Global Management and Innovation of Japanese Enterprises - The Strengths of Global Management and Further Challenges

The panel discussion began with a presentation by SANBONMATSU Susumu, Consulting Fellow, RIETI; Senior Researcher, Organization for Small & Medium Enterprises and Regional Innovation, on the subject of "The Strengths of Global Management of Japanese Enterprises and Further Challenges." The outline of the presentation is as follows.

Global management provides the following two advantages: (a) gains from access to specific global markets; and (b) gains from achieving dynamic global competitiveness. Challenges for the future can be summarized under four points: (a) response of Japanese enterprises to global innovation; (b) reforming Japanese enterprises for adoption of global management models; (c) sustained development of organizational capacity and human resources for global management; and (d) responding to the evolution of production and R&D by Japanese enterprises in the ASEAN countries.

Global management provides two forms of strength: strengths obtained as a result of global management, and strengths related to achieving global competitiveness. Enterprises that are already engaged in global management enjoy the strength that comes from having access to existing large markets. This plugs them into regional needs and generates advantages related to inter-regional differences in industrial structure. As for strengths relating to dynamic global competitiveness, competitive advantages can be obtained by engaging in development in different regions. That is, the global foundation of competitiveness underscores this strength.

The first challenge pertains to global innovation chains. The essence of the problem lies in taking all the elements in a 10-year process, identifying existing needs in the local market, coping with technological progress, and finally integrating these factors into a management chain in an effective and efficient manner. Effectiveness pertains to the question of where to procure the elemental technologies needed for development. Considering that development cannot happen in the absence of elemental technologies, systems are needed for effectively securing such technologies. On the other hand, it is also necessary to have in place a management process for commercializing new developments. Therefore, the management of the innovation chain must extend to and cover all processes up to the last one in the market.

The second challenge pertains to the need to reform Japanese enterprises in order to be able to effectively adopt global management. The central issue is the globalization of management. Here, I am proposing four typologies: (a) the global model frequently seen in Japan; (b) the multinational model; (c) the transnational model; and (d) the metanational enterprise. Regarding group (a), when an enterprise with advantages in Japan is relocating abroad, it is necessary to translate the values and routines of the Japanese enterprise into English and other languages, to universalize these values and routines, and finally to transplant them to its overseas subsidiaries and affiliates. Regarding groups (b) - (d), a certain degree of mixing is required. In other words, depending on the performance of corporate management, some forms of actions will be required from the perspective of participation in management. This has to do with raising the motivation of people in each of the continents where they are located.

The third challenge pertains to sustained development of organizational capacity and human resources needed for global management. It is necessary to consistently manage the complex four major objectives (sales, products, functions, maintaining competitiveness) using organizational capacities at the three levels of management (subsidiaries, business divisions, headquarters). This requires a high level of organizational capacity.

The fourth challenge pertains to responding to the evolution of production and R&D by Japanese enterprises in the ASEAN countries. Japanese automakers have been transferring competitive advantages in product supplying to the ASEAN countries. But more will be required if auto manufacturers are to successfully transfer their design functions to ASEAN as well. Measures will have to be taken on three levels: the corporate level, human resources development projects, and future-looking responses. Ultimately, the challenge will be the training of local engineers, the training of local workers and the development of organizational capacity on all local levels, including developing the capacity of the people working at all levels. One of the issues will be how to divide and share these tasks between the government and private sector.

The next presentation was given by FUJIYAMA Tomohiko, General Manager, Corporate Strategy and Research Department, Mitsubishi Corporation on the subject of "Global Management and Innovation in Mitsubishi Corporation."

Mitsubishi Corporation pays special attention to the following three sources of value: (a) the design concept of the entire value chain; (b) the broadly based and highly diverse set of customers, regions, and networks that support the value chain; and (c) human resources capable of sensing, melding, and utilizing knowledge on a global scale.

At Mitsubishi Corporation, what type of person do we feel we need for innovation? Being a general trading company, we look at personnel in the context of a three-axis matrix. These axes are the product/industry axis, the regional axis, and the functional axis. Ideally, we want someone to be competent in all of these three points, and to have entrepreneurial potential as well. In the final analysis, innovation at Mitsubishi Corporation is supported by people who can sense, meld, and utilize knowledge on a global scale.

Regarding the design concept of the value chain, our aim can be stated as follows: The achievement of overall optimization of various value chains through win-win relations with our partners. The objective is to strive toward overall optimization while maximizing the satisfaction of final users.

