RIETI Policy Symposium

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

Information

  • Time and Date:
    9:30-18:15, Thursday, January 26, 2006
  • Venue:
    Hall, Shinsei Bank (1st Floor, Head Office, 2-1-8 Uchisaiwaicho, Chiyoda-ku, Tokyo)
  • Language:
    Japanese / English (with simultaneous interpretation)

Summary of Proceedings

Session 1: Issues of Global Innovation for Japanese Companies

The first presentation, titled "Issues of Global Innovation for Japanese Companies" was made by ASAKAWA Kazuhiro, Faculty Fellow, RIETI; Professor, Graduate School of Business Administration, Keio University.

Considering globalization and innovation together, three issues exist from the perspective of metanational theory. The first is overcoming the tendency to focus on one's own country; in other words, if key sources of competitive advantage cannot be found at home, it is necessary to look at sourcing knowledge from abroad. This is done by reforming the organization to do away with the home-country focus, hiring personnel who excel in knowledge broking, further developing them, and making the most of their skills. The second issue is overcoming self-reliance; in other words proactively making the most of domestic and overseas alliances. The third issue is shifting one's gaze to the emerging economies of Asia, tuning one's sensors to pick up information from anywhere in the world, and innovating by melding with things of a different nature. From the perspective of metanational theory, these three issues can be regarded as the key challenges for global R&D.

Japan enjoys a very favorable R&D environment, with R&D spending as a proportion of GDP being the highest in the world. Researcher numbers are second only to the U.S. and the world's highest in per capita terms, with particularly large numbers of researchers in industry. When it comes to science linkage, however, Japan is at the lowest level among developed countries. The limitations imposed by the domestic focus of Japanese organizations have constrained R&D.

To effectively sense, meld and leverage local knowledge via overseas R&D, it is necessary to build sufficient capability in overseas affiliates, create extensive networks in local communities, and establish internal networks that include the home-country R&D headquarters. While it is often difficult to grant overseas affiliates the appropriate degree of autonomy, this is an important part of the process.

Internal networks are important at the melding stage. How the parent company assesses high-potential overseas knowledge and its ability to deal with locally-developed technologies, know-how and ideas from a broad perspective are crucial. The process is most effective when large numbers of people are interacting and communicating.

The role of overseas laboratories change with the times, from the start-up stage to units whose main role is local sensing as local innovators, and to divisions contributing to the transfer and dissemination of the fruits of R&D to other divisions within the organization. The keys to managing this effectively include rotating personnel, intentionally changing locations and shuffling directors. Another method is to use a center of excellence format, taking the mission of one laboratory and dividing it among several laboratories to change their role to that of a virtual center of excellence.

There are many barriers to becoming metanational, including perceptual, sociopolitical, and systemic obstacles. It is vital for top management to ensure its mindset is shared across the whole company, making metanationalism the dominant logic throughout the organization, i.e. the basis for creating corporate value and the focus of strategy.

From now on, Japanese companies need to think of the emerging BRIC economies - Brazil, Russia, India, and China - as more than just low-cost production bases. They need to seriously consider these countries as sources of high-added-value innovation, as European and U.S. companies are already doing. While fully understanding the peculiarities of emerging economies such as insufficient protection of intellectual property, they need to adopt approaches and build mechanisms that enable high-level knowledge to be generated from these regions.

Following the presentation, a member of the audience posed the following question.

Q: I understand the need for sensing, overcoming self-reliance and adopting metanational management, but to what extent do people capable of doing this exist in Japan? To achieve this, do recruitment and promotion have to be metanational too? How should Japanese people be educated in order to become metanational?

A: (Prof. Asakawa) As Professor Yves DOZ noted earlier, the most important thing is to develop cosmopolitan managers, and Japanese companies are no exception to this rule. Cosmopolitan managers are recruited and promoted on the basis of their abilities, regardless of nationality. This means developing people whose skills are applicable anywhere in the world and assigning the right people to the right jobs, including overseas local staff. It's important to give such people experience of working in several countries as early as possible in their careers.

Next Marco CASSIS, President, STMicroelectronics K.K. and Corporate Vice President, STMicroelectronics, made the following points in his presentation titled "ST's Globalization Strategy for Continuous Innovation."

