Japanese business system analysis

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1. Introduction

Simple comparisons of two companies that are from different countries are not practical and there might be problems that could not be understood until we get to know the environment that these two companies are operating in. And this could also be applied in the country level. And the different environments are the business system that consists of different constitutional factors.

And there is debate in the business that business should be managed under universal business model in term of similar corporate structure and culture which is the most efficient and ideal and those other business models are considered to be inffieicent and are not modern enough. But the success of Japan model in Asian has provided sufficient proof to go against this viewpoint. And the Japanese model will be discussed under the Whitley’s national business system.

2. Business system

2.1 Definition of business system

Whitley (1992, p13) provided a well known definition of the concept “business system” which is “distinctive configurations of hierarchy-market relations which become institutionalized as relatively successful ways of organizing economic activities in different institutional environments. From this given definition, we can conclude some key premises of the concept which well describes the nature of the business systems:

2.1.1 Firms and markets are socially embedded

The character of being social embedded means that companies and market are not separated from the social environments in which they function and such environmental factors include political factors, economical factors, social customs and technological changes. And companies need to be adapted their business behaviors according to these environmental factors as companies are surrounded and integrated as part of these factors. As commented by Backman (1999, p365), “old habits are hard to break” in the context of opaque and corrupted business systems in some Asian countries. The old but still widely applicable saying that “when in Rome does as the Romans do” may vividly describe the nature of social embeddeness of the business systems.

2.1.2 There is no one best business model at all time

To Whitley, there are different ways to achieve success in business sector according to different institutional environments, and there is no one best model that fit every kind of business environment which means that business model is affected by situational factors. Take Japan’s successful model development as an example, which has distinctive features that the US model does not share. From the imitation of US model since the Second World War, with years’ effort the Japanese economy had established itself as a different business model with most mentioned features: higher employee loyalty which is relative with lifetime employment, social cohesion in the workplace and consensus decision making style, long term goal setting and so on (Pascale & Athos 1981). After noticing the fact the various industries had catch up or even surpass the American counterparts, the study of the Japanese model had proved the fact that the US model is not always the best model at least in Japan. Ohmae (1982) explained this by claiming that the strategy adopted by the US firms are too analytical in term of the use of formula and step by step processes while in contrast the Japanese model recognize the existence of ambiguity and tentative decisions. Later the US firms had learnt the experience of Japanese firms to put more effort on the creation of corporate culture and at the same time there are many failures while learning the Japanese model by the US firms. In this point, even the US model itself is not static and is susceptible to changes, and different models are applicable in different business environments.

2.1.3 Business systems are sustainable

Despite the fact that there will be distinctive configurations of hierarchy-market relations due to the fast changing environmental factors and thus form different business system, business systems still show the character of stability. As only relatively stable and enduring patterns of business practices in specific localities and societies could possibly form a system or else always changing business practices without some kind of stability will have no ways to form a business system (Henry 2000). And business systems are sustainable also means that a business system can develop considerable cohesion and thus is resistant against major changes, only under this premise the theory of business system could be studied.

2.2 Globalization and convergence of business system

On one hand even though business systems are to some extent different from each other, but on the other hand, integrations and convergence of the business systems is also apparent with the influence of the accelerated globalization process. Three representative changes happening in the globalization of the Asian business systems are:

2.2.1 Strengthening interdependence of national economies and firms

With the help of increasing growth of the trade and investment between the western countries and Asian countries and intra-regional cooperation relationships between the Asian countries which is strengthened by the governmental organizations such as Association of Southeast Asian Nations (ASEAN). And as more and more firms internationalize their business operations, it is reasonable to think in this way that they might become to some extent separated from the domestic institutions and agencies (Whitley 1998, p240). And so the relatively homogenous and distinctive business systems of the Asian countries could gradually change in creating a more standardized form of economic origination. To achieve globalization in business system, outward investment and inflow investment are both important. But some Asian countries and regions such as Japan, Taiwan and South Korea, they are highly developed and become less attractive to the foreign investment, so this results the fact that they have strong outward investment but relatively small scale of inflow investment.