Regarding the business domains of Mitsubishi Corporation (as compared to investment banks and consulting companies), our approach is to focus on the value chain and to engage in various actions corresponding to customer needs. At times, we dispatch specialists in finance or legal affairs and take on an equity position in a partner or project. We are prepared to make long-term commitments to actual business activities. This approach permits us to identify emerging needs in the market. Mitsubishi Corporation has been engaged in investment-fund type activities since the second half of the 1980s. As for consulting capabilities, we have in-house capabilities as well as options to utilize our consultancy subsidiaries. On the other hand, there is evidence that investment banks and consulting companies are incorporating some operational aspects of the general trading company. For example, some investment banks that originally started with derivatives trading are now engaged in the business of procuring jet fuel. We are also seeing the forming of closer relations between consulting companies and investment banks, and their melding.

Our new medium-term business plan launched in 2004 is titled "Innovation 2007" and contains a vision for the future growth of Mitsubishi Corporation as a "new industry innovator." There are three very crucial challenges here: (a) to bring out the best in people and to nurture people; (b) to strengthen the foundations; and (c) to respond to change and to thereby open the path to the future. Our medium-term growth strategy is based on two pillars: to thoroughly strengthen our core businesses, and to enter into areas of future strategic importance. Innovation at Mitsubishi Corporation is based on innovations achieved in the businesses of individual divisions. While pursuing changes in our business domains and in our R&D activities, we look to the future with the following points in mind: (a) transformation of our business domains as a general trading company; (b) developing capacities for transformation of business models; (c) strengthening our abilities for approaching and interacting with customers; (d) regional strategies; (e) development of operational models; and (f) development of new business fields.

What is Mitsubishi Corporation doing in terms of metanational management? Metanational management is very important in terms of transmitting regional information. General trading companies have been engaged for many years in sensing, melding, and utilizing information on a global scale with the aim to discover new and budding innovations. This is part of our genetic legacy as a general trading company. Therefore, we feel a very strong sense of affinity toward the metanational concept.

As a general trading company, we are hardwired to be innovation-oriented and we are constantly working with partners to jointly search out value chain innovations. We have some very important assets to support this process: personnel endowed with global networking and metanational DNA, the capacity to accept risks, and a perspective for optimizing the entire value chain. Manufacturing companies are also pursuing metanational transformation by attempting to combine their own traditional assets with business models, state-of-the-art technologies and market needs from around the world. But due to the characteristics of their business domains, manufacturers are more closely bound to fixed business models and are likely to run into various constraints when they attempt to move quickly toward the metanational model. We can assist the metanational transformation of manufacturers by working with them to develop worldwide value chains that can contribute to their international competitive strength.

We face three challenges in achieving metanational management: (a) Formulation and establishment of worldwide knowledge management systems as a new industry innovator. For this, we need to devise systems and schemes for supporting bidirectional exchange of information and lateral alliances. (b) The internationalization of personnel based on well-established knowledge management systems. Knowledge management systems have yet to be established, and not much progress has been made in the internationalization of personnel. In the future, non-Japanese employees must play a leading part in the development and promotion of new businesses. For this, they will have to share our corporate values, rise to a higher vantage point that affords a clear perspective of corporate management and the businesses of the entire company, and they themselves must become the transmitters of information. (c) The need to engage in constant business transformation predicated on collaboration and integration with other industries, and to transmit information outward. We need to ensure that stakeholders from widely varying cultural backgrounds can achieve a deep understanding of the value chains we have developed in the past, the role that these value chains have played, and the type of businesses we are hoping to create in the future. For this, we need to realize that local employees that are fully conversant with local cultures are the most efficient and most important translators available to us.

The next presentation was given by KOBAYASHI Toshinori, Director, International Economic Affairs Division, Trade Policy Bureau, Ministry of Economy, Trade and Industry (METI). The presentation approached the issues of global management and innovation from the perspective of policymaking.

In the past, the policies of the Japanese government successfully created a virtuous cycle in which Japanese enterprises increased their competitiveness and actively expanded their businesses both domestically and internationally, which in turn contributed to strengthening Japan as a nation. During this period, government policies and corporate strategies shared the same orientation. However, this shared orientation stands in doubt today.

Government policies pertaining to global management can be divided into two categories. The first category of policies promotes global development and global management. The second category is designed to encourage Japanese enterprises to keep their activities within Japan. We may possibly have to develop an environment that is conducive to the creation of systems for directing the gains of global management back to Japan or for reproducing these gains. In this context, a very important point is this: As progress is made toward global management, what functions and operations should be left in Japan? The overseas transfer of manufacturing as well as R&D activities contributes to improving the total competitiveness of Japanese enterprises, which is the foundation of our industrial policies. However, this leaves us with a policy dilemma: What should be done to ensure that these gains and advantages are directed back to Japan? As networks of global management proliferate, we will have to consider whether Japan can position itself at the hub of these networks, or whether Japan can position itself to reap and receive the profits generated by global management. We need to implement policies promoting Japan as a network hub. This involves some extremely complex interactions, which include the issues of taxation and corporate tax rates. Nevertheless, becoming a hub and developing systems that will attract the gains and advantages of global management stands as a very critical issue for the future of Japan.

