DX Series

Business Reinvention of Japan and DX: Challenges and opportunities

Date October 15, 2021
Speaker Ulrike SCHAEDE (Professor of Japanese Business, University of California, San Diego)
Commentator YOSHIZAKI Toshifumi (Digital Business Platform Unit, Executive Vice President, NEC)
Commentator & Moderator ONODERA Osamu (Consulting Fellow, RIETI / Director-General for International Affairs, Global Strategy Bureau, Ministry of Internal Affairs and Communications)

The current wave of digital transformation (DX) is transforming industries and societies around the globe, and Japan is no exception.
Japan's ability to compete in DX will determine its position in the global economy, in particular in Asia. In this BBL, Dr. Ulrike SCHAEDE, a Professor at University of California San Diego and author of the Book "The Business Reinvention of Japan - How to make sense of the New Japan and why it matters" (winner of the 37th Ohira Memorial Prize) will share her analysis of how DX is providing an opportunity for Japanese business to reinvent themselves, and the challenges and necessary moves for success going forward.


Japan today is facing new challenges related to digital transformation. To respond to the rise of lower-cost competitors in Northeast Asia, one strategy is the move towards high quality components and materials to create critical industrial input products in deep-tech niches expertise that are difficult to duplicate. Business models will also require reinvention in order to compete in the DX, including a revision of revenue models and new internal alignments to compete in new business segments. This brings new challenges in initiating cultural transformation, to create agile and adaptive organizations.

Reinvention in Japan

In spite of Japan's lost years, its deflation and struggling regional economies and government debt, it remains the 3rd largest economy in the world. Japan's leading companies adopted an "aggregate niche strategy" towards a renewal and are adopting a "Japan inside" strategy. This is necessary because of the rise of Asian competitors, the globalization of supply chains, the DX, and, domestically, labor shortage and pressures on corporate profitability. This made the old conglomerates and industrial powers transform into smarter, smaller and more agile businesses and positions them to benefit from DX and the disruptions that it represents.

A NEDO study of global market share of Japanese companies shows that of more than 1,100 product categories Japanese companies combined to more than 50% of global market share in 500. I have called this new positioning a "aggregate niche strategy", where large firms enter into and occupy leadership positions in deep technology markets. These positions are difficult to imitate and should provide a secure source of revenue for the next decade. There are two dimensions to these niches. The first is where one company occupies several niches, such as JSR occupying photoresists, polarizer film and brightness film. The other dimension is where several companies occupy one technology niche, such as in photoresists where Japanese companies such as JSR and TOK have 97% of global market share.

The presence of large Japanese conglomerates with many large subsidiaries still remains a problem. As part of their continued efforts to undertake "choose and focus," 2.0, some of those conglomerates are transforming their identities, focusing on technologies instead of size, creating dependencies, and improving profit margin. Hitachi is one such example as it transforms from metals, chemicals and medical to smart city infrastructure and data solutions. NEC may have similar aims. IBM is one such firm that has undergone this transformation and it took 10 years. This reinvention bodes well for Japan in terms of the DX, and in particular in manufacturing, where Japanese companies occupy important niches in shopfloor technologies, and are now positioning to compete in "industry 4.0".

The Alignment Model and Culture Change

An excellent analytical tool to study the changes necessary for Japanese companies to reinvent is the Alignment Model. It looks at the cogruence between 4 factors: the critical tasks of an organization; the people and the dominant mindset; the organization and reward systems, and corporate culture. If all these elements are aligned, then the organization will perform strongly. If this method is applied to a traditional manufacturing business, you see that the alignment focuses on "make no mistakes", "be meticulous and precise", "take orders", PDCA cycles, etc.

But to compete in breakthrough innovation and deep-tech, the new tasks are to sense and seize rapidly, new business development, and technical excellence. The people mindset revolves around creativity, a tolerance for failure, and embracing diversity. In terms of the organization and rewards systems, there needs to be a shift towards meritocracy, individualized career tracks/paths, incentivization for experimentation, with longer term and looser metrics. The culture needs to encourage curiosity and exploration, stepping out of bounds, tolerance and diversity.

Furthermore, there is a challenge translating the word culture into Japanese. Words that signal long and deeply entrenched tradition (such as bunka or DNA) are not helpful when companies try to change and reinvent, because they cannot be changed. A word is needed that indicates that culture is a set of socially created, adjustable "norms of behavior", and therefore, corproate culture can be managed and changed. Perhaps it can be translated as yarikata, in the meaning of "the way we do things around here", or kanko, "our practices". "Culture" refers to a roadmap, set up by CEOs, on what is the appropriate behavior in our company. It is adaptable and can be adjusted. For example, if you want people to be more innovative, as a leader you will have to praise such behavior. If more risk-taking people are praised for their accomplished, over time such behavior becomes a new and acceptable norm.

