Speeding Management "Visualization" with IT in Japanese Companies

Senior Fellow, RIETI

Japanese companies are slow to utilize information technology (IT) because management fails to properly recognize the importance of IT systems, with IT utilization mostly limited to mission-critical systems. IT utilization must be strengthened in the form of information processing systems to greater capitalize on IT as a tool for "aggressive" business management, such as in developing new products and cultivating new markets, and thereby contributing to the productivity improvement.

IT in Japanese companies as a tool for improving operational efficiency

As Japan's population ages and its fertility continues to decline, economic growth led by productivity gains tops the nation's policy agenda. Effective use of IT is key in achieving that growth. Japanese companies are said to lag behind those in the United States, an IT leader, in their degree of IT utilization and IT's contribution to productivity. This means that Japanese companies that fully utilize advanced IT systems could see a significant improvement to productivity at a macroeconomic level.

Here, I would like to illustrate differences between Japan and the U.S. and consider ways to increase productivity through IT utilization, drawing upon findings from RIETI's International Comparative Survey of Firms' IT Strategies.*

The survey, conducted in February 2007, targeted listed companies in Japan, the U.S., and South Korea regarding their deployment of IT systems, asking about the status of IT strategy within management strategy, IT-related internal organization, and outsourcing of IT systems. Responses came from 317 Japanese, 200 U.S., and 300 South Korean companies. The companies, typically large in size and utilizing various IT systems, were compared and analyzed particularly from the standpoint of how each, as an entire company, considers its relationship with IT management. In addition to the manufacturing sector, the survey covered the retail and financial sectors.

First, in the degree of IT system use by division or department, Japanese companies, relative to their U.S. counterparts, were found to have a higher deployment ratio for back-office systems (those designed to perform administrative tasks such as personnel and wage management) but lag in deployment of information processing systems in such areas as management strategy support, market analysis and customer development, production planning support, and technology information management.

Information systems designed to improve the efficiency of routine business operations (back-office tasks related to personnel and payroll management, product order management, etc.) are referred to as mission-critical systems, which are important in ensuring a steady and effective flow of tasks. Indeed, as areas in which IT investment contributes quite significantly, many Japanese cited improved operational efficiency, such as in the form of reduced indirect and inventory costs.

Information processing systems are used primarily as a tool for database building and analysis in areas such as management strategy support, market analysis, and customer development. U.S. companies have a high deployment ratio for these systems; in the survey, many U.S. companies cited "development of new products, services, and businesses" and "strengthening of core business competitiveness" as areas where IT investment has contributed significantly.

Japan's IT status symbolized by many CIOs wearing two hats

A look back at the history of IT deployment by Japanese companies shows the era of general-purpose computers in and around the 1980s characterized by mission-critical systems designed to increase the efficiency of routine business operations - accounting and order management systems, etc. - as a primary area of IT system application. More recently, however, focus is placed on information processing systems and their role as a tool for database development. Information processing systems enable companies to integrate information and data collected through mission-critical systems both from internal and external sources, creating databases that can be a resource in making management decisions and analyzing market competition.

Although the general notion of management information systems (MIS) has been around for quite some time, there have been problems in computer processing capacity and usability. Only recently, and owing to the advancement of Internet technology, has full-fledged use of information processing systems finally begun to proliferate. Japanese companies, however, continue their outmoded use of IT, trailing the U.S. in the development of advanced applications.

The relationship between IT systems and a company's management can be measured by the extent to which the company discusses IT investment and the use of IT systems in its medium- to long-term management strategy. Our survey found that U.S. companies tend to clearly define the status of IT within their management strategy. In contrast, many Japanese companies said their "IT strategy is undefined but consistent with management strategy." The proportion of companies finding a "weak relationship between IT strategy and management strategy" was greater among South Korean companies than Japanese companies.

Another way to measure the status of IT systems in a company's management strategy is to look at the role of the chief information officer (CIO). A CIO is responsible for the planning, development, and operation of information systems within the company and is in a senior executive position that supervises the overall management of the company. In some companies, CIO refers to a non-executive head of the information processing division. However, even the chief officer for all information processing systems within a company should not be referred to as CIO unless that person contributes to 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 seen as 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; a CIO holding a concurrent post is high among Japanese companies; and no CIO at all 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.

As mentioned, in many Japanese companies the post of CIO is held concurrently with another executive post. This is presumably due to temporary factors associated with implementation of the revised Financial Instruments and Exchange Law, the Japanese version of the Sarbanes-Oxley Act (J-SOX). Many companies find it necessary for general affairs and/or finance executives to also take charge of information systems in order to establish internal control systems as required by law. Our interviews with some major companies revealed that, in the past several years, they have substantially stepped up efforts 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 - in parts procurement and production, with significant results. Our survey also found that the percentage of companies introducing SCM is greater in Japan than in the U.S. and South Korea. Yet at the same time the results also show that implementation of SCM integrated with enterprise resource planning (ERP), a mission-critical system, remains low in Japan. Although Japanese companies have introduced IT systems in specific product lines or particular divisions, and made significant progress in each of these areas, they lag in integrating the acquired data for company-wide management decisions.

A closer look at individual cases reveals some Japanese companies making robust investment in information processing systems and/or defining IT systems as an important tool for realizing management strategy. These companies exhibit higher productivity than those lagging in IT deployment. However, the problem lies in the fact that for a vast majority of Japanese companies IT systems remain no more than a tool for improving efficiency of routine business operations.

Top managers' leadership needed to ramp-up IT deployment

In many Japanese companies, upper management has only a superficial understanding of the need and importance of IT systems and is doubtful about the use of data analysis in its decision-making. It feels that in making critical decisions that affect the entire company, computer-generated analytical results should be at the most supplementary. However, in this era of global mega-competition, collecting and analyzing as much information as possible is becoming increasingly more important than relying on "experience" and "intuition," for making decisions.

Top managers' leadership is key in raising the level of IT management. Managers should recognize the importance of IT systems as a corporate management tool and lead cross-departmental initiatives to deploy information processing systems.

Today's companies can turn to a range of tools to arm themselves with companywide information; employing data warehouses to integrate and accumulate bulk data on a day-to-day basis through mission-critical systems across the company or business intelligence to support level-by-level data analysis, helping to analyze data on management, planning divisions, or general employees. This "aggressive" type of IT management is directly linked to the competitive power of a company in developing new products and cultivating market. U.S. companies generally use IT systems in this manner.

However, in order to fully utilize these kinds of IT systems, companies need staff with advanced skills, capable of developing business process models and conducting market analysis. Business analysis capability is needed in order to select and develop managerially valuable "information" from the enormous volume of "data." In this regard, increased company-wide awareness about the need to better utilize IT systems, along with development of the necessary human resources will become increasingly important. For this, it would be useful to set up a specialized division, such as an integrated information management division, within the company. Recently, Japanese companies took a significant step forward in "visualizing" or improving transparency of business processes through the use of IT. Their next step would be to realize the "visualization" of the future by strengthening company-wide business analysis capabilities.

>> Original text in Japanese

* Translated by RIETI.

March 28, 2008 Nihon Keizai Shimbun


* see "Comparative Analysis of IT Management and Productivity between Japanese and U.S. Firms," RIETI Discussion Paper Series 08-E-007, 2007.

April 28, 2008