2.2.2 Convergence to Anglo-American model

With China adopting the market economy in 1980s coupled with the so called reform and opening up policy, blocks of the market entry to the major Asian countries have eventually been erased. But take note that even though the Chinese market economy is developing with the huge inflow foreign investment and export, the political status of China which is one party controlled government is different from that of US and other major western countries. And in Taiwan, the democratization has reduced the differences of the political status between Taiwan and western economies. In particular, the liberalization of labor legislation and some lessening of (Kuo Ming Tang ) KMT control over unions had contributed to the less autocratic management style and greater tolerance of bargaining rights of the working class (Wilkinson 1994). And on the other hand with more and more Asian origin companies turn to the stock market for funding, financial market has been changed to a more American style. Even the China Family Business companies are forced to the transform to a more western corporate management style as they have to separate their ownership and management role in order to a listed company to enjoy the resource of the capital market. In many other aspects that have not been mentioned such as cultural conventions, the convergence to a more US style business system is obvious.

2.2.3 Domestic institutions have changed

Take the role of state as a domestic institution as an example, with the speed-up ongoing industrialization in the Asian countries, such as Japan and South Korea, differentiations and complexity have increased which make the reduction of the traditionally strong government intervention in the business activities become possible and necessary. The role of state has changed to a more supportive function. And in China, this trend is more obvious in term of state owned enterprise reform. Such first stage of this reform started in 1980s which focused on improving the management through ways such as the adoption of the independent accounting systems, and in the last ten years this reform has come to the second stage which is to separate the ownership and management role of the state own enterprises to a modern governance system which is profit oriented (Ke 2004). To achieve this goal the strategy of privatization of the state owned enterprises is adopted in the second stage of this reform.

3. Japanese business system analysis

The majority of effort in this part of the article will be given to analysis of Japanese business system using Whitley’s national business framework.

3.1 Four components analysis

Whitley argue that specific dominant institutions in a business system will have major influence over the organizational and management practices. Of many institutions four institutions are dominant: cultural conventions, nature of states, financial institutions and labor system.

3.1.1 Cultural conventions

Cultural convention is one of the four components in a business system that Whitley argues will have dominant influents in the business practices. And for the cultural context, Edward T. Hall (1976) in his famous booking “Beyond Culture” classified the cultural system in two kinds: high cultural context and low cultural context. In this book, Edward T. Hall pointed out the most evident feature that can distinguish these two different cultural systems is that high context transaction feature pre-programmed information that is in the receiver and in the setting, with only minimal information in the transmitted message. Low context transactions are in the reverse (Hall 1976). Like many other Asian countries such as China, Japan has a high cultural context in which emphasis is put on the subjective relations in term of great influence of family unit and group identity. In Japan, the non verbal communication is necessary to understand the other people’s real intention beyond the words.

In such a high cultural context society, in term of trust Japanese society also has high degree of trust. This can be seen from the fact that the Japanese firms tend to form relatively stable partnership with suppliers, customers, employees and even competitors rather than the preferred contractual relationships in the western low cultural business system. Research finds out that the high trust suppliers controlled cost better in Japan in term of average annual cost changes according to the statistics in the early 1990s and high trust suppliers were also better in the just-in-time (JIT) delivery and joint conjuncture (Lane & Bachmann 1998). Also Japanese culture has a masculine tradition. In Japan, work is considered to be one of the top priorities and business men and employees tend to be ambitious and task oriented in term of the acceptance of work overtime frequently.

