In our January 2 update, we featured the first part of a two-part interview with HBS professor Michael E. Porter, an internationally influential expert on strategy and competition. (Porter was recently appointed to a University Professorship, the highest professional distinction for a Harvard faculty member.) In the interview, he discussed his latest book, Can Japan Compete?, cowritten with Hirotaka Takeuchi and Mariko Sakakibara, as well as the book's implications for business practices beyond Japan.
In this second part, Porter expands upon the importance of defining strategy and nurturing open competition.
If you were to divide up the Japanese government's energies between repairing ailing industries and spurring on new ones, how would you do that?
Not to be too provocative here, but I would say that this is the wrong way to think about it. This is the approach taken by the Japanese government in the past: trying to resuscitate ailing industries and nurture new ones. This approach did not actually work.
What the government ought to do, instead, is address the systematic weaknesses in the competitive environment in Japan. If it moves boldly, then older industries will restore themselves and new industries will grow.
The number-one priority is to change the competition laws and the whole approach to regulating competition. Without competitive pressures, sick industries will never restructure. Until Japan stops protecting industries such as the chemical industry and the inefficient local industries, including construction and food processing, they will not become competitive.
The traditional Japanese government approach has been to believe that if, say, the chemical industry was ailing, it should step in and fix the industry. Government would help organize a cartel to stabilize prices, develop a plan to rationalize capacity, and so on. The mentality was that all companies should share equally in the pain; then no one will get hurt too badly. Of course, this approach leads to a perpetually uncompetitive industry. The restructuring ought to happen through the market. Efficient companies should be the ones that maintain their capacity, and the inefficient ones should shrink or be sold.
The same principle is involved in new industries. Instead of subsidizing new companies, government should improve the environment for new company formation. What is holding back new industries in Japan are things like highly skilled specialist personnel; a lack of risk capital because of heavily controlled financial markets; barriers to commercializing university research; and limited incentives for risk taking.
The challenge facing the Japanese government is to stop trying to intervene in the process of competition and to improve the environment for competition.
One of the points you mention in your book is that Japanese corporate practice has encouraged permanent employment. How is employee loyalty fostered in a business environment based on competition?
I think the notion underlying permanent employment actually is a good one. It is taken to the extreme in Japan.
What we are soon to discover in the United States—if we haven't already discovered it—is that having employees move rapidly from company to company will not prove to be a very efficient system. U.S. companies are already starting to find ways to combine incentives for performance with measures to create more loyalty and employee affiliation with the company.
Japanese companies created a very extreme version of such affiliation. The company provided a job for life and pay was based almost totally on seniority. Japan should try to preserve its view of employees as assets to be nurtured and developed. However, this does not mean that the job has to be for life, and that individual employee performance cannot be rewarded. I think it is a matter of a 25-percent correction rather than throwing out the whole idea.
The other thing about Japanese organization that needs change is the internal processes by which decisions are made. The Japanese company structure is anti-risk. It is much safer to do something that other companies are doing, even if it turns out to be a bad idea, than it is to go off on your own and create something different. With consensus decision making and shared responsibility for everything, nobody feels responsible.
In our book, we discuss how Japanese companies need to adopt more business unit structures where groups of managers are held responsible for a business unit. The reward system needs to be based on unit and individual performance, where performance is measured in terms of profitability. And in order for both of those things to happen, there needs to be a change in the corporate governance system, so that boards of directors are more independent and shareholders have the ability to put the heat on the company if it is not performing.
These represent rather substantial changes in the Japanese organizational model. The leading companies—the Sonys—are rapidly moving in these directions. Sony, for example, now has outside board members. This never happened in Japan. However, the average Japanese company is still only taking baby steps in these directions.
What I want to get across is that we are not advocating the wholesale adoption by Japan of the Western system. While Japan will need to emulate some elements of the U.S. model, as it has many times in the past, it will prosper by creating a distinctly Japanese approach.
If you have read my other work, you know that I believe that the U.S. is far from perfect. For example, many U.S. companies suffer from a short time horizon, and we are underinvesting in basic research.
As I noted in discussing lifetime employment, Japan needs to preserve its assets. Japanese time horizons are an asset. Japanese skill and education levels are an asset. We sketch in the book some elements of a distinctly Japanese approach, but one that embraces competition rather than resists it.
Do you think Total Quality Management was strategic when it was developed?
Not strategic in the sense that I use the word strategic.
"Strategic" is a word that gets used promiscuously—some people use it to mean anything important. Total quality management was a very important development, and provided an enormous advantage for Japanese companies initially. It is one of the reasons why they were able to produce products with such few defects. U.S. companies used to pride themselves on having good repair networks. Japanese companies came out with products that didn't need to be repaired.
Total Quality thinking really was a breakthrough, but it is what I call operational effectiveness. It is a "best practice," or something that every company should do.
"Strategy" is a term I reserve for choices—things a company does to set itself apart from others. So a strategic choice would be, "What customers does the company choose to serve?" A company that is not strategic serves whatever customer appears, or whatever need presents itself.
This notion of operational effectiveness vs. strategic positioning, is, I believe, fundamental to thinking about management. Companies must distinguish these two very different agendas, which present different organizational challenges.
As I will develop more fully in my next book, best practice improvement is organizationally much easier to deal with than developing and adhering to a strategy. It is comparatively easy to motivate the search for best practices. The strategy part is very much more difficult, but it creates the need for choice with the associated uncertainty and anxiety. Strategy requires saying no, rather than empowering everyone in the organization to make incremental improvements in the way they do things.
What are the implications of your book's message beyond Japan?
Many other countries emulated Japan, both in government and in business. Some countries modeled their whole national economic strategies on Japan's, while others picked and chose among Japanese policies. Many U.S. and European companies copied Japanese management techniques.
Given the influence of Japan, our book aims to set the record straight on what did and did not work there. The rest of the world should not be emulating policies that were unsuccessful. For example, both the U.S. and Europe have adopted policies that encourage more cooperative activity among companies. Europe has spent billions of dollars sponsoring cooperative research with little to show for it. The U.S. initiated a range of R&D consortia and relaxed its antitrust laws to encourage collaboration. Our research clearly indicates that these aspects of Japanese policy were not successful, and the poor results elsewhere in the world are not surprising.
We also point out in the book, however, some areas where Japanese policy was truly innovative like high standards for energy efficiency and policies to simulate early demand for new products. There is an important contemporary example of this underway. Japan is introducing third-generation cellular technology a year before the rest of the world because of rapid regulatory approval. That's going to give Japanese companies a tremendous advantage, because they will get a head start in understanding and serving the market vs. competitors. Western companies are now all going to Japan to try to learn about the new technology.
Ironically, many of Japan's policies that were successful and should be emulated were not emphasized as part of the "Japanese Miracle" story.
There is also the need for Western managers to learn from the Japanese experience. Simply adopting Japanese management techniques is not a recipe for success, as the recent experience shows. The Japan case highlights the need for strategy even in a rapidly changing competitive environment.