STMicroelectronics was formed in 1987 as a result of the merger between Thomson Semiconducteurs of France and SGS Microelettronica of Italy. At that time we ranked 14th in the world, but by 2005 we had reached number six. Our headquarters are in the Netherlands and for tax purposes we are a Dutch company, but the head office is in Geneva and not many personnel work there. Sales, which were $860 million when the company was formed, grew to $8.8 billion in 2005. Unlike other companies, our 50,000 employees are scattered around the world. Asia is home to 34% of our employees, while 20% work in France, 22% in Italy, 6% in the U.S. and 15% in Malta and Morocco. With only 0.4% of our workforce, the Japan operation is still small, but we plan to expand it in the future.

STMicroelectronics conducts R&D and manufactures and sells automotive products, computer peripherals, home and personal communications equipment, memory devices, microlinear discrete devices and subsystems. Semiconductor technology is advancing at a furious rate and in geographical terms markets have shifted to the Asia Pacific region and China. With profit margins being shaved year by year, we need to apply a strategy of becoming a more global company. We are marketing using our global systems, keeping our antennae tuned to sense new developments, maintaining a global R&D structure and shifting production bases to more cost competitive areas.

The first of our three business pillars is a global sales network consisting of 78 branches in 36 countries. We have established 39 design and application centers and are rapidly shifting production from high-cost areas to mid- or low-cost regions. The second pillar is our global R&D capability. Fully 20% of our 50,000 employees work in R&D facilities located close to our customers throughout the world, from advanced R&D centers to our 39 design and application centers. We have built academic networks in the U.S., Europe, and China, and conduct future-oriented development from a long-term perspective. The third pillar is the partnerships we have established via global alliances. We have even entered into tie-ups with competitors to jointly develop next-generation technologies and continue to expand into new regions with alliance partners. However, it is not possible to link employees scattered around the world and achieve shared understanding without a common culture. At the core of our growth strategy is the value we place on corporate culture as the bond that connects our employees spread around the globe.

YOSHIDA Toyoji, Member of the Board and General Manager, Corporate Communication Department, Takeda Pharmaceutical Company Limited then made the following points in a presentation titled "The Challenge for Global Innovation."

Takeda Pharmaceutical has a long history stretching back to its foundation in 1781, reaching its 226th anniversary this year. Since Takeda Kunio, a member of the company's founding family, was appointed as CEO 13 years ago the company has embarked on reforms focused on three main themes: making high-added-value products, focusing resources on key areas, and putting the right people in the right jobs. In the aim of transforming a venerable firm with diverse and largely domestic business into a global pharmaceutical company focused on R&D we adopted a results-oriented approach, launching a range of initiatives, including stricter evaluation of executives' performance and simplification of organizational structure.

Six years ago when our share price peaked at ¥8,080 the company had a market capitalization in excess of ¥6 trillion, but now the share price is in the ¥6,430 to ¥6,440 range and market capitalization is around ¥5 trillion. This is because key products have peaked out and ROE has fallen due to mounting investment in R&D. Our financial statements show we are currently holding about ¥1.7 trillion in cash, and the company has been harshly criticized by analysts demanding more active investment. However, given that the pharmaceutical business involves enormous R&D costs and a high degree of risk due to the low probability of a product succeeding, we believe it is necessary to hold a certain amount of cash for crisis management.

We have four internationally strategic products - anti-ulcer agents, drugs for the treatment of diabetes, antihypertensive agents and prostate cancer medication - all of which rely on overseas markets for about 70% of their sales. This includes dependence on the U.S. market for 52% of sales. Domestic sales account for 33%, and the key words for our corporate strategy are globalization and R&D. We have more than 7,000 group employees in Japan and over 5,000 in the U.S. alone. Over the last 10 years we have been rapidly globalizing our operations. Sales in the U.S. market have risen from $2.75 billion 10 years ago to $10.1 billion today and the survival of the company is now interlinked with survival in the U.S. market.

We have two sales companies in the U.S., both based in Chicago. Takeda Pharmaceuticals North America, Inc. handles sales of drugs for the treatment of diabetes and insomnia, while TAP Pharmaceutical Products, Inc., a joint venture with Abbott Laboratories, sells antiulcer agents and prostate cancer medication. We also have two U.S. R&D facilities: Takeda Global Research and Development Center, Inc. in Chicago and Takeda San Diego, Inc. Together with Takeda Research Investment, Inc. in San Francisco, these companies form a value chain for research, development, and sales in the U.S., lending strength to our global operations.

