of the corporation? Compensation. Generally, Japanese CEOs draw a straight salary without any stock option considerations. This is because deferred compensation is informally prohibited by the Finance Ministry. Low overall executive pay is a part of the strong egalitarianism that permeates the East Asian culture. The tight lid on top salaries has been a key part of the systematized seniority salary system that is now weakening throughout Japan. The systemization has reached the level at which all starting pay rates are published in public financial reference books and are identical at the major firms within an industry. Compensation has included the use of a corporate car, housing assistance, and vacation benefits. As competition enters the personnel practices of corporations, the Japanese executive may insist on deferred compensation in the form of stock options because of the new internal competition for his job. Temporary Employees. Moving to the use of temporary employees as the major labor source also has risks. Specific process and conpany-related skills are not always available in a labor pool, even one composed of highly skilled individuals. Japanese industry recognizes this fact fhe somewhat; as Sharp’s Deputy General Manager Kazusa said, “We’ll help any parts company that wants to go into a new field, but I doubt that companies that have relied on part-time labor and have no special technology will be able to survive.” Nippon Telegraph and Telephone recently cut SO,000 staff members from their payroll of 220.000. To retain a portion of the skills lost and help soften the financial impact on the individual, the company has introduced ;I yearly contract system to temporarily rehire some of those who took early retirement. Labor Unions. Staff reductions have led to increased union activity. Historically, Japanese labor unions have been company unions and
psrsonnel changes have resur”&X$ in colkpse of
then only present in major corporations. Pay negotiations and personnel policies have been agreed upon without any noticeable labor strife. Worker-management harmony was built on the foundation of lifetime employment and group harmony. Although this situation has been called “lapdog” unions by some Japanese, it has led to labor peace in a growing economy. The economic stagnation and resulting detrimental personnel changes have resulted in the collapse of some docile unions and the formation of new active ones. At Rohm’s Apollo Electronics subsidiary, forced early retirements of 80 junior staff members were the motivating factor for 20 employees forming a new union organizing committee. Division and department heads had called in the targeted employees one by one and coerced them into signing the consent form to take early retirement. When some employees cornplained to the old union, its only response was to parrot the company line. The company’s union tacitly accepted the early retirements and then quietly disbanded. A senior employee and a member of the organizing committee was quoted as saying, “I’ve been active in the Japanese labor movement for 20 years, but that’s the first time I’ve seen a company’s primary union disband.” Managers at all levels are excluded from union membership. Rut with forced retirements reaching into management ranks, middle managers felt compelled to form a trade union. Thus, the Middle Managers’ Union was initiated in December 1793 for employees who are not represented by another union. This included corporate mid-level managers and employees of smaller companies without labor unions. The union has engaged in group negotiations and intercession when forced resignations, unfair dismissals. or malicious transfers were involved. For middle managers of first tier corporations who have been immersed in the Japanese corporate culture all their working lives. it is extremely difficult to take action against the same company that has been their home and community. Joining an active union for job protection was an act of frustrntion, anger, and hurt toward firms they thought were supposed to take care of them. New Hires. The hiring of new employees. including college graduates, has been seriously slowed or stopped in some companies. Mazda Motor Corporation did not hire any new college graduates in 1795, nor does it plan to hire any in 1776. Sakura Bank hired 400 new graduates in 1795 but plans to reduce hiring to 100 in 1796. All 11 Japanese city banks have reduced the number of college graduates employed in 1795 by 35 percent from 1794. One exception is the pachinko pinball game operating chains, which are frequented by all economic levels and located in most Japanese
neighborhoods. New Alpha KK hired 80 college graduates in 1995 and plans to hire 130 in 1996. Another pachinko operator, Dynam KK, hired 92 graduates for its Tokyo gaming outlets in 1995 and will add 100 next year. Dynam KK’s president says, “Pachinko can offer jobs not only to new graduates but also to experienced workers, the middle-aged, and the elderly.” In Japan, as in other countries, leisure time diversions often are a growth business, even in recessionary periods. A tabulation of job offers to college graduate applicants by the Japanese Ministry of Labor indicates a softened job market. Yearly comparative figures are:
AverageJob Qffeersto College Applicants Compared to the Number of Applicants 66 to 100 64 to 100
1995
1994 1993 1992
71 to 100
147 to 100
Unemployment. With an unemployment rate of only 3 percent in March 1995 and 2.6 percent in March 1994, unemployment does not appear to be a serious problem in Japan. In the U.S., unemployment during the same period has averaged over 5 percent. However, in a country where unemployment is mostly unheard of, these figures give the government and the business community much concern. The Japanese Labor Ministry expects the non-manufacturing sector to absorb continuing layoffs from manufacturing but the resulting unemployment rate to continue near the 2.7 percent level through the year 2000. Company Innovations. Although many of the changes in Japanese business personnel practices have seriously disturbed corporate culture, one trend is very positive. As first tier corporations restructure, many of the second tier suppliers are forced to change their corporate strategy or cease operations. Yoshimi Inc. began developing its own products in 1977 after the major purchaser of Yoshimi’s output moved its production facilities offshore. After entering a price war with foreign suppliers, Yoshimi had to decide either to scale back its operations or to develop a completely different product line. Yoshimi’s president previously had used a shape-memory alloy technique to make complicated metal molds. In addition, the president had once worked for one of only two companies in Japan capable of producing the alloy materials used in the process. So he proposed a joint venture with the nearby alloy producer, and now Yoshimi Inc. has successfully developed and marketed shape-memory alloys for many applications. If the purchaser had not moved offshore, Yoshimi Inc. would not have developed an entire line of new products and grown significantly. Japanese
Management.
