OBHR

224 - Strategic HRM Final Paper on Japan

(Individual Report)

Robert Gunawan F2511529P

Prepared for Course Instructor: Catherine Mudford

1) Overview of Japans Macro-Economic and Geo-Political Environment

Macro-Economic Japan is a country with a population of 128.06 million and is the worlds 10th most populous nation in the world. The economy is meanwhile the 3rd largest in the world, with main exports coming from industries such as automobiles, consumer electronics, advanced machinery and chemicals, and imports including beef, chemicals, textiles and raw materials. Japan has a GDP per capita of approximately $42,000 USD (Economist Intelligence Unit Estimates, 2010) adjusted for purchasing power parity, and has experienced a period of high growth post WWII. 1 However, as Japan experienced recessions in 1990s and compounded with global repercussions such as the 1998 Asian Financial Crisis, the Global Financial Crisis (GFC) in 2008 and natural disasters in early 2011, Japans economy is currently undergoing a period of stagflation. Businesses investors have lost confidence and have cut investments across the board. In addition, the 2008 GFC has heavily curbed global demand for majority of Japans key exports, such as consumer electronics, and further exacerbated the impact of the economic downturn. Highlighting the vulnerability of the Japanese economy currently against external shocks in the worlds economy. Geo-Political Environment Japan in terms of International relations, over the past few decades, has gradually increased its role in global political agenda through its involvement in international institutions such as the UN, World Bank, IMF, APEC, and more recently entering into Japan-ASEAN free trade agreement in 2008. Coupled with the rise of Asia as a major center of business opportunities in the 90s and early 2000s, has meant that Japan has been regarded as a source of experience and leadership globally, having undergone rapid industrialization and development since the mid 1900s. However, Japan also continues to be subjected to a variety of geopolitical disputes, many of which are partially due its historical legacy of its colonial past. Currently, Japan faces regional territorial disputes with China over the Senkaku islands (called Daioyutai in China), power struggle over natural resource deposits in the South China Seabed, the ongoing dispute with North Korea over its missile testing programs and territorial disputes with Russia over the Kurile islands.

1 The Statistics Bureau and the Director-General for Policy Planning of Japan, Retrieved 13 Nov from, http://www.stat.go.jp/english/data/handbook/c02cont.htm

 2) Evolving Japanese business Landscape

Japanese Businesses has been performing strongly before the 1990s Japanese economic recession, and many will be familiar with the large corporations such as Mitsubishi or Sumitomo corporations. So, what is interesting is for this report to highlight the evolving trends of the Japanese business landscape, and how this has an influence on the Japanese HR practices. Robust Economy (Before 1990s) Even before WWII, Japan economy has been performing strongly under the Zaibatsu business model. Zaibatsu is a term to describe business group composed of several, large family controlled firms. However shortly after WWII, the system collapsed but not totally, and emerged into the Keiretsu model after the end of WWII. Keiretsu is a business model largely similar to Zaibatsu, where there is interlocking relationship & shareholdings. But there are two main differences: 1) It is not family owned 2) And system centered on a core bank This system protects Japanese companies from short-term fluctuations in profitability and takeovers. Since the companies have the financial support of each other within the Keiretsu system. Influence on Life-Time Employment Zaibatsu and then the Keiretsu model create the eco-system, which supports lifetime employment practice in Japanese business. As the pattern of ownership looks at long-term economic perspective, market share & size, and not on short-term profitability. Business stability is hence achieved in the Keiretsu business model, translating into job security in the form of lifetime employment. Economic Stagflation/Risutora (Post 1990s till 2011) In conclusion, till the 1980s, the Japanese economy has been performing strongly Both the Zaibatsu & Keiretsu model has been serving Japanese businesses well. Yet in the 1990s, when Japan went into recession, cracks haven begun to appear. This causes Japanese business to go into Risutora (restructuring). Now organizations no longer can rely largely on the Keiretsu model, and has to focus on core businesses and competitiveness. Also, in an effort to reduce operational cost, business have begun to outsource non-core activities. Influence of Japanese Labour Market (Dualism) These pressures for business to be competitive and hence reduce opreating cost, has a direct influence on the labour market. Causing a sharp rise in labour market dualism; in which companies are increasingly hiring temporary workers instead of hiring permanent workers. Also as part of Risutora, Japanese companies are trying to also increase female participation in the labour force. These two trends, which is a result of Risutora, are still a common theme in the Japanese Labour market up till 2011.