3.1.2 Nature of state

The nature of state refer to the degree to which the government get involved in the economic strategy making, degree of the autonomy from the power brokers and the extent of the state-business relations. Even though the Japanese economy the result of market economy in which private business dominate, the Japanese government has directly contributes to the achievements that the business sector has made today. The influence of the government is carried out through two major ministries: the ministry of finance and the ministry of economy, trade and industry (METI). The ministry of finance is in charge of the fiscal policies and monetary policies making by the indirect control the Bank of Japan. The ministry of finance by providing low interest rate to capital market to the business sector encourages industrial expansion and promotes a core export oriented business model. While the Japanese greatly encourage an outbound economy development, the ministry of economy, trade and industry help create a protectionist dual economy by regulating the domestic sectors. The METI is considered to be playing a role of stewardship in the Japanese economy. It enacts economic and industrial policies and regulates the international trade relationships.

The heavy intervene of the government in the Japanese business system stems from a national consensus that Japan must become a super power in the world and to achieve this goal the individual interest could be sacrificed if in need. This consensus is closely connected to the masculine culture of Japan and it explains why the Japanese business accepts the stewardship from the government to this extent because this economy is not market oriented like the US but stakeholder oriented and obviously the Japanese government is one of the most important stakeholders.

3.1.3 The financial institutions

The financial institution refers to the how the firms get the funding to initiate the business, whether it is an economy capital market or bank based and how the relationship goes between these financial institutions and the business and industries. In a bank based system, the bulk of financial assets and liability consists of the deposits and direct loans of the banks. But in a market based financial system, tradable securities are the major form of financial asset (Streeck & Yamamura 2001, p171). But note that there is not 100 percent market based or 100 percent bank based financial system in a country as both way of financing are adopted in most countries. The most cases are that difference countries have different mixture market and bank finance. So the market based financial system means that market finance dominates the market more than the bank does.

For the case of Japanese business systems, it has a bank based financial institution as the banking systems in Japan account for 64 percent of the financial-system assets according to the statistics in 1996 (Streeck & Yamamura 2001, p172). It is common in Japan that finance and industry has long term and strong ties in term of bank loans, bank equity holding and bank appointed personnel rather than separation in the Anglo-Saxon model (Weinstein & Yafeh 1998). One of the advantages of the use of bank based financial system in Japan is that it will help carry out the government plan on business development because as mentioned above the major banks have close relations with the government, the industries such as IT industry and automobile industry are example of successful stories by focus investment encouraged by the banks.

3.1.4 The labor system

The economy miracle has close relationship with the labor system in Japan. One eminent feature that best describe the Japanese style labor system is the employees’ strong loyalty and group identity of the companies. This feature can be connected to the life time employment which is a long established practice in many large Japanese firms and it is a “gentlemen’s agreement” without any enforcement by the legal department (Koshiro 1984). But note that the life time employment convention is only applicable to the core workers which only account for 20 percent of the workforce. And empirical studies have found that there are no major changes to the life time employment which is pertaining to the core employees even during the time of stagnant economy growth (Moriguchi & Ono 2004). This persisting convention again shows the high trust in the Japanese society.

Chart 1 Unemployment rate in Japan from 2007

But with the long recession that began in the early 1990s, some problems in the labor system are becoming more and more evident:

The first problem is the high unemployment rate. According to the statistics as shown above in Chart 1, the unemployment rate in April this year is 5.1 percent which is relatively high in the history. This has excluded those who are unemployed but no longer will look for jobs which mean that the actual digit of the unemployment rate is higher.

The second problem that surrounds the Japanese economy is the aging workforce. Even though the aging population has been an existing or coming issue that will be faced by the major leading economies in the world, Japan is clearly the most suffered country in the world which is probably proliferated by the late but fast first demographic transition between the 1902 and 1950 and the one of the highest life expectancy (Hamada, Koichi and Kato, eds. 2007). This trend also brings substantial changes to the labor market such as the gradual acceptance of the part time work rather than life time employment and the women workers.