Recession
Style
Another example of small firm innovation and survival is the Kitajima Shibori Seisakusyo Company. The firm produces a wide variety of different objects ranging from parabola antennas two meters in diameter to tiny components only three millimeters across. Their production process is based on metal spinning technology, which consists of processing a flat disc of sheet metal into a cylinder by rotating and applying force to it using wooded or metal tools called “spatulas.” Margins of error of 0.1 millimeter or less are required for some of Kitajima’s products. The company president boasts, “I’m proud to say we’ve never turned down a customer for ,’ I lack of ability to do the required job: And once we accept a job, we will accomplish it without fail. We’ve never had a job we couldn’t finish through trial and error-by heating or cooling the metal or modifying the spatula.” Kitajima Shibori Seisakusyo has recently added a number of employees. Labor Force. First tier corporate early retirements have created a new skilled labor force for small companies. When Tokio Mizukami took early retirement as IBM Japan’s head of developmental production, he founded International Manufacturing & Engineering Services (IMES) to develop and produce computer peripheral equipment such as CD-ROM drives and back-lighting for liquid crystal displays. Many IMES products are now sold to the nearby IBM plant. IMES also sells overseas and has a mass production plant in the Philippines. The average staff member is 53 years old and usually has technical experience with IBM equipment. Because IMES has a retirement age of 65 years old and the nearby IBM plant permits employees to retire at 50 with a full pension, IMES can hire the recently retired IBM engineer for 15 years of a productive second career. IMES has benefited greatly from IBM’s early retirement program. Restructuring. Restructuring of major corporations has left market niches previously unfilled. Mayekawa Manufacturing Company has grown to serve 50 percent of the worldwide industrial refrigerator market. Although the overall market is declining, Mayekawa has steadily expanded its market share and profitability. Not only does the company make high-value products different from those of its competition, it also is distinctly different in its corporate structure. The company consists of 100 small firms designed specifically to meet the needs of a single customer or region. Of the 2.500 employees, only a few are in head-
7i
quarters. Most of the affiliated firms have 25 employees or less. The small companies are on intimate terms with their customers and handle everything from requests to complaints. The former are met with meticulous attention to detail, the latter with a rapid response unhampered by corporate red tape. The head office provides support when it is needed. This customer-centered approach has brought growth to the $370 million level. apanese business personnel policies have changed dramatically during the last five years. Spurred by recession, major corporations have reduced their work forces; introduced merit pay, promotions, and personal performance evaluations; moved production facilities offshore; increased the use of temporary employees; and forced early retirements of its employees. These have been unsettling to a culture that prides itself on stability, continuity, and group support and harmony. Although many small and medium-sized companies were dependent on major corporations for their sales, they have seized the opportunity to create new products and fill market niches. At the same time, they have put many people who had been dismissed from the large corporations back to productive work. Thus, Japan is currently restructuring its industry in a distinctive Japanese way. The results may create an even more competitive Japanese industrial base than before the 1991 recession. 0
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References
Tadahiko Abe, “Overseas Production Won’t Weaken Japan’s Technology Edge,” Nikkei WeekZy, May 1, 1995, p. 7. “Americans Feel More Satisfied Than Do Japanese, Shows,” Nikkei Weekly, April 24, 1995, p. 3.
Today.
