IT Management in Japanese Firms: Strengths and Weaknesses as Compared to U.S. and Korean Firms

Faculty Fellow, RIETI

As Japan's population is aging and its fertility continues to decline, economic growth led by productivity gains tops the nation's policy agenda. The key to achieving this end lies in the effective use of information technology (IT), for which strategic thinking on IT-based management - utilizing IT for corporate management - is vital. In this column, I will draw upon the findings in the "International Comparative Survey of Firms' IT Strategies," conducted by RIETI, to illustrate the IT-based management strengths and weaknesses in Japanese companies.

Japanese firms' IT investments focus on operational efficiency

Our survey targeted listed companies in Japan, the United States, and South Korea. The survey topics include deployment of IT systems, the relation between IT investments and management strategies, and internal, IT-related organization, and outsourcing of IT systems. Companies covered in the survey were typically large in size and were compared and analyzed from the standpoint of how each, as an entire company, utilizes the wide variety of IT systems it has deployed. Not only manufacturers but also service-sector companies, such as retailers and financial institutions, were included. Since the survey results are affected by the industrial sector and the size of firms, a descriptive regression was conducted to control for these effects. (For further details, see Discussion Paper 07-E-047)

The results reveal that Japanese companies have a higher deployment ratio for back-office systems - those designed to perform administrative tasks such as personnel and wage management - than U.S. firms, whereas they lag behind their U.S. counterparts in the deployment of "information processing" systems in areas such as management strategy support, market analysis and customer development, production planning, and planning support/information management of technology. By comparison, "mission critical" systems, which are designed to enhance the efficiency of routine operations such as back-office tasks and order management, can be defined as tools typically used for IT-oriented streamlining of business processes. Indeed, as areas in which the contribution of IT investment is relatively significant, many Japanese companies pointed to the effects of mission critical systems, such as, "reduction in indirect costs" and "reduction in inventory costs." In contrast, U.S. companies cited "development of new products, services, and businesses" and "strengthening of core business competitiveness" as areas where investment in IT has contributed significantly.

IT strategy clearly defined in U.S. but not in Japan and South Korea

In order to realize effective company-wide use of IT systems, the role of IT systems must clearly be defined in a medium-term, three- to five-year management plan and reflected in a medium-term IT investment plan (IT strategy). Thus, the survey asked about the status of IT strategy within a company's management strategy. A relatively large portion of U.S. companies responded that their "IT strategy is clearly defined in management strategy" whereas a large portion of Japanese companies said their "IT strategy is undefined but consistent with management strategy." The proportion of companies finding a "weak relation between IT strategy and management strategy" was greater among South Korean companies than among Japanese companies.

Another way to measure the status of IT systems within a company's management strategy is to look at the role of the chief information officer (CIO) within the company. A CIO, as referred to here, is responsible for the planning, development, and operation of information systems within the company and is in a senior executive position responsible for supervising the overall management of the company. In some companies, CIO refers to the non-executive head of the information processing division. However, even someone serving as the chief officer for all information processing systems within a company should not be referred to as CIO unless (s)he is responsible for the overall management of the company. Furthermore, in cases where the CIO is an executive but holds a concurrent post, the status of IT-based management within the company is perceived to be somewhat low. From this standpoint, the survey results show that the ratio of companies with a fulltime CIO is relatively high among U.S. companies; with a CIO holding a concurrent post is high among Japanese companies; and without a CIO high among South Korean companies. Thus the U.S. is again the pacesetter in defining the status of IT strategy within management strategy, followed by Japan, then South Korea.

Data integration and usage in formulating management strategy

In many Japanese companies, the post of CIO is held concurrently with another executive post. This is presumably due to temporary factors associated with the forthcoming implementation of the Financial Instruments and Exchange Law, the so-called Japanese version of the Sarbanes-Oxley Act (J-SOX). Many companies find it necessary for executive officers of general affairs and/or finance to also take charge of information systems in order to establish internal control systems as required by law. The impressions gathered from interviews with major companies imply that in the past several years major Japanese companies have actively sought to restructure their business processes. For instance, some companies, following the introduction of supply chain management (SCM), promoted collaboration - not only among group companies but also with business partners and customers - in areas ranging from parts procurement to production and sales, with profound results. Our survey also found that the percentage of companies that have introduced SCM is greater in Japan than in the U.S. and South Korea. At the same time, however, the survey results also show the percentage of those implementing SCM integrated with enterprise resource planning (ERP), mission critical systems, remains low in Japan. Japanese companies have introduced IT systems in specific product lines or particular divisions of the firm, and made significant progress in each of these areas. Yet they are lagging in terms of utilizing the amassed data for company-wide purposes, such as formulating management strategies and making investment decisions for the development of new businesses.

Mission critical systems for increasing efficiency of routine business operations such as order management, a kind of reform for which Japanese companies have a forte, can be defined as a classic case of IT application, observable as early as the 1970s, when general-purpose computers began to proliferate. Yet Japanese companies are not proficient at deploying informational systems, which are designed to perform complex analysis to better utilize data generated by mission critical systems for management decision-making and market analysis. In the arena of informational systems, such concepts as management information systems (MIS) and decision support systems (DSS) existed as early as the 1970s. However, it was only in the 1990s - after high-speed, large-volume data processing was made possible by sharply increased memory and processing capability of computers - that informational systems were put into practical use. Companies thus began to build data warehouses to integrate and manage existing but dispersed data within their respective organizations, using data mining to extract useful, management-relevant information from the data warehouse. From 2000, the concept of business intelligence (BI) has been put forward to offer a user-friendly IT environment and provide access to non-IT specialists in the management and business planning divisions. To elevate the level of IT system use by Japanese companies and drive companywide performance improvement, internal data resources stored separately in individual systems must be integrated and used effectively in management decision-making. Productivity is defined as output per unit input. Japanese companies have thus far promoted the use of IT as a tool to reduce input in the form of operational efficiency improvement. I strongly hope that they will also promote the use of IT as a tool to enhance their competitiveness by boosting output, for instance in the form of increased shares in the global market and more agile development of new products.

August 14, 2007

August 14, 2007