3) Human Capital Landscape

Moving on to Human Capital Landscape in Japan, current Japanese HR Practices (JHRP) are arguably largely a by-product of a series of milestones in the Japanese Economic/Business Landscape; starting from the historical culture (Zaibatsu & Keiretsu), rapid industrialization, and moving on to globalization, 1990s recession and recently, the rise of its Asian economies especially China & India. Owing to factors mentioned above, a summary of the evolving Human Capital Landscape factors (Organizational, HRM & Demographic) in Japan can be shown at Table 1 Below. Table 1

Traditional Japanese Organization & HRM

Post Risutora Japanese Organization & HRM

Flat internal hierarchies; from a consensus-orientation to speedier decision making Concentration, selection, and accountability regarding individual business units Growing use of holding-company structures Outsourcing of Non-Core activities Performance-based career (Importance of individual productivity, mobility) Performance-based compensation with open feedback on performance evaluation, career development and training

Organizational

Formal Internal Structure; Various Experiments with matrix, multidivisional and hybrid forms over the years Work Organization and information flows is largely team based Wide boundary of firms, with a high degree of integration between suppliers/sub- contractors and a strong control base at the core company

HRM

Long-Term Employment principle, largely On-the-Job training (Importance of company-specific and tacit knowledge building) Senior based compensation

Flexible rotation of personnel, usually within related functions but across units and companies Discrimination against non-core labour (women & foreigners) Baby Boomers Mature Workforce

Introduction of differentiated employment tracks Rise in non-discriminatory hiring of (male/female) specialists, mid-career professionals Generation Y Ageing Workforce

Demographic

Source: Experimenting with Standardization and Individualism: Human Resource Management and Restructuring in Japan, Daniel Dirks, Special Issue 1998

4) Japans HR Challenges
In view of globalization and the pressure for companies to be competitive in the market, the key theme of challenge for Japanese organizations is that Risutora in the context of HRM undergoes varying degree of success. While parts of the Japanese organizations may have begun to adopt formal talent management programmes (which is part of Risutora) slower than their western counterparts, many of its leading and forward-looking companies have long been successfully practicing worlds best practices in the HR discipline. 2 An example is Canon, which possesses a comprehensive talent management system covering new recruits through to senior executives, and includes three levels of Canon Innovative Leader courses for managers, which are held at different locations worldwide. 3 Balanced Risutora for HR Practices Hence, the key HR challenges for Japanese organizations is to achieve the right Talent Management balance between transforming their traditional organizational culture and HRM practices (Risutora), in view of the demographic factors such as ageing population. Demographic Factors Organization Culture TM HRM Practice

Bearing in mind that Japanese human capital is deeply influenced by its historical, and cultural aspects such as managements long-term orientation & sustainable growth (Keiretsu), lifetime employment and seniority-based pay. HR practitioners should not be tempted to radically change the HR system and adopt a westernized best practice approach; a progressive approach, such as practiced in Kotters 8-Step Change Model should be tailored to the needs of each company. 1) Create Urgency 2) Form a Powerful Coalition 3) Create a Vision for Change 4) Communicate the Vision
2Experimenting with Standardization and Individualism: Human Resource Management and Restructuring in Japan, Daniel Dirks, Special Issue 1998

5) Remove Obstacles 6) Create Short-Term Wins 7) Build on the Change 8) Anchor the Change in Corporate Culture