There is much debate on what types of R&D activities should be kept in Japan. For instance, what should be done with R&D activities that are not particularly advanced but which Japan is extremely good at? What should be done to preserve profits from know-how, software and other proprietary assets? No policy conclusion has been reached on these questions. But the truth is that when we consider global management and innovation, the issue of how to relate these developments to the position of Japan gives the government a real headache.

Following these presentations, comments were made by Yves DOZ, Professor of Global Technology and Innovation, INSEAD.

I believe that Mitsubishi Corporation is now making the transition to a metanational. It has succeeded in transforming itself into a solutions company that generates high value-added. It possesses the assets needed for this transition, which include management resources, global reach and the shift from products to functions.

Putting aside the best Japanese enterprises, let us look at the average Japanese enterprise. It seems to me that these enterprises are also pursuing fundamental transformation. Let me give an example from Singapore. Three years ago, Japanese enterprises in Singapore had the lowest level of local integration compared to enterprises from other parts of the world. Overseas businesses should not be viewed as an extension of domestic operations. Rather, enterprises must adopt the metanational spirit. There is no such thing as "global management" per se. Everything is founded on "local management." Global management ultimately emerges through linkages established among many points of "local management."

When we consider how the Japanese economy may become integrated into the Asian economy, we are led to the question of what will remain as Japan's characteristic areas of competitive advantage. Will Japan retain high value-added activities for itself and use China as merely a production site? I do not think that this is what will happen. In order to maintain competitive advantages in the world economy, Japan will have to carefully consider the next and emerging stages of science and intellectual investment. In the past, Japan gave birth to some highly innovative developments, and it is highly likely that Japan will continue to do so in the future. The point to bear in mind is that such innovation always requires a lot of work and imagination.

Comments were made by ASAKAWA Kazuhiro, Faculty Fellow, REITI; Professor, Graduate School of Business Administration, Keio University, with an eye to summarizing the presentations.

What innovations are needed under what conditions? We need to identify the advantages of global management, the advantages of the metanational model, and advantages of systems combining the two models. Also, we need to identify what the appropriate conditions are.

When do we need to establish a framework for examining the concept of regional innovation?

In the future, it will probably be very important to consider the innovation strategies of global enterprises in combination with policy issues of the Japanese government.

We must think about methods (the "how") for the development of future strategies.

It is necessary to identify appropriate models for the metanational strategies of major corporations, startups, and small and medium-size enterprises (SMEs).

The comments were followed by free discussion. First, Mr. Sanbonmatsu commented on metanational activities by SMEs in Asia and introduced the case of Japanese auto parts companies operating throughout the entire East Asian region. Next, YAHAGI Tsuneo, Professor, Graduate School of Business and Graduate School of Medicine, Keio University, asked how the metanational model could be applied according to corporate scale and stage of growth, to which the panelists responded with their views.

Prof. Asakawa: I think that evolution theory applies more aptly to the current situation than any developmental stage theory. Instead of taking a great deal of time to move from one stage to the next, we see that even some startups are jumping directly to the metanational stage. There are many corporate models for each of the stages of unusual change, selection and retention. Looking at the current situation, I believe that typologies are only capable of picturing one moment in time in the continued evolution of various stages.

Mr. Fujiyama: Becoming a metanational has nothing to do with size. The metanational concept can apply to both major corporations and SMEs. One needs a certain form of wisdom to know how to combine different types of information. There are those who possess this wisdom and those who do not. The ability to develop this kind of human resource, and not the size of a company, determines the ability to become a metanational.

Prof. Yahagi: From my own experiences, I can say that general trading companies were already involved in this type of business activity nearly 40 years ago. In my case, I was sent to a dam construction site at a remote location in South Africa. Decision-making involved maintaining direct contact with similar sites in Canada and Chile and with expert staff at corporate headquarters. This very remote spot became a center unto itself, and as someone assigned to this spot, I was in a position to exchange information with the rest of the world and to make appropriate on-the-spot decisions. This arrangement was seen as entirely normal and obvious. In this sense, I believe that metanational mechanisms have been operating in general trading companies from the beginning.

Mr. Fujiyama: At Mitsubishi Corporation, employees in their 20s and 30s are seconded to companies in which we have invested where they participate in management. After this experience, they return to Mitsubishi Corporation. This is the pattern of personnel education that we have adopted. Our employees are also assigned to overseas posts where they function as general staff. Unless an employee has experience both in a specialized business area and as a general staff member in an overseas post, it will be very difficult for him or her to join the ranks of management.

Next, Prof. Yahagi posed the following question. Government policies are predicated on a closed economic system, while enterprises are working in an open global system. Friction is unavoidable when the two attempt to optimize their goals. How should we view this conflict?