Akira Ikeyq “Workers’ Corporate Cocoons Collapsing As Yen Drives Production Offshore,” Nikkei WeekJy, June 12, 1995, p. 1. ‘Japanese Employment: Looking For Work,” Economist, January 16, 1993, p. 66. “Japanese High-Tech Manufacturing Is On The MoveOut Of Japan,” To/~yo Business Todaq: October 1993, p. 44. “Nissan’s Gentle Exit Eases Town’s Pain,” Nikkei Weekly. March 27, 1995, p. 1. “NTT Plans To Cut 30,000 Jobs by 2000,” Nikkei Weekly, June 12, 1995, p. 8. Haniyasu Ohsumi, “Cultural Differences and JdpanU.S. Economic Frictions,” Tokyo Business TodaLy, February 1995, p. 52. Nobuyuki Oishi. “For Young Generation: How Much Boom?” Nikkei Week&, February 27, 1995, p. 2. “Pachinko Hikes Hiring,” Nikkei Week&, May 1, 1995, p. 3. “Retailer Moves To Merit System,” Nikkei Week& April 24, 1995, p. 8. Shinobu Fakeda, “Takeda Chemical To Slash Work Force By 32%,” Nikkei Weekly, April 24, 1995, p. 10. Kyohei Toishiba, “Asahi Fears Success Softening Young Staff,” Nikkei Weekly, May 1, 1995, p. 9. “Workers Pleased With Merit Pay,” Nikkei Weekly, March 13, 1995, p. 13.
Poll
“Companies Set to Retire Seniority System,” Nikkei WeekZy, March 13, 1995, p. 13. Frank Gibney, Japavz: 7he Fragile Super Power (New York: W.W. Norton and Co., Inc., 1979). “Here Come The Little Guys!” Tokyo Business February 1995, pp. 4-11.
“The Honeymoon Is Over,” Tokyo Business April 1994, p. 14.
Richard J. Schmidt is a visiting professor of accounting at Weber State University In Ogden, Utah, formerly a professor of accounting at Troy State University, Pa-
Today,
Business Horizons / March-Aprillc)%
Richard J. Schmidt
apanese business has entered a new management phase. Major corporations are changing their personnel practices by eliminating employee positions. This runs counter to a cultural foundation of Japanese business practices that has enphasized the importance of group harmony, stability, continuity, and consensus decision-making, As in a successful Japanese family, the goal has always been harmony within the group. Indviduality became second in importance to peace in the family. Although the father of the family made the major decisions, the other family members were expected to discuss potential activities among themselves and decide courses of action without conflict. The family as a group took the agreed-upon action. Thus, the Japanese family developed highly disciplined individual members who became obligated to fulfill the group’s purposes. The group harmony provided collective responsibility and the individual was judged on how he contributed to the group. After the Japanese male left the closely knit family unit of his youth, the work organization assumed the primary support role for him. Group harmony, with its stability and continuity, combined with consensus decisionmaking became the pillars of the ‘LJapanese management style” envied by the rest of the industrial warld. Just as a family provides ;I lifetime of association, Japan’s growing economy and successful major corporations have provided life-long association through employment for their professional
J
and managerial employees. Professional, technical, and managerial employees were hired at the entry level so that all employees could be trained in the one corporate way of doing business. This did require companies to spend a substantial amount of time and money in training new hires. But because the corporation replaced the parents as the all-encompassing support group for the new college gmduate employee. it was extremely important to build a group cohesiveness and interdependency within the corporate employees. A series of decade-long corporate training programs emphasized the corporate culture until it became clearly understood by all. No major corporation would think of “headhunting“ a key employee from another majol corporation, or consider employing an experienced person from any other segment of the Japanese economy. The Employment Security Law of 1947 blocked employers from advertising for labor and from hiring any worker whose job change required a change of residence. The law also made it illegal to fire employees. A person entered at the bottom of the corporate hierarchy if he wanted to join the corporate group. If an employee LXX not happy with his job, there were few opportunities to change employers. Corporate managers paid abund3nt attention to the selection, training. and development of employees. “In Japan the job is the society, and the society is the job” reported Frank Gibney (1979). “Every man who enters the company equally shares in it.” Assignments were given to teams of employees rather than to individuals. Japanese firms recognized :md felt responsible for the whole m:m, with his interrelated social, psychological, and economic needs. Managers’ commitment to uniform employment levels. even in recessions, built 21long-term perspective among all employees. Seniority became the basis for most promotions. Senior managers were protected by their seniority from being leapfrogged
by junior staff in promotion considerations. The older, more experienced staff were expected to mentor their younger staff. Over time, the obligations of belonging to such a close-knit group developed a strong loyalty to fellow employees and to the corporation.