3 Talent Strategies for Innovation: Japan, Economics Intelligence Unit, 2010

5) HR Strategy Priorities for Japan organizations by adapting Kotters 8-Step Change Model4
5.1 Create Urgency With economic stagflation affecting all Japanese organization, a national urgency has appeared in the form of Risutora. Hence in respect to HRM, the urgency to build a productive and mobile talent pool needs buy-in from the relevant stakeholders, especially top- management. The immediate issues to tackle are: o Seniority Based Pay & Promotion; if organizations are continuing to practices seniority based performance ratings, total compensation cost (Cash & Benefits) for the organizations will continue to spiral given the aging demographics of the workforce. Derailing the Risutora process of organization competitiveness. o Labour Force Dualism; increasing number of temporary workers, which raises the concerns over temporary workers efficiency due to inadequate training. Also the equity issue temporary workers faces in term of income disparity against permanent employees, which may affect work motivation and performance. o Discrimination of Non-Core workers (Women & Foreigners); which causes inequality in hiring, and hence compounding the severity of labour force dualism. This causes re-entry of mothers to the workforce to become unattractive and hence shrinking the talent pool in Japan. 5.2 Form a powerful coalition Human Resource hence must take the lead to build business partnership with influential top-management and diversified Risutora evangelist from different departments and different levels of the company, while gaining their commitment. HR should leverage on company events with appropriate themes linked with employment, such as Labours Day or Annual Family day to hold communication events about HR Risutora initiatives. A great example of gaining visibility and commitment, are getting written commitment pledges towards the initiative, which will be framed up in prominent office area to make this a truly living HR Risutora. 4 Kotters 8-Step Change Model, Retrieved 13 Nov 2011 from http://www.mindtools.com/pages/article/newPPM_82.htm

5.3 Create a vision for Change A clear vision for the company has to be established, where it clearly identifies the present positioning of the organization HRM Policies, and what the organizations wish to achieve. For Japanese organization, the recommended vision would be: Being the employer of choice for friendly employment practices and equitable & competitive performance reviews Positioning the organization as a leading Japanese employer for attracting, developing and retaining employees. While supported by the following HRM Policies: 5.3.1HRM Strategies Priorities o Focus on Performance Based Career to increase labour productivity Organization Hybrid (Focus on Performance Based) 75th Percentile 50th Percentile Industry Seniority Based Performance Based

In positioning the organization thrust on performance-based career, and to be in the 75% percentile of companies practicing performance based career, an alignment will be achieved to support productivity and competitiveness of the organization. Hence in view of this, a proposed total compensation breakdown for the organization is as follows:

Total Compensation Components

Compensation based on: Seniority Compensation based on: Performance 75% Performance / Objective Based

25%

25% Seniority Based

25%

Compensation based on: Job Grading

50%

o Ensuring equitable training & development opportunities between Permanent & Temporary Workers to offset labour wages discrepancy while maintaining workforce productivity and mobility To mitigate the impact of labour-market dualism, where temporary workers might possesses skills gaps in performing a role, currently many Japanese organizations have resorted to job mentoring or OJT (On-the-job-training). This may cause longer lead time for an employee to become productive, hence not aligned with organization productivity. Also, it is researched that temporary workers are largely those in the 25 to 34 age group graduating from high school and moving into non-regular job without gaining specialized skills & competencies in their past organizations. 5 Organizations hence should adopt policies to bridge the gap in skills, through equitable training & development opportunities for temporary workers. Organizations should view talent development for temporary workers especially those below the age of 35 as building up an organization capability. Shoring up training for the organizations human capital will hence boost productivity in Japanese workforce and increase their skills competences. Resulting in higher internal mobility, especially with respect to Japanese Multi-National Corporations. o Employer friendly policies towards women to enlarge the labour force participation According to Japanese government data, reflecting that around 60% of women withdraw from the labour force when their first child is born.6 Hence, it is imperative for organizations to retain experienced workforce to combat the issue of the ageing workforce, and hence shrinking talent pool. Japanese organizations thus are recommended to encourage family-friendly policies and benefits. Such as job counseling, prolonged maternity-leave benefits, initiatives to ease the transition back to into the workforce, flexible work scheduling and tele-working options. In the end, as Japanese workforce is deeply rooted on their culture, their sense of loyalty towards organizations should be leveraged on. With better family & women friendly policies, organizations commitment towards employees long-term career, employees will commit to your organization and creates this creates a winning employer of choice proposition; ultimately a competitive edge for organizations. 5 Reforming the market to cope with increasing dualism and population Ageing, OECD economics survey: Japan, 2008 6 Reforming the market to cope with increasing dualism and population Ageing, OECD economics survey: Japan, 2008