Mr. Kobayashi: As enterprises become increasingly global, perhaps the right thing to do is for governments to also move in a global direction, but it is unlikely that nationality will change significantly. However, it is necessary to achieve a balance between what constitutes an optimal solution for Japan and, for example in East Asia, what constitutes an optimal solution for China. The same type of balance is needed between optimal solutions for South Korea and ASEAN.

Prof. Yahagi: We need to be aware that governments are already exposed to competition on two fronts. The first area of inter-government competition is in infrastructure, which includes location, taxation, administrative efficiency, and other factors. The second area pertains to diplomacy and the competing capacities of governments in diplomatic negotiations.

Mr. Kobayashi: Five or six years ago, there was a lot of debate concerning hollowing-out caused by overseas investment. Today, we face a different set of problems. For instance, entire companies are moving overseas. On the domestic front, we are seeing a structural weakening of the ties between Tokyo and other parts of the country, and the ties between companies and the government and administrative agencies. Regarding free trade agreements, action is being delayed because too much time and energy is being expended on ironing out the details of the agreement. I believe the most important point is for our leaders themselves to become globalized.

Q: Is Mitsubishi Corporation investing in Japan? What is your evaluation of the Japanese government's value chain?

A: (Mr. Fujiyama) Mitsubishi Corporation is very serious about investing in Japan. This country faces many problems that are constantly changing, but this also offers opportunities. It is my view that Mitsubishi Corporation has been playing an important role wherever significant changes are taking place in the value chain. Regarding Japan's value chain, what we need to do is to combine the excellence embodied in the personnel of the bureaucracy with political determination of the government and the capabilities of the private sector.

Q: Mention was made of the need for policies aimed at tethering Japanese companies to Japan. Does this imply that many companies will move their headquarters overseas if metanationals increase in number? What specific problems exist in Japan's current policies?

A: (Mr. Kobayashi) I cannot predict whether many metanationals will move their headquarters overseas, but I do believe that this trend is inevitable. Regarding policy problems, I believe the system of corporate taxation present a very serious challenge from an international perspective.

Q: It seems to me that management of Japan's total value chain requires strategic thinking as well as explicit knowledge. Effective management also requires a unified language. How are Japanese companies coping with these requirements? Why are Japanese electronics companies experiencing difficulty in achieving the same level of performance as auto manufacturers and general trading companies?

A: (Prof. Doz) Language becomes an issue when a company is moving outward from its home country and also when it attempts to transform its core businesses. The question is whether an appropriate level of abstraction is possible. But at the same time, the company should not veer from the context and site. I agree with your comments concerning tacit and explicit knowledge.

(Mr. Sanbonmatsu) Electronics have not performed as well as automobiles because, in the selection and concentration process, the electronics industry failed to make the necessary large-scale investments on a timely schedule. It can be said that management was unable to meet the global industrial requirement levels that prevailed at the time for semiconductors and other products.

(Mr. Kobayashi) For a time, the electronics industry was putting up a good fight in hardware. But the industry was weak in software, an area that remains protected by the barriers of the Japanese language.

Prof. Yahagi summarized the proceedings as follows.

The grand theme of the symposium today was: How can Japanese enterprises develop competitive advantages on a global level? The ultimate objective of developing competitive advantages is to arrive at a state of no competition. Thus, the strategic challenge for management is to find how to achieve a state of no competition and how to maintain this over time. The metanational concept is predicated on the knowledge-based economy. The key to developing competitive advantages in the knowledge-based economy lies in the creation of supply chains and the innovation chains that result from these supply chains.

The key to chain building is the prospecting for information and knowledge throughout the world, transforming this into a resource, and finally applying it at the operational level. This brings us to another one of our observations today: There are clear limits to autarkical approaches to chain-building. In other words, to build the strongest possible chain, an enterprise must engage in wide-ranging collaborations and alliances at various levels. By engaging in this cooperative process with due flexibility, an enterprise can combine and build to arrive at the strongest possible network.

Enterprises in pursuit of the metanational concept assume an open-system world. As opposed to this, governments operate in a closed-system world consisting of a single country. In both instances, strategic thinking is required. We live in an age of extremely frequent paradigm shifts. Placed in this environment, both enterprises and governments must, before all else, delineate their ultimate objectives. That is, they must clearly define their principles, their values and their mission. If these are not clearly defined, both enterprises and governments will be reduced to the fate of floating weeds that are forever buffeted by the tides. Because there is always a significant gap between ideals and reality, a clear vision must be developed to serve as a bridge between the two. Strategy consists of scenarios prepared for the realization of this vision. That is, it is necessary to clearly establish what the ultimate objective is for utilizing the metanational concept to create powerful strategies. In other words, the clear definition of principles, mission, and vision must precede all other forms of action.