Economic Slowdown Forces Changes Japanese economic growth from the end of World War II until the oil crisis in 1973 WZi 9 percent annually. From 1973 to 1990, the growth rate was halved to 4 percent per year. However, the economic slowdown, beginning in 1991 and continuing to this day (the Heisei Recession), has reduced economic growth to only 2 percent annually and forced Japanese corporations to evaluate ways of restoring profitable operations. For the first time since 1945, Japanese companies have not had a steadily increasing market to absorb their growing work force. A large number of workers were added to the corporate ranks during the boom years of the second half of the 1980s when companies expected to grow steadily for many years. Overstaffing of Japanese firms in 1993 has been estimated at two million employees. The objective of each business has changed from sharing the market to cost-cutting for corporate survival. Although Japanese corporations were constrained by past practices and do not change rapidly, reengineering concepts identified employee payroll costs as a major cost reduction target. These cost reduction programs have been twofold: (1) moving production facilities offshore and (2) reducing the number of employees in Japanese plants and headquarters. Both programs have resulted in reducing the number of clerical, production, professional, and managerial Japanese employees in major corporations.
Production Moved To Off-Shore Locations Moving production facilities to off-shore locations has hollowed out major corporations within Japan. As new production facilities are needed to add product lines, replace older outdated plants, move to cheaper labor sources, or respond to political pressures to build plants in major export market areas. production and professional employees directly associated with local production facilities have been dismissed. Sony, Matsushita, and Toshiba use off-shore provided parts as the basis for price negotiations with competitive Japanese parts suppliers. TDK Corporation traditionally has been a very competitive electronic parts maker for color television. S. Iwaya, TDK Executive Managing Director. was quoted as saying, “When the consumer electronics companies who are our customers move, we have no choice
Japanese
Manafpment,
Recession
Style
but to move with them.” TDK’s non-Japanese production, mostly from China, has reached 50 percent of the company’s output. Sanyo Electric built an Indonesian VCR plant half as large as its Japanese facility, then upgraded the foreign capacity in 1994to nearly match the Japanese plant. When that happened, Sanyo’s managing director Yagata was quoted as saying, “Osaka (Sanyo’s headquarters) will become completely hollowed out. There’ll be a labor surplus that extends to our affiliated plants.” Some Japanese technical assistance was moved to the new off-shore site in the form of supervisors or technical employees, but the vast majority of plant jobs were filled by nationals in the plant area. A 1994 survey of 101 major Japanese manufacturers indicated that operations moved abroad were concentrated in the mass production of general purpose or commodity items. Of this same group of respondents, 55 percent said they planned to move their general purpose manufacturing facilities off-shore within three years. The operations most likely to remain in Japan were basic research, applied research, prototype production, and design and development. The employees left in Japan were a hollow core of their former number and consisted of high-level management, central support personnel, and those involved in R&D activities. Technological developments and innovation will continue from the Japanese locations because manufacturers traditionally work closely with their suppliers in designing products and improving manufacturing techniques.
More Temporary Employees In addition to moving plants off-shore, making permanent employees into temporary ones has been expanded in Japanese industry. Since World War II, most major corporations have used temporary or short-term employees for most clerical and lower-level professional and technical positions even more extensively than in the United States. These employees have no implied lifetime employment guarantee rights, nor are they extensively trained by the corporation. In fact, they are specifically exempted from the non-firing provisions of the Employment Security Law of 1947. Now in many corporations the permanent, middle-level, long-term professional and managerial employees have been added to the temporary employee category. This personnel shift away from lifetime employment guarantees has been a major change in Japanese business practices.
Employees Moved To Suppliers A third payroll reduction technique involved shifting employees from major corporations to
their component suppliers. Major corporations, called first tier in Japan. have required their main supply companies, the second tier, to add the excess employees to their own payrolls. The second tier corporations include many small and medium-sized firms who have never practiced lifetime employment for their employees. Many of these companies supply the major first tier corporations with components, parts. or service and work closely -with their first tier customers. The first tier corporation may be the only principal customer of the dependent and smaller second tier company. Strongly supported “just-intime” inventory techniques ha\,? reinforced the close corporate working relationships. When the large corpol-rations realized costcutting measures were necessary. one of their early personnel responses was to transfer current employees to their suppliers. Because of the close dependent relationships. the suppliers \\rere obligated to add these shifted employees. gencr-
These people were workers from curtailed production from ~~fe#~me employment lines, middle manguarantees has been a agers over 55, and surplus technical major change in Japanese managers. When business practices, ‘I suppliers were not available, Nippon Telegraph and Telephone created independent subsidiaries and transferred 5,000 employees to them as the initial staff. Takecia Chemical Inciustries has tried to avoid early retirement pressure and employee transfers to subsidiaries. K. Takeda. the new company president. said, “Our whole tradition is to avoid personnel adjustments.” He pledged to reduce 3,500 positions by attrition from the work force of 11,000. Reduced hiring of new employees was conbined with this practice at the first tier corporz tion. The second tier company often eliminated new hiring entirely hecause the company had acquired a significant number of employees from the first tier company they didn’t really want. Automakers have modified this technique. Koji Endo, first vice president at Lehman Brothers Japan. stated, “Automakers have nearly eliminated all seasonal workers and are transferring employees to affiliate dealerships. But that strategy is reaching its limit.”