In conclusion, Japan's leading companies are undergoing this pivot or reinvention into deep-tech global niches. This requires great effort of internal reorganization and culture change. This presents an opportunity for a new type of competitive advantage. The DX is only just beginning, and the question is whether Japanese companies will be able capitalize on this moment.

Comments and Q&A

YOSHIZAKI Toshifumi:
I'm very honored to join this meeting, and it was great and encouraging presentation by Dr. Schaede. I am responsible for DX, AI, cloud security and bio authentication in NEC. I would like to speak on our current challenges in Japan.

Now we are proceeding with our DX, and many companies have assigned a leader for DX promotion within the organization, whether the CEO, CMO or CDO. Almost 63% of major companies have assigned DX promotion leaders in Japan. However, still there are worries about a shortage of human resources for DX promotion.

Looking at the ratio of IT human resources, there are differences by country. There are only about 30% of IT engineers in-house at Japanese enterprises. In the U.S., in-house IT compared to outsourcing of IT engineers is at a ratio of around 70:30. It is almost the complete opposite situation to the Japan model of IT. On top of that, most enterprises in Japan are dealing with the challenge of maintenance and are continuously dependent on legacy systems. So based on this environment, we are now proceeding with our DX.

NEC's challenges to realize DX are based on a three axes framework, encompassing business process, technology and competency. To improve our business process, we focus on the improvement of our customer experience. We started up a DX consultancy. We now have more than 200 DX consultants, starting from last year. This is to reach more upstream client opportunities. To deliver our technology, we developed one global platform. It was developed in the U.S in collaboration with our engineers and researchers in India. Currently our platform is developed as one architecture under one single platform, globally. Before that, for example, the facial recognition system was fragmented at NEC on more than 20 engines across 30 systems.

To improve our competency and digital skills, we designed a new environment for DX. We have classified nine new DX specialists, such as data engineers, data scientists, designers and agile engineers. Those are the new skills needed in the design category in NEC. We are aiming at achieving 10,000 specialists toward 2025. Currently, we have achieved 5000, so our goal is almost double the current number. Today we learned from Dr. Schaede, and we should like to proceed with yarikata based on the right behavior.

There are a number of reports on DX with interesting data. The METI DX Report 2.1 talks about the comfortable relationship between the IT software industry and the user industry, stating that they tend to gravitate towards the status quo. It mentioned the lack of a sense of crisis and simultaneously the need for upgrading IT skills. However, there is a fear that if too much training is provided to IT staff, they might leave the company in favor of better opportunities. And for vendors, entering into co-creator relationships poses the risk of loss of current lucrative contracts. Despite these challenges, the IT needs to be reconfigured.

Meanwhile, the IPA DX White Paper 2021 looks at the Japan-U.S. comparison of a state of digital transformation. It showed that U.S. companies are 71% on their way while Japanese companies are only 45% transformed. Dr. Schaede or Mr. Yoshizaki, do you have any comments on that data?

I find both of these reports very interesting. Mr. Yoshizaki should be very happy about level of outsourcing of IT services because that is good for business. It is just a different business model, that in Japan this is outsourced and in the U.S. it is not.

Regarding the reports and the emphasis in Japan of the digital cliff, it is very interesting and surprising for non-Japanese because Japan used to be at the forefront of IT and corporate IT, and it was in the 80s and early 90s that companies like NEC and Fujitsu and so forth were celebrated for bringing corporate IT into corporations. And now surprisingly Japan is facing this digital cliff. This may go back to the way the vendors were set up originally and the concept of keiretsu. But isn't it a great opportunity that just when DX is arriving, all Japanese large corporations need new IT systems? That is, we can throw all the old stuff out and build new stuff from scratch that is relevant.

YOSHIZAKI Toshifumi:
Well yes, Dr. Schaede. I believe this is a great opportunity for us. There are a lot of traditional Japanese companies, that means that we have a lot of the traditional assets and traditional lessons.

At NEC also, we almost 120 years of corporate history. That is a great asset for starting the new, long DX journey. Currently, we are putting together our long-term assets and knowledge to contribute to Japanese companies' re-invention.

There is a question from the audience asking whether digital gemba could be a big business opportunity for Japan, given that Japan has real strength in machine tools and the control field?

