How Japanese Companies Are Rebounding with a Hybrid Leadership Model

Wharton Business Daily: So, let’s start with — what happened and why did it happen?

Harbir Singh: [I’d like] to acknowledge our third author, Professor [Jusuke J.J.] Ikegami from Waseda University. Japan was at its peak in the stock market in the late 1980s. After that it, began to decline. Many people thought the argument was that [Japanese] companies were wedded to the manufacturing model, which [included] a total quality movement, but not as much to services and information-technology-based businesses.

What we’ve seen in the resurgence now is really a discovery on the part of leaders at several [Japanese] corporations that they need to pivot to technology-based industries, such as gaming and media, and adapt their model. They brought in processes that they saw in various parts of the world and incorporated them into the Japanese model, retaining their process discipline.

So, you have this idea of pivoting into new industries, creating a sense of tolerance for failure but also entrepreneurial activity, which is a huge shift for them. [With that is an] understanding that you cannot have the same hierarchies as you had before. You had to have a flatter organization. Leaders needed to be more approachable and be more informal, and seek ideas from the middle and lower levels of the organization, and bring a sense of ferment and exploration in these companies.

It so happened that we were studying models of management and trying to understand what’s unique about Japanese-headquartered firms — many of them are global. We found that there were four elements. The first one was a question of a stakeholder view of the firm — that the firm is responsible to more than just shareholders. It’s responsible to customers, employees, shareholders and communities. But importantly, it’s a flywheel — they reinforced each other. That sense of momentum is what they were trying to bring in the current reality.

The second part was the idea of learning for the long run, and leading for the long run [of] 10 to 15 years. They retained that principle. The third one was exploration versus exploitation. [That was about] enhancing the exploration piece, and allowing for some internal venture capital. The fourth one was [about] addressing inspiration of employees and bringing a sense of empowerment into the organization, following what we’ve seen in the tech world here.

That blend, [which is] a hybrid of modern management techniques in many parts of the world and the traditional Japanese model, is what we call the hybrid leadership model that they came up with.

Michael Useem: I would just add that we went into this study of Japanese top management on the premise that Japan was languishing. And it was, for a couple decades. Just to go back a little bit on the history of Japanese business — in the 1960s and 1970s, Japan around the world became known as Number One. [Japan had] hugely successful companies. Not just in auto making, but just about everything, including banking. A professional colleague wrote a book called Japan as Number One, which aptly described many of the methods that had carried them well through the ’70s and then through the ’80s. But around 1990, Japan went off a cliff. And for the last three decades, it’s been in retreat.

Picking up on what Harbir said, the four specific points are captured by a phrase that comes from a well-known executive coach, Marshall Goldsmith. It’s a great phrase. I’m going to take it out of context. He uses it in a slightly different way than I’m going to reference it here. But he basically said that as you look at careers develop, “What got you here won’t get you there,” in the next five or 10 years.

I think that’s what happened in Japan [with] what got them to this “Japan is Number One” status worldwide. Everybody wanted to be like Japanese companies such as Mitsubishi, Nissan and Toyota. Picking up on the particulars that Harbir just offered up, over the last 20 or 30 years [which is] now referred to as “the lost 30s,” Japanese companies have been languishing, because it’s taken that long — believe it or not — to shake off what was serving them well back in the ’70s and ’80s, in favor of a new set of principles for leading big companies.

The Cultural Shift Driving the New Model

Wharton Business Daily: From the outside looking in, Harbir, you alluded to stories you hear about not accepting failure.

Singh: Yes.

Wharton Business Daily: That’s one of the components of what was legendary within the Japanese structure for such a long period of time. I’m sure they don’t accept failure, but they moderate with it the idea now that the failure is a component in business. But you can become better off from it, correct?

Singh: Yes, exactly right. It is very much ingrained in their societal culture and history, that failure is not an option. That goes very far in process discipline. And many companies explicitly created a context in which you could experiment, and if it didn’t work, you pivot. So, they got into this idea of pivoting and the idea of agility.

A company called Asahi Glass, which was No. 1 in glass in the world, found that the glass industry was commoditizing. So, they needed to get into some other areas. The head of that company created a business development function to allow them to explore various ideas. He had a three-element process. Materials — try new materials. Try to incubate. And try to transfer. And they went through a 10- or 15-year period of driving that. They ended up going from glass to applications of different materials, including even life sciences, and they were able to make that transition. That is an example of retaining process discipline, but allowing for exploration, which is very interesting.