“Thispersonnel
siwawuy
Forced Early Retirement
A fourth new Japanese personnel practice is requiring middle managers over 55 years of age to retire if jobs are not available in associated second tier companies. Traditionally, if a person’s 72
long-term performance record was poor, Japanese corporations would consider him for early retirement-even as early as in his late 40s. One Japanese nationwide chain store, the Nagasakiya Company, has begun to demote incompetent managers based on the company’s performance evaluation system. The corporate headquarters’ personnel division prepares a list of the managers who score in the bottom 25 percent in the annual evaluation. The number of managers targeted for demotion could reach 10 percent (870) of the total number of rnanagers in the company. Some first tier corporations have tried to maintain the illusion that managers are never fired. Over a tn-o-)‘ear period, for example, Nissan managed to find jobs for each of its 2.000 employees working in the now closed major Japanese automobile assembly plant. Nissan has tried to adhere to the lifetime employment policy, even though such adherence helped \viden carporate financial losses over the two-year period. Stories are told about other Japanese staff reduction practices. One manager reached 57 years old and was told to quit. He replied. “I have plans which involve retiring at 60. I can’t quit for another three years.” His IXY+Ssnapped back. “I don‘t gix-e a damn about your personal plans. Just quit! We don‘t need you any more.” Other tactics have been used to induce employees to quit or take early retirement. Making them do jobs for which they have no talent or expcrience, demoting them. transferring them to the company‘s most remote location without their family, and giving them meaningless \vork or no work at all also have been used. Losing one’s job mczms an employee must relinquish his company subsidized housing and go looking for a new home. The increased use of these new personnel practices create serious repercussions in employee morale that have just begun to be felt in Japanese industries. After a period of lost conpany sales and layoffs. 3 1993 early retirement solicitation at Alps Electric resulted in the majority of its skilled workers quitting. Forced retirements and lay-offs have been described as trcating long-term employees not as human beings but as commodities. The demise of lifetime employment in first tier corporations and the techniques Japanese firms have used to reduce payrolls have seriously weakened the ties employees have to the corporation. besently, Japanese employees work long days--often 14 hours regularly-without overtime considerations, six-day work weeks, and more or less mandatory participation with fellow employees in nightly after-work festivities. This leaves little time for private or family activities. Leisure activities are concentrated on Sunday and during the periodic company picnics. Because
the husband is usually the sole salaried employee in a family, the wife is left to raise the children with little help from her husband. For the first time, the new personnel practices have made the Japanese employee question the practice of total commitment to the corporation. Reengineering has been praised for setting goals, but it has also sanctioned layoffs as a means for change. Japanese have described this U.S. technique as destroying workers’ spirit. Yet the absence of lifetime loyalty to workers is being personally questioned by both white- and bluecollar employees in all age groups. Because loyalty is viewed as a two-way street, laid-off employees have begun to raise the question, “Is my life more than just work?” Effects of Personnel
Policy Changes
Forced Retirement. A possible fallout from these altered personnel practices is a shortened performance horizon for the Japanese business executive. Forced early retirement has not yet affected the executive ranks as it has the middle manager level. However, the selection of who will be forced to retire raises the question of individual performance evaluations. Evaluations. Up to now, groups of employees hired together were treated similarly with raises, job assignments, and promotions for a training and development period that often lasted 10 to 15 years. Frequent job changes within the same age group to broaden career backgrounds softened the importance of slightly higher assignments. Social events within the company even included an annual celebration of the group joining the corporation. Only at the very high corporate levels did significant selection take place. Now individual performance measurements for promotion, retention, and merit pay have introduced competitive factors between employees. This is the Western style of business that had not been considered before in the Japanese policy of group cohesiveness and harmony. In the past, Japanese have viewed competition between workers as undesirable. Personnel tests after World War II showed that Japanese worker performance deteriorated under competitive conditions. Emphasis was placed on developing and improving an individual’s skills, rather than on competition with each other. But corporate merit competition has shifted the emphasis to individual performance and away from employee group success. Asahi Breweries, for example, has introduced a revised personnel evaluation system to include more levels of management and to tie evaluations and promotions closer together-an idea that most of Asahi’s younger employees have calmly accepted. The company’s chairman has used the system to
