As discussed in earlier articles in this series, both individuals and companies (organizations) in all levels are unable to take advantage of the benefits of digitization in today's Japan. How to respond to multi-level competition is particularly a big challenge. Multi-level competition refers to inter-system competition in which the complexity of products and systems containing them as components increases in a nonlinear fashion to add a new, elevated level of competition. In order to navigate such competition successfully, the precise abstraction of information within each class of system hierarchy and the clear and prompt traceability of information across classes are indispensable. A lack of these indispensable qualities is the reason why Japan is lagging behind other peers.
For instance, companies must have a research and development (R&D) strategy designed to increase real options to be better prepared for growing uncertainty. This involves expanding the scope of R&D activities and identifying the strength and weakness of their technologies from a long-term viewpoint. This, however, cannot be done in a self-contained manner because long-term (comparative) assessment is indispensable. This dilemma led to the rise of corporate venture capital (CVC), a new form of corporate investment in startup businesses in which the parent company's R&D division is actively involved. Acquisition and development (A&D) based on evaluation metrics obtained through CVC is also crucial. However, Japanese companies are hardly visible in both CVC and A&D.
Japanese companies are also slow to respond in the area of corporate governance. The global trend is for the segregation of duties, which is to ensure the independence of two functions—i.e., execution and supervision—from each other. This is because more and more companies have come to recognize the need to have a long-term perspective and contribute to society in order to remain profitable in the future. In developing new business strategies, leaving the task to existing executive officers alone tends to narrow the channels of thinking. In addition, if they are unable to take advantage of informating, a benefit brought by digitization, they cannot recognize changes in the business environment resulting from multi-level competition. Many Japanese companies have adopted a governance structure consisting of two separate functions, namely, execution and supervision. In reality, however, the former tends to dominate the latter in power balance.
This state of affairs of Japanese companies, i.e., inability to adapt to multi-level competition, has its analogues in layered patterns (fractal structure) in various areas including design and manufacturing, R&D, corporate governance, corporate structure, and venture finance. Japan also faces a dilemma in which the presence of this structure causes a lack of learning opportunities needed for the formation of human capital with self-evolving capabilities. Changing this fractal structure is indispensable to enable Japanese companies compete with their overseas rivals.
* Translated by RIETI.
May 30, 2017 Nihon Keizai Shimbun