There are three features of Takeda Pharmaceutical's innovation efforts. The first is what we call MPDRAP, an in-house group that shares information across marketing, production, development, research, alliance, and patent divisions so that consistent strategies from research to market can be implemented in four key areas. The second is our global R&D structure, with research facilities in Tsukuba, Osaka, and San Diego and development facilities in Osaka, Chicago, and London. The third is our "multi IND engine model," a structure that enables multiple research facilities such as those in Tsukuba, Osaka, and San Diego to generate new drug candidates by making the most of each other's strengths and working in an organic partnership.

Our main human resources issue is: How should we recruit and utilize Japanese people with both operational ability and English skills? Or should we shift to more effective ways of utilizing overseas staff? Indeed, it is a difficult issue how to communicate the philosophy of a long-established Japanese company to staff in overseas sales, research, and production affiliates so that they share our corporate values. Is it enough to be global, or should we aim to be a metanational corporation of the kind being discussed at this symposium? We fully intend to give even more serious consideration to this question in the future.

Next, NAKAMURA Hiroshi, Professor, Graduate School of Business Administration, Keio University gave a presentation titled "Disadvantages in External Environments and R&D Management in Pharmaceutical and Biotechnology Industries."

The R&D environment for the pharmaceutical and biotechnology industries in Japan is markedly inferior to that in other countries. In these days of rapid technological advances, it is difficult for companies to independently conduct their own R&D. Cluster formats are needed to overcome this problem. Positioning one's own research facilities within a cluster of companies generating new knowledge can have a positive impact on a firm's R&D.

There are two management strategies for companies in locations with inferior R&D environments. The first is to acquire the meager management resources available in their own countries along with management resources overseas, and the second is to utilize those resources effectively. The examples of the alliances of bio-ventures AnGes MG, Inc. and Precision System Science Co., Ltd. with pharmaceutical companies illustrate this point.

In terms of acquiring management resources, AnGes MG possessed the seeds of clinical research on humans conducted at Osaka University, which led to an alliance with Daiichi Pharmaceutical Co., Ltd. Having such research seeds to produce cash income also contributed to stable management. Moreover, the company looked abroad from the beginning when developing the seeds of new drugs, establishing overseas affiliates and gaining U.S. Food and Drug Administration (FDA) approval for clinical trials, and this was a major factor behind its success.

Precision had produced DNA extraction equipment and perfected technology to solve the issue of one person's DNA potentially being mistaken for another's - a serious problem in the clinical environment. The company was quick in noticing this problem and its simple and user-friendly technology rapidly addressed it, resulting in a tie-up with multinational heavyweight Roche.

Alliances are important for pharmaceutical companies. Gaining access to the seeds of other companies' research under license and buying out other firms enables acquisition of their management resources. A company that is skilled in forging alliances is one that maintains a balance between the ability to make acquisitions and the ability to absorb and make use of them, as well as having systems that enable objective evaluation of outside research seeds so that it can recognize good opportunities when they arise. Ways of achieving this include stronger incentives for the entire company to support introduction of these skills and systems, formulating a policy on corporate alliances and ensuring it is thoroughly understood, and setting up small entrepreneurial organizations within large corporations.

In response to the presentations SUGIYAMA Yasuo, Associate Professor, Graduate School of Economics, Kyoto University, offered the following comments.

On today's theme of global innovation we have heard from representatives of the semiconductor and pharmaceutical industries. Whereas core R&D functions in the pharmaceutical industry tend to be focused in the home country, semiconductor companies have overseas affiliates to lead cooperative efforts with partners, and place emphasis on target marketing in the B-to-B sector, where product lifecycles are short. I understand that STMicroelectronics has set up its entire R&D function along those lines. In contrast, Takeda Pharmaceutical still faces the challenge of decentralizing its R&D, but I understand that efforts in this direction have begun, especially for research.

The key to whether business activities can be decentralized seems to be the degree of interdependence between units, no matter whether we are talking about research, development, alliance partners, or the link between development and production. In that light, in the pharmaceutical industry interdependence with external partners is quite a lot stronger than interdependence between internal units. The semiconductor industry, on the other hand, seems to paint a different picture.

In this context it is easy to understand the metanational concept. In industries where information is hard to handle (i.e. costly to acquire, transfer and use in a new locus) and levels of interdependence are very high the essence of metanationals lies in arriving at the right balance. Shifting to a balance not achieved by other companies can create opportunities for profit.

