Nottingham University Business School

The Effect of Japan’s Structural Difficulties
in the 1990s on the Japanese Management Model

East Asian Business and Society
Spring 2003

by

Karl-Günther Illing

TABLE OF CONTENTS

1. Introduction  1

2. The Japanese Management Model  2

3. A Changing Context for Japanese Management in the 1990s  4

4. Radical Change or Incremental Adjustment?  7

5. Conclusion  12

LIST OF ABBREVIATIONS
GDP Gross domestic product
HRM Human resource management
JIT Just-In-Time
SME Small and medium-sized enterprises
TQC Total Quality Control

1. INTRODUCTION

In the decades after the second World War the Japanese economy experienced phenomenal growth. Western academics and press have often praised the Japanese management model as a major success factor for the “Japanese miracle”. Many have called for the adoption of Japanese practices in Western firms in order to remain competitive against the Far-Eastern counterparts. But in the 1990s the burst of the bubble economy and the resulting recession have lead to a change in the view on Japanese management practices. Many now see the Japanese model as outdated and ready for a thorough overhaul.

This essay explores in how far the problems and structural changes that Japan experienced over the last ten to fifteen years have necessitated a radical change in her management practices. After briefly introducing the Japanese management model in the second section, several social and economic developments are discussed that might have a lasting impact in the management practices. The fourth section examines and explains observations made about the actual effect on Japanese management in the face of these developments. Finally, the essay concludes that, while incremental adjustments are taking place, rather than a radical change or, indeed, a westernisation of Japanese management, a more fundamental rethinking might take place in the future.

2. THE JAPANESE MANAGEMENT MODEL

A large amount of literature has been written on the subject of Japanese management, which oftentimes does not capture the complexity of the subject (Handy et al, 1988). On the other hand one can observe a wide array of concepts being linked to the Japanese system of management. These include general management practices like long-term planning and consensus decision- making, manufacturing systems like JIT and TQC, and human resource management (HRM) practices like life-time employment and seniority-based wages (Keys et al, 1994).

As is often done in current literature, in this essay the Japanese management model will be understood as a set of HRM practices (Dedoussis, 2001). The key elements of the model upon which many authors agree include a system of wages and promotions based on seniority, enterprise-level labour unions, long-term planning, a bottom-up decision-making approach, recruitment from within the firm, and a range of company incentives like bonuses (Handy et al, 1988). The most prominent feature of Japanese-style management, however, is lifetime employment. Lifetime employment principally refers to the recruitment of graduates directly from university which will then be retained until their retirement at the age of 55 or 60 (Sullivan & Peterson, 1991). The individual elements of this management system are coherent in that they are interrelated and build upon each other, at least in principal: for example, since employees must have less fear of becoming redundant, organising industry- Illing, Karl-Guenther East Asian Business and Society – Essay Spring 2003 level unions is not thought necessary (Fingleton, 1995). This, in turn, reduces union pressure on firms.

As Dedoussis (2001) argues, the Japanese management system has to be seen in the context of the keiretsu, big industrial groupings that are “invariably characterised by cross-shareholdings among major companies and subcontracting of labor-intensive activities to smaller firms” (p.175). In 1990 Japan’s eight horizontal groupings, the biggest of which were Sumitomo and Mitsubishi, accounted for 18.7% of revenues generated in the economy (Eli, 1998). The management model in its above form only exists within the keiretsu. It does not apply to Japan’s small and medium-sized enterprises (SME), which constitute the vast majority of the country’s companies. Even within the large firms, the model’s application is limited. The internal labour market is a dual one, divided into core and peripheral employees. Only the former enjoy the privileges of the above described practices (Handy et al, 1988), while the peripheral workers are subject frequent fluctuations.

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