One Condition for Developing Overseas Markets: All-out commitment to utilizing multinational human resources

Faculty Fellow, RIETI

As Japan's population declines and ages, and the yen continues to appreciate rapidly, attention is being drawn to the rapid growth of emerging markets. Confronted with these new circumstances, many Japanese companies have adopted the "expansion of business overseas" as their growth strategy, but this is a very steep path to climb.

In extending business globally, world attention is focused on China, India, Brazil, and other emerging markets. American companies such as General Electric (GE), IBM, and Proctor & Gamble (P&G) as well as Switzerland's Nestlé have undertaken significant transformations to expand their businesses into emerging markets.

A leader among global companies that just celebrated its 100th anniversary last year, IBM terms itself a "globally-integrated business entity." Not seeing management resources such as personnel and technology in a country-by-country context but rather as transcending national borders in freely and jointly utilizing these resources has allowed the company to boost the speed of its global business growth and hold down costs. Approaches to accounting, personnel, and other administrative management, as well as software development and call centers being shared worldwide, enable management resources to be utilized in a concentrated fashion to provide customers with solutions when advancing into emerging markets. Underlying this is the idea of according higher priority to the company's own growth than to the company's country of origin.

Global companies, however, do not forget market diversity. Nestlé is seeking a source of competitive advantage in tailoring its efforts to meet local (regional) needs. Despite being the world's largest manufacturer of food products, Nestlé holds only a 1.7% market share as a consequence of the food industry's diversity. Its rivals differ by country, making local adaptation important; this is the reason the company as a whole offers more than 70 brands of bottled water. Diversity characterizes the company's workforce as well as its product lineup, and its 280,000 employees comprise 150 different nationalities.

Utilizing personnel familiar with their respective localities is essential in fully developing diverse emerging countries as consumer markets. That in itself is the secret to the success of "reverse innovation (technical innovation)" that develops products by deriving technology from information on the functions and prices demanded by the market.

♦  ♦  ♦

No matter how diverse a work force it seeks to employ, however, a company is doomed to fail sooner or later if it does not modify its organization and management style to encourage these diverse human resources to play an active part. Needed is management that maximally leverages personnel diversity with the aim of getting highly capable employees to exercise leadership in creating business in their respective markets. Nestlé's management team encompasses nine nationalities, indicating no insistence on dominance by Swiss personnel simply because the company is Swiss. Here again is the vision of a global company not constrained by the concept of countries.

In 1999, P&G initiated reforms aimed at globalization, while in 2000, Nestlé began standardizing its operations internationally and continuing to tailor its product lineups to individual markets. By contrast, the globalization efforts of Japanese companies lag by a decade or more. Many Japanese companies remain focused on Japan as their mainstay market, at best becoming international companies extending a portion of their manufacturing, sales, and operations overseas. Japan-centric decision making by Japanese managers is still prevalent. Global growth will be difficult, though, unless Japanese companies break away from the old approach.

To make effective use of their management resources and expand their businesses across national borders, global companies are making the transition to matrix structures. Organizations with a matrix structure are classified by intersections of vertical columns (region) and horizontal rows (business). Accordingly, disagreements are more likely to arise in these global companies than in their Japanese counterparts, which often define their organizations within a single vertical column. It is not at all unusual for personnel in charge of particular businesses and those in charge of specific localities to differ in their opinions on the products that should be sold. Matrix-based organizations cannot operate without the skill to resolve the conflicts between businesses and localities quickly. This presents a quandary for Japanese companies, which thus far have sought to keep such disputes from surfacing.

In other words, simply modifying organizational structure or increasing employee diversity is not sufficient for global business growth. There are numerous instances of companies debating the use of English as the official in-house language for the sake of globalization. More important than the language issue, though, are understanding the cultural differences behind conflicts and ensuring employees have the skills to resolve conflicts effectively; language proficiency alone is meaningless without these.

Effectively dealing with conflicts stemming from cultural diversity is an essential part of managerial training at global companies. In short, matters cannot be resolved by relying entirely on Japanese approaches. Global issues must be resolved by a global team. The problem solving process at global companies also differs from that at Japanese companies.

♦  ♦  ♦

What Ajinomoto, Kao, Japan Tobacco (JT), Nissan Motors, Shiseido, and other Japanese companies dynamically pursuing globalization have in common is that their top managers exhibit leadership in implementing major across-the-board reforms encompassing strategy, organization, decision-making processes, and personnel systems. Kao has been closing in on P&G with the introduction of a global matrix organization. Kao's president Motoki Ozaki is deeply committed to training personnel comprising various nationalities to resolve conflicts creatively. Global human resources development is the most important issue in which top management itself should be directly involved.

Globalization is essentially all about dealing effectively with diversity inside and outside the organization. In this regard, Westerners who live in the midst of racial diversity have a greater wealth of experience than Japanese. This being the case, it might be better to empower global business growth to non-Japanese personnel. The key to the success of JT, the world's third largest tobacco manufacturer, lies in its decision to delegate leadership of global business expansion efforts to Geneva-based JT International, with the Tokyo head office devoting its attention to governance.

Shiseido's attainment of global business growth, as exemplified by its double-digit growth in China, is due in great part to the leadership of Carsten Fischer, corporate senior executive officer, who came to the company from P&G. Shiseido's unique attempt to secure major markets by utilizing diverse "product brands" other than the Shiseido brand has proven fruitful.

Nissan's president Carlos Ghosn has also made his mark through global growth. As of 2010, 86% of Nissan's sales were overseas, while domestic production accounted for only 25% of the whole. Underpinning its business is a personnel system that integrates the discovery, training, and rotation of outstanding personnel on a global basis. Non-Japanese nationals now make up half of Nissan's company directors and 25% of its executive officers.

♦  ♦  ♦

There is no single solution for optimal globalization that is effective for all companies. Imitating leading global companies alone will not bring success. Careful thought must be given to the implications of the fact that the company is based in Japan. Should it venture overseas or focus on the home front? What are the company's identity and mission? What does being a "Japanese company" actually mean? All of these questions put company philosophies in the spotlight.

Transcending the idea of countries, however, is not the one and only key to globalization. A good example of this is provided by Komatsu, which, despite a dedication to manufacturing in Japan, was prompted by the challenges of capital recovery and theft prevention in China to develop a worldwide management system for large construction machinery utilizing the Global Positioning System (GPS). This is where entrepreneurship linking globalization to technical innovation comes in play.

Regardless of the optimal approach to globalization, business growth cannot be achieved unless company-wide transformations inclusive of head office functions are undertaken. Japanese company managers must be fully prepared to take all employees out of the comfort zone of an all-Japanese staff working entirely in Japanese. This is a steep path to climb, though, necessitating strong leadership. Everything will come back to the decisions of leaders who set out on significant reforms in the realization that globalization is the only road to survival.

>> Original text in Japanese

* Translated by RIETI.

January 31, 2012 Nihon Keizai Shimbun

March 6, 2012

Article(s) by this author