Wharton Business Daily: Is there a component of this, Mike, while we’re speaking about this in the business perspective, that this is a cultural change in terms of how Japan views itself and what it should be in the decades ahead?

Useem: Yes. It’s a great point, in the sense that as we went into the study, just by way of a context here, we didn’t have any priors as to what was happening or why it should be happening, or what kind of changes were underway. But we discovered in talking with people, say at the head of this glass company, or at Mitsubishi or Nissan and well beyond, that a number of the top managers in these firms were coming to terms with the fact that their stock price has been down. Their earnings have been off. And they’re really going to have to reinvent themselves. That, in our view, is the driver.

A number of people — some already in office, some brought into office with the support of their board — and Japanese governance changed, along with top management and its attitude about this, saying, “Look. The old ways of running firms worked very well back in the ’70s and ’80s. But they’re doing very poorly in a much more competitive global market.” Therefore, they said, “We’ve really got to help people working for us rethink what they’re doing and how they’re doing it.”

[That change included] moving away from lifetime employment, for example, or the assumption that once you’re there at a given company, you’re going to be there for life and it’s just a matter of regular upward procession.

Many of the people we talked with said that they began that way in their own career, but they came to appreciate that [they must] get the people working for them to really focus on what the market was doing, getting rid of some old business that was no longer all that competitive, and appreciating that new methods of manufacturing, new materials and new products were going to be important.

They set about a long remake. The remake we describe in the book probably goes back at least five or 10 years. [That was] in part — back to your initial point — because the culture ultimately had to be changed as part of everything else.

So [they brought] a new focus on talent and its development, as opposed to taking for granted that the people who are hired by you will do well, and that they don’t need a lot of coaching. [That was] a different attitude about the role of top management.

In a nutshell, the old method of speaking from on high if you are a CEO, and everybody’s going to hear and apply what you want them to do in their own work life, no longer was working.

The culture change now that is underlying all that we’ve said — the four particular points that Harbir referenced up earlier — [make up] the fundamental platform by which Japan, resolutely, is coming back from the disaster it faced.

How the Hybrid Model Plays Out

Wharton Business Daily: How are we starting to see, then, those four points play out, Harbir, in terms of the corporations trying to lead this comeback?

Singh: One of the most fundamental things that we see among the leaders is that they’re actually instilling a sense of vision that has a wider aperture. It’s not just that particular business, and not just the product. It is like a set of services, [or] a set of new knowledge that they’re trying to develop. Then also, there’s a sense of going beyond the traditional hierarchy, creating a greater element of informality.

Interestingly, they have a lot of town meetings, [which are] the most successful, because you need to mobilize people. They’re almost walking around in shirt sleeves with a microphone in hand, not sitting at a table and then broadcasting the message. So, there’s a sense of activism, a sense of momentum, inspiration. Accompanying that is a sense of processes and incentives and so on.

The other point that’s very interesting is — as Mike mentioned — they tend to retain talent. They, of course, shut down factories, and they lose talent in those situations. But they’ve learned how to redeploy talent. There’s a lot we can learn in our context. It’s because they have a longer time horizon to build businesses. They’re a little more patient with capital in their business. So, they’re retaining some of the traditional Japanese skills, but modifying them.

Wharton Business Daily: Something that Mike said is interesting. That component of hearing the message from on high, and it being passed down to the employees, and the employees just implement it. It is unique to see that change, because of how historical that is within the culture of business within Japan.

Singh: Exactly. In fact, they even said that in some cases, they used to have meetings with seating charts — they got rid of the seating chart. One of the leaders said — to convey the sense of approachability — “I’m the one who takes out the garbage.” Metaphorically, he was saying that all of us need to do that; all of us need to be in charge of our own situation. That, I think, was fascinating.

That was, in fact, Kazuo Hirai [former chairman of] Sony. He led a 10- or 12-year horizon of changing Sony’s portfolio. Sony was struggling a lot when Apple began to dominate consumer electronics, and they were not doing well so much in the movie production business. They had to change their whole portfolio of businesses. So that’s an example.

Only about a third of [Japanese] companies have been able to do that. We’re presuming the others might follow.

A Sense of Urgency to Change

Wharton Business Daily: Is the landscape open to making change right now, more than maybe it was, say, 20, 30 or 40, years ago?

Singh: I think it definitely is. Mike and I remember the early start of this work, and seeing a sense of some despondency that for so many years the [Japanese] economy has remained stagnant. There was a sense of urgency [to change]. There’s a context in society where you start seeing working examples, and people start emulating those.

Wharton Business Daily: When you think about leadership of what these companies were, what it is now, and what it could potentially be, you’re seeing a shift or a movement. This will play out probably generationally, with the leaders that will be there 20 years down the road.