Japanese
Management,
Recession
Style
double the number of internal promotions each year. Matsushita Electric Industrial also converted its employee system to one based on merit. Professional knowledge, skills, and performance affect 90,000 employees-excluding management. Merit Pay. In 1992, Honda Motor introduced a merit pay system for its 4,500 managers. Although it was not well received at first, the company and employees found there were only minor discrepancies between a person’s self-evaluation and his supervisor’s evaluation of him. At Nippon Steel this year, managers will begin a procedure whereby they will have to prove in a lengthy interview that they achieved their goals if they want an increased bonus (as much as 25 percent of a worker’s salary). The new system is targeted toward the 50 percent of the 8,000 managers who are in their 30s and 40s. Seniority for pay and promotions will be gradually phased out. However, in an effort to assure office harmony, everyone will still receive a basic bonus. A 1995 survey by the Japan Productivity Center for Socio-economic Development found that 67 percent of the 242 sampled employees working under discretionary pay systems said they were satisfied with the salary arrangements. Reasons companies listed for not adapting merit systems included not having a method of evaluating results (61 percent) and legal restrictions (44 percent). Of the 334 publicly traded companies who responded to the survey, only 3 percent had adopted a merit pay system, but 70 percent of those without such a system said they were interested in adopting merit pay. A second survey conducted by two business newspapers, the Nihon Keizai Shimbun and the Wall StreetJournal, showed a less optimistic outlook of the Japanese worker. When asked about job satisfaction, 15 percent of the Japanese respondents said they were very or fairly satisfied with their jobs, whereas 53 percent in the U.S. responded favorably to the same question. When asked about the current business climate, 49 percent of the Japanese and 36 percent of the Americans thought business conditions were bad in their home country. Short-term View. Japanese first tier corporate executives have the reputation of viewing corporate success over the long term. With lifetime employment guarantees until they chose to retire, yearly corporate results did not have a
73
direct bearing on their personal success. The emphasis was on long-term accountability because the results of decisions made today could be answerable only in the future when the same group of executives were still in the corporation, Now, however, will up-and-coming executives make decisions to benefit the short term and make themselves look especially good? Or will they continue to think of the long-term strength of the corporation? Compensation. Generally, Japanese CEOs draw a straight salary without any stock option considerations. This is because deferred compensation is informally prohibited by the Finance Ministry. Low overall executive pay is a part of the strong egalitarianism that permeates the East Asian culture. The tight lid on top salaries has been a key part of the systematized seniority salary system that is now weakening throughout Japan. The systemization has reached the level at which all starting pay rates are published in public financial reference books and are identical at the major firms within an industry. Compensation has included the use of a corporate car, housing assistance, and vacation benefits. As competition enters the personnel practices of corporations, the Japanese executive may insist on deferred compensation in the form of stock options because of the new internal competition for his job. Temporary Employees. Moving to the use of temporary employees as the major labor source also has risks. Specific process and conpany-related skills are not always available in a labor pool, even one composed of highly skilled individuals. Japanese industry recognizes this fact fhe somewhat; as Sharp’s Deputy General Manager Kazusa said, “We’ll help any parts company that wants to go into a new field, but I doubt that companies that have relied on part-time labor and have no special technology will be able to survive.” Nippon Telegraph and Telephone recently cut SO,000 staff members from their payroll of 220.000. To retain a portion of the skills lost and help soften the financial impact on the individual, the company has introduced ;I yearly contract system to temporarily rehire some of those who took early retirement. Labor Unions. Staff reductions have led to increased union activity. Historically, Japanese labor unions have been company unions and
psrsonnel changes have resur”&X$ in colkpse of