Yes, I think this is a great chance. I have talked to not only engineers in Japan, but also in Germany and some in the United States. This is something that Germany and Japan can really divide among their main competitors. And it's the long tradition, and it is not only the technologies. It's also the intangibles, like the Toyota production system--the alignment that is really good for shifting and being very precise. And so I think the digital gemba is really the first great chance. In the United States, there is not a lot of talk about it, because Americans do not compete in this as much.

I am Japanese, so I have some skepticism on this. I do think that the putting too much emphasis on the gemba leads to a complacency of sorts. And from that point of view, I think there may be bigger opportunities that may be ignored if you just focus on your own gemba and digitalization.

That is a very important point. This pivot is important. Toyota has this idea of going into the service business. However, the car of the future will still have to be manufactured, and it will be manufactured by the Toyota production system, only by robots. But it is in the safety of transportation where these car companies will compete. Hitachi is doing the same thing with rail transportation as a service. It is a whole new business model, and whole new opportunities are before us.

An audience member asked a very interesting question. Corporate culture or yarikata changes are very important, but are there any good metrics on this?

Yes, absolutely. There is a lot of research in the United States about culture management, such as Professor O'Reilly's work. I mentioned that culture has three dimensions. You can survey your workers and ask them what kind of behavior is important in our organization. In one organization they might say being obedient is very important. But in another culture they might say they have to come up with new ideas or else they will not be promoted. You can also check for consensus with a survey too. And you can also identify gaps between what the management thinks and what the workers think. It is a very useful mechanism.

Thank you very much. Mr. Yoshizaki, do you have any thoughts?

YOSHIZAKI Toshifumi:
That is a great suggestion for us because we always need to monitor how our digital transformation and current status are progressing. Regarding NEC, we have also changed several internal processes, like opportunity management or digital transformational offering, which means hardware and software services are newly packaged to clients. So it is easy for us to increase our DX offerings before and after these changes. But on top of that, as Dr. Schaede mentioned, we need to analyze behavior based on the contents or consensus. So we need a new type of monitoring.

From that point of view that the Japanese organization needs to become more agile in the new DX society, in order to do that, do you think repetition is more important or do you think trying to meet the customer's needs early is more important? That kind of decision is probably something that needs to be made in the new setting rather than the old way of thinking.

The real challenge will be to keep both alignments in one company. In other words, success will come from keeping all of the advantages of the traditional and monozukuri alignment, where you get very high-quality results, while incorporating the new alignment for the new explorer businesses. And then you have to sort of have these two alignments in one company.

How this can be done is a different type of conversation. I don't think it's old and new. Maybe it is hybrid. And I actually do not think we need employment mobility for this. Big layoffs are not likely in Japan and besides, you can change people and you can change culture. AGC and JSR are doing new things with the same people. By telling the people to behave differently, you can manage a new culture with the same people. It is just a set of behaviors.

We have another question from the audience on reward structure or salary structure? When you try to have two kinds of cultures in the same company, how would you try to align that with the reward structure?

That is very complicated because there are lots of great things about lifetime employment and wage parity, which makes for less competition and it is good for teamwork. I think that is why many Japanese companies have gone very slowly in changing to a meritocracy. But fundamentally, the shift to meritocracy pay is the right thing, and it has to happen, unfortunately.

Thank you very much. I would like to ask for your final comments about what you think is important going forward or the important things that you found in the discussions. And if you have any policy recommendations, it would also be highly appreciated.

The policy task is how can you change to have more Japanese companies enter this niche, and make more Japanese companies reinvent themselves and pivot. I think that one way to get there is to somehow convince them that they should be more self-confident. To grab an opportunity, you actually have to have an optimistic worldview like entrepreneurs do. Entrepreneurs win because they are optimistic about the future. They think they can do it. And so even in large companies, we need this entrepreneurial spirit. And it would probably be very healthy for Japanese companies to be more self-congratulatory and have this positive outlook, then it is easier to grab business opportunities.

YOSHIZAKI Toshifumi:
Yes, thank you very much. We should have more confidence. Of course, I am still in middle of running a Japanese company, but I believe we should try to compete as a global company again. It is not easy for us to try the scrap and build approach. However, we need to, step by step. Small success is very important. And we should go forward based on the lessons learned and our success. We should go forward based on confidence.

Thank you very much Dr. Schaede for your very interesting presentation, and Mr. Yoshizaki for your insightful comments, and thank you very much to the audience for listening in today. I hope this discussion was interesting and that it gives you the right incentives and courage to go forward, along with an understanding of the need for change.

*This summary was compiled by RIETI Editorial staff.