Takeda Pharmaceutical has broken away from the normal balance in the Japanese pharmaceutical industry to adopt a more global orientation, but in world terms globalization is already the industry standard, so the key to success will be finding a new balance within the global industry.

RIETI Consulting Fellow SANBONMATSU Susumu made the following comments.

Within the innovation chain, one challenging issue is the overall management of various R&D activities which are each heading in different directions. Companies that succeed in meeting that challenge are innovative companies.

The STMicroelectronics business model involves going out and getting elemental systems technology researched and developed in many locations around the world, building that technology into its own product development, and making use of it for future products. This model has been established as a joint research system with public research centers in the form of a global academic network. This is a feat which might not be possible for Japanese companies.

Within a function-based organizational structure typical of a large Japanese corporation, Takeda Pharmaceutical is developing its business according to vertical divisions. These are linked globally. This is an example of skillful innovation chain management in the sense that vertical business development is well-managed horizontally across the organization, and this is a major factor in the company's success.

Yves Doz, Professor of Global Technology and Innovation at INSEAD, offered the following comments.

Global innovation leaders need to be distinguished from global innovation followers. Firstly, innovation leaders like STMicroelectronics and Takeda Pharmaceutical are extremely active in pursuing new knowledge in a dispersed fashion. STMicroelectronics has a technology group with systems as advanced as its marketing operations. In seeking knowledge it is very important to broadly concentrate both technology and marketing resources. Secondly, innovation leaders make much greater use of technology alliances and partnerships than innovation followers.

There is no need to be so sensitive about industry differences. The important thing is to gather knowledge from many places around the world and to attune your senses to integrating that knowledge. When markets differ the implications of innovation patterns also differ, so we can learn a great deal from differences in strategy among companies.

Professor Asakawa summarized the discussion in Session 1 as follows.

While "global" and "metanational" are in some respects alternatives, in fact I believe it is more a question of how various factors in the management equation are combined and in what proportions. In reality no single absolute solution is apparent yet, but there is no denying the existence of metanational approaches as a general trend. It has become clear that management policies that ignore this trend are not suited to today's world. The key point to emerge from the discussion is the importance of leadership displaying the kind of management skills and organizational ability that can make these approaches function effectively.

Finally, the floor was opened to questions.

Q: What is the difference between STMicroelectronics' headquarters and head office? And in which are the CEO, CFO, and COO located?

A: (Mr. Cassis) Unlike other companies, our office in the Netherlands is basically a legal entity, while the CEO, CFO, and COO are located in the head office in Geneva.

Q: I would like to ask Mr. Yoshida about problems and issues in communicating with overseas branches of Takeda Pharmaceutical, and what measures are taken to resolve them.

A: (Mr. Yoshida) There is a theory that communications get clogged if there are more than seven levels in the organization, so one thing we did was simplifying the organizational structure. We did away with management titles and pushed everyone except line heads into the single category of team leaders. The second measure we took was appointing local staff to head all overseas operations other than certain production facilities. I think these two steps are the reasons for our success.

Q: I would like to ask about problems experienced by biotech and pharmaceutical companies relating to the role of universities and the systems they use, as external environmental factors for such companies.

A: (Prof. Nakamura) There is not enough communication between academia and people in the industry, and those on the university side have not built up a lot of knowledge about the commercialization of research. We aim to do more knowledge translation research to link basic research through to commercialization, but Japan does not have the environment for that, and this is a major sticking point. Gaps in this area need to be bridged using overseas researcher networks. To achieve this, it is important that an attitude of bringing good research in from outside is part of the corporate culture.

Q: In order to move research ahead, how do you strike a balance between autonomy and management, in other words how do you find the appropriate level of control? How do you promote information exchange and human interaction?

A (Mr. Yoshida): I think autonomy is the most important thing. Information exchange is necessary, but autonomy is the basic principle. It is desirable that the Takeda spirit - fairness, honesty, and perseverance - will permeate the company by such means as recognizing people who embody that spirit in our business activities.

Q: How do you think turning Japanese research institutes into independent administrative institutions will contribute to Japan's R&D environment?

A: (Prof. Nakamura) There are too many gray areas between universities and industry. I think making things more open on both sides will create channels for communication.