then only present in major corporations. Pay negotiations and personnel policies have been agreed upon without any noticeable labor strife. Worker-management harmony was built on the foundation of lifetime employment and group harmony. Although this situation has been called “lapdog” unions by some Japanese, it has led to labor peace in a growing economy. The economic stagnation and resulting detrimental personnel changes have resulted in the collapse of some docile unions and the formation of new active ones. At Rohm’s Apollo Electronics subsidiary, forced early retirements of 80 junior staff members were the motivating factor for 20 employees forming a new union organizing committee. Division and department heads had called in the targeted employees one by one and coerced them into signing the consent form to take early retirement. When some employees cornplained to the old union, its only response was to parrot the company line. The company’s union tacitly accepted the early retirements and then quietly disbanded. A senior employee and a member of the organizing committee was quoted as saying, “I’ve been active in the Japanese labor movement for 20 years, but that’s the first time I’ve seen a company’s primary union disband.” Managers at all levels are excluded from union membership. Rut with forced retirements reaching into management ranks, middle managers felt compelled to form a trade union. Thus, the Middle Managers’ Union was initiated in December 1793 for employees who are not represented by another union. This included corporate mid-level managers and employees of smaller companies without labor unions. The union has engaged in group negotiations and intercession when forced resignations, unfair dismissals. or malicious transfers were involved. For middle managers of first tier corporations who have been immersed in the Japanese corporate culture all their working lives. it is extremely difficult to take action against the same company that has been their home and community. Joining an active union for job protection was an act of frustrntion, anger, and hurt toward firms they thought were supposed to take care of them. New Hires. The hiring of new employees. including college graduates, has been seriously slowed or stopped in some companies. Mazda Motor Corporation did not hire any new college graduates in 1795, nor does it plan to hire any in 1776. Sakura Bank hired 400 new graduates in 1795 but plans to reduce hiring to 100 in 1796. All 11 Japanese city banks have reduced the number of college graduates employed in 1795 by 35 percent from 1794. One exception is the pachinko pinball game operating chains, which are frequented by all economic levels and located in most Japanese
neighborhoods. New Alpha KK hired 80 college graduates in 1995 and plans to hire 130 in 1996. Another pachinko operator, Dynam KK, hired 92 graduates for its Tokyo gaming outlets in 1995 and will add 100 next year. Dynam KK’s president says, “Pachinko can offer jobs not only to new graduates but also to experienced workers, the middle-aged, and the elderly.” In Japan, as in other countries, leisure time diversions often are a growth business, even in recessionary periods. A tabulation of job offers to college graduate applicants by the Japanese Ministry of Labor indicates a softened job market. Yearly comparative figures are:
AverageJob Qffeersto College Applicants Compared to the Number of Applicants 66 to 100 64 to 100
1995
1994 1993 1992
71 to 100
147 to 100
Unemployment. With an unemployment rate of only 3 percent in March 1995 and 2.6 percent in March 1994, unemployment does not appear to be a serious problem in Japan. In the U.S., unemployment during the same period has averaged over 5 percent. However, in a country where unemployment is mostly unheard of, these figures give the government and the business community much concern. The Japanese Labor Ministry expects the non-manufacturing sector to absorb continuing layoffs from manufacturing but the resulting unemployment rate to continue near the 2.7 percent level through the year 2000. Company Innovations. Although many of the changes in Japanese business personnel practices have seriously disturbed corporate culture, one trend is very positive. As first tier corporations restructure, many of the second tier suppliers are forced to change their corporate strategy or cease operations. Yoshimi Inc. began developing its own products in 1977 after the major purchaser of Yoshimi’s output moved its production facilities offshore. After entering a price war with foreign suppliers, Yoshimi had to decide either to scale back its operations or to develop a completely different product line. Yoshimi’s president previously had used a shape-memory alloy technique to make complicated metal molds. In addition, the president had once worked for one of only two companies in Japan capable of producing the alloy materials used in the process. So he proposed a joint venture with the nearby alloy producer, and now Yoshimi Inc. has successfully developed and marketed shape-memory alloys for many applications. If the purchaser had not moved offshore, Yoshimi Inc. would not have developed an entire line of new products and grown significantly. Japanese
Management.