3.2 Three core dimensions

3.2.1 Nature of economic agents

In term of competitive strategies, Japanese firm used to diversify into related areas to enjoy the effect of synergy and especially the large multinational firms which even tend to diversify into other unrelated areas to in pursuit of growth of the companies. And this explains the fact that Porter’ competitive strategy has long be considered But in the 21st century this long existing strategy orientation observes some changes. In the book “Choose and focus” Ulrike Schaede (2008) attributed the economy expansion that started from 2002 to the transformation of strategy orientation in the leading Japanese firms from high degree of diversification to a more focus strategy on the core areas.

The growth oriented strategy that used to be adopted and still used by many Japanese is one of the major motivations that contribute to the immense economic growth in the last century in term of widely accepted product diversification in many keiretsu. Japanese firms buy in the plant and recruit the human talents before the demand (Unknown 1994). This growth oriented strategy accompanies with the national consensus to contribute to the country’s expansion in power in the economy. But as mentioned above this growth oriented model also to some extent lead to the Japanese economy stagnation because according to Michael E. Porter (1998)’s generic strategy, cost leadership, differentiation or focus strategy that could bring competitiveness and obvious the traditional Japanese growth oriented strategy cannot be categorized in to one of these three strategies.

3.2.2 Nature of market organization

The nature of the market organization represents how is a market is organized in term of the relations between firms and industries. In Japan, firms are more involved in the network than their counterparts in other major western countries in form of the dominance of keiretsu in the market organization. A keiretsu is a business group that consists of a number of companies with close interrelations between these group members, and such interrelations could take form of shareholding or partnership. The dominant form of keiretsu is a bank centered group joint by a number of companies. Rather than providing simple financial support to the group members, the bank in a keiretsu has great control over the firms and plays the monitoring role and provides bail out if necessary (Ohsono1995).

The keiretsu could be vertical or horizontal. The vertical keiretsu integrate companies that have vertical business relationship with the companies into the network system of a company such as suppliers and customers. For example, Toyota is the biggest keiretsu controlling directly 12 companies including Aichi Steel Works which provides steels, Toyoda Gosei which provides resin and rubber parts and Toyota Tsucho Corporation that is in charge of the wholesaling of the cars. These firms are integrated vertically into the Toyota group, and besides this Toyota is also a horizontal keiretsu which is rare in Japan because Toyota is too big to became a member of Mitsui Group (Miyashita and Russell 1994). A horizontal keiretsu shows how companies which can be from the same industry or across industries and they are all self sustain entities. The keiretsu as a form of market organization demonstrates that companies in Japan are in complicated and stable network system.

3.2.3 Nature of work coordination and control

Consensus (nemawashi) management is a special feature in the Japanese business system and comes together with the collective (ringi-seido) approach to decision making. Nemawashi means prior consultation, it help yield consensus from everyone before making a decision. The advantage of the application of nemawashi is that it will provide with time in advance to let those with different opinion adjust their opinion and make compromises to reach agreements. But the disadvantage of this system is more and more obvious nowadays which is that this decision making process consume a lot of time and is too slow and bureaucratic to adapt to the fast changing business environment.

4. Key issues

Even though the market of Japan is relatively closed to the outside world which help keep the unique Japanese business model which has the keywords such as Keiretsu and lifetime employment. But with more and more foreign companies entering into the Japanese, and more Japanese are expanding into the oversea market, the exchange of value and business convention has changed the Japanese business model as well as that Japan is also changing the world’s thinking such as the JIT management system. So with the changing environment and business system, some Japanese features are also changing such as the life time employment which is reduced due to the influence of the modern employment idea and high unemployment rate.

5. Conclusion

The national business system is a total indicator that describes the nature of a set business practices to explain why these behavior share the geographical similarity. Through the analysis of the Japanese key constitutional components we can see that Japan has a different set of business configuration than the western style business system. So this give good answer to the questions why the successful Japanese business practices could not be transplanted in other countries such the US because different business system may require different way of management and business conventions. And in the term of changing of the business system, in my opinion differentiation and synchronization happen at the same time and they are both working in their way that distinguish with each other but also merge into each other.


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