5.4 Closing the loop for the HR Strategies Priorities (Step 4 to 8) Having established the vision for the Japanese HR community, and the policies to achieve these visions, companies would have to communicate the vision by applying the policies to aspects of operations (from training to performance reviews). Hence organizations should openly and candidly addresses employees concern, especially those directly affected from the de-emphasis on seniority-based career. So if there are barriers to the transformation, HR should investigate the reason for the resistance to change. Placing a structured change management plan, and removing obstacles such as conflicting policies, will quickly remove the barriers to change. Next, in achieving achieving quick-wins such as re-employment of mothers would give the whole organizations a taste of benefits of the HRM Risutora. Thus, do celebrate these short-term wins by rewarding people who are pro-active in achieving the Risutora Japanese companies are embarking on. Finally, over time the transformations will hopefully be ingrained in the organizations way of day-to-day-work and be part of the corporate culture of Japanese Organizations!

6) Conclusion

The foregoing sections of this report have analyzed and discussed developments in present-day Japan as influenced by the business landscape of Zaibatsu, Keiretsu and then the recent restructuring initiatives. Hence conclusions for HR Strategies are such: Firstly, the deeply rooted culture of Japanese organization and HRM has rendered moving away completely from Senior based Career paradigm as impractical, as the senior employees in the current workforce are conditioned with this cultural baggage. Hence, for organizations to achieve competitiveness and labour productivity, a hybrid approach needs to be taken. On the other hand, due to increasing globalization, economic pressures and rise of the Asian economies, Japanese organizations need to adapt and react fast to changing market conditions. Hence in achieving, a successful restructuring, it is recommended that Japanese organizations aggressively tackles into the key HR challenges which are: Seniority based pay and promotion Labour Force Dualism Discrimination of Non-Core Workers.

Finally, the proposed HR Strategies & Policies proposed aimed at accelerating the focus towards performance-based pay. Coupled with the two pronged approach of providing equitable training & development opportunities for temporary workers and employer friendly policies towards women,

will reduce the Labour Force Dualism trend which caused negative externalities to the Japanese workforce such as low productivity of temporary workers and shrinking talent pool due to low participation rate of women. Ultimately, this will achieve the objective of increasing workforce productivity and compeitiveness and enlarging the pool of talents through the inclusion of higher female participation; a problem caused by the ageing workforce demographic!

Bibiliography
1) The Statistics Bureau and the Director-General for Policy Planning of Japan, Retrieved 13 Nov
from, http://www.stat.go.jp/english/data/handbook/c02cont.htm

2) Experimenting with Standardization and Individualism: Human Resource Management and

Restructuring in Japan, Daniel Dirks, Special Issue 1998

3) Talent Strategies for Innovation: Japan, Economics Intelligence Unit, 2010

4) Kotters 8-Step Change Model, Retrieved 13 Nov 2011 from

http://www.mindtools.com/pages/article/newPPM_82.htm

5) Reforming the market to cope with increasing dualism and population Ageing, OECD economics
survey: Japan, 2008