Recession
Style
Another example of small firm innovation and survival is the Kitajima Shibori Seisakusyo Company. The firm produces a wide variety of different objects ranging from parabola antennas two meters in diameter to tiny components only three millimeters across. Their production process is based on metal spinning technology, which consists of processing a flat disc of sheet metal into a cylinder by rotating and applying force to it using wooded or metal tools called “spatulas.” Margins of error of 0.1 millimeter or less are required for some of Kitajima’s products. The company president boasts, “I’m proud to say we’ve never turned down a customer for ,’ I lack of ability to do the required job: And once we accept a job, we will accomplish it without fail. We’ve never had a job we couldn’t finish through trial and error-by heating or cooling the metal or modifying the spatula.” Kitajima Shibori Seisakusyo has recently added a number of employees. Labor Force. First tier corporate early retirements have created a new skilled labor force for small companies. When Tokio Mizukami took early retirement as IBM Japan’s head of developmental production, he founded International Manufacturing & Engineering Services (IMES) to develop and produce computer peripheral equipment such as CD-ROM drives and back-lighting for liquid crystal displays. Many IMES products are now sold to the nearby IBM plant. IMES also sells overseas and has a mass production plant in the Philippines. The average staff member is 53 years old and usually has technical experience with IBM equipment. Because IMES has a retirement age of 65 years old and the nearby IBM plant permits employees to retire at 50 with a full pension, IMES can hire the recently retired IBM engineer for 15 years of a productive second career. IMES has benefited greatly from IBM’s early retirement program. Restructuring. Restructuring of major corporations has left market niches previously unfilled. Mayekawa Manufacturing Company has grown to serve 50 percent of the worldwide industrial refrigerator market. Although the overall market is declining, Mayekawa has steadily expanded its market share and profitability. Not only does the company make high-value products different from those of its competition, it also is distinctly different in its corporate structure. The company consists of 100 small firms designed specifically to meet the needs of a single customer or region. Of the 2.500 employees, only a few are in head-
7i
quarters. Most of the affiliated firms have 25 employees or less. The small companies are on intimate terms with their customers and handle everything from requests to complaints. The former are met with meticulous attention to detail, the latter with a rapid response unhampered by corporate red tape. The head office provides support when it is needed. This customer-centered approach has brought growth to the $370 million level. apanese business personnel policies have changed dramatically during the last five years. Spurred by recession, major corporations have reduced their work forces; introduced merit pay, promotions, and personal performance evaluations; moved production facilities offshore; increased the use of temporary employees; and forced early retirements of its employees. These have been unsettling to a culture that prides itself on stability, continuity, and group support and harmony. Although many small and medium-sized companies were dependent on major corporations for their sales, they have seized the opportunity to create new products and fill market niches. At the same time, they have put many people who had been dismissed from the large corporations back to productive work. Thus, Japan is currently restructuring its industry in a distinctive Japanese way. The results may create an even more competitive Japanese industrial base than before the 1991 recession. 0
J
References
Tadahiko Abe, “Overseas Production Won’t Weaken Japan’s Technology Edge,” Nikkei WeekZy, May 1, 1995, p. 7. “Americans Feel More Satisfied Than Do Japanese, Shows,” Nikkei Weekly, April 24, 1995, p. 3.
Today.
Akira Ikeyq “Workers’ Corporate Cocoons Collapsing As Yen Drives Production Offshore,” Nikkei WeekJy, June 12, 1995, p. 1. ‘Japanese Employment: Looking For Work,” Economist, January 16, 1993, p. 66. “Japanese High-Tech Manufacturing Is On The MoveOut Of Japan,” To/~yo Business Todaq: October 1993, p. 44. “Nissan’s Gentle Exit Eases Town’s Pain,” Nikkei Weekly. March 27, 1995, p. 1. “NTT Plans To Cut 30,000 Jobs by 2000,” Nikkei Weekly, June 12, 1995, p. 8. Haniyasu Ohsumi, “Cultural Differences and JdpanU.S. Economic Frictions,” Tokyo Business TodaLy, February 1995, p. 52. Nobuyuki Oishi. “For Young Generation: How Much Boom?” Nikkei Week&, February 27, 1995, p. 2. “Pachinko Hikes Hiring,” Nikkei Week&, May 1, 1995, p. 3. “Retailer Moves To Merit System,” Nikkei Week& April 24, 1995, p. 8. Shinobu Fakeda, “Takeda Chemical To Slash Work Force By 32%,” Nikkei Weekly, April 24, 1995, p. 10. Kyohei Toishiba, “Asahi Fears Success Softening Young Staff,” Nikkei Weekly, May 1, 1995, p. 9. “Workers Pleased With Merit Pay,” Nikkei Weekly, March 13, 1995, p. 13.
Poll
“Companies Set to Retire Seniority System,” Nikkei WeekZy, March 13, 1995, p. 13. Frank Gibney, Japavz: 7he Fragile Super Power (New York: W.W. Norton and Co., Inc., 1979). “Here Come The Little Guys!” Tokyo Business February 1995, pp. 4-11.
“The Honeymoon Is Over,” Tokyo Business April 1994, p. 14.
Richard J. Schmidt is a visiting professor of accounting at Weber State University In Ogden, Utah, formerly a professor of accounting at Troy State University, Pa-
Today,
Business Horizons / March-Aprillc)%