Useem: Harbir and our colleague in Japan concluded — after talking with 102 of these people at the top of the chart including chief executives and board chairs — that this has an amazing amount of momentum. It’s happening. It’s going to play out over the next five or 10 years. Even more importantly from our standpoint, what’s developing now in Japan is worth thinking about even if you’re not running a company in Japan.

They’ve invented a bit of a hybrid. They’ve kept some of the old methods that worked very well. They’ve also added new pieces to how they do it. For example, not sitting in the high castle and casting or pushing directives down, but actually getting out of your castle and walking around and talking with people.

Longer term, that what’s happening in Japan — a quiet, largely unseen revolution in how business is getting business done, and responding to changes in the workplace and the competition these companies face. We think we can, in a sense, see some of our own future in looking at Japan.

Wharton Business Daily: What do you think is then the potential economic benefit of having this style of leadership, this change? Many of these companies have been successful for a long period of time, and have also gone through down cycles. But still, they’re well-known, well- understood companies and brands. What does it mean for their outlook moving forward?

Singh: Those who have been able to adapt see a very positive horizon. Others have a sense of urgency to retire some of the legacy assets and move forward. They’ve also seen a less stressful way of doing that, but over a longer time. So, they’re understanding the hybrid model.

We think this hybrid model will actually diffuse through the economy. There are some structural elements that are still a problem. It’s hard to reduce employment in Japan. There are demographic challenges in Japan as well, and not much immigrant labor is coming in. They are looking at high-tech, high-value-added services. In that, they are doing very well.

Useem: I’ll offer up an illustration of the same from the low-tech world. In Japan, there is a chain that’s very much like 7/11 over here [in the U.S.], called Lawson. By the way, 7/11 is also Japanese-owned — that is not appreciated by most Americans. Lawson had traditionally run its 15,000 convenience stores all across Japan saying, “Look, you’ve got to stock the following items, and you’ve got to follow the rules coming out of headquarters down here in Tokyo.”

The new chief executive, who came in some years ago, said that local needs are different. There are a bunch of Lawson stores, for example, up near the Fukushima area where we had a nuclear disaster [caused by a] tsunami 14 years ago. He said to the stores, “Think through what people need in your area.” What people needed was water, for example. They needed food, which these local stores didn’t have so much of. He simply said, “Figure it out. Look at your customers. What do they need? You’re hereby delegated to be your own leader, so to speak.”

We believe that this form of the delegation — intent clear, but delegation of authority to make “on-the-battlefield” decisions — is a good idea. It’s here to stay. It’s helped turn around the stock market in Japan, which is now way, way up. That’s why some large investors, including Warren Buffett, are increasingly looking to invest in Japan.

A quick summary point is that this quiet revolution behind the scenes, along the lines that Harbir outlined at the very start, is happening. We think it’s here to stay. We think other companies are going to pick it up. If you’re running a company in Japan, India, North America, Brazil or Europe, it’s a good idea to take a look at what’s happening in Japan, because in some respects, it’s our own future as well.

The Emerging Shape of Future Corporations

Wharton Business Daily: Other cultures will have their own philosophies on how to lead, how to run companies, and what they believe is successful. How receptive do you think they will be to bringing these ideas in?

Useem: It’s a great question. Harbir and I and our colleague in Japan have independently come to the conclusion that one of the best ways to evolve your own leadership is look around at other companies in the U.S., in Brazil or China or Japan.

Many of these Japanese companies are creating the future. Not only for them, but a future that we can see through them, that may be our own future. That’s why we wrote the book; we wanted to tell the story [of the change underway] in Japan. People in Japan know the story. So, this is not for people who are living it. It really is for people who want to think about their own leadership, and their own firm. And how they, too, just like these resolute new leaders in Japan have turned around many companies there. We think that some of our future is seen now in Japan. Thus, good to take a look at what Japanese companies are doing. We think it’s the future.

Singh: In fact, one of the big debates in the U.S. today is the issue of shareholder value and purpose, right? Shareholder value has a primacy. Very often, people allude to that and say, “Therefore, we are shutting down these divisions,” and so on. At the same time, in many of our corporations here, there’s a sense of the pursuit of purpose as a way of attracting people, and giving them something that they can be motivated by.

I think the Japanese model — the hybrid model — is a very good example of the firm’s role in society and of seamlessly working with consumers, employees and communities. And that’s a well-established tradition. With about half or more of the Fortune 500 companies trying to follow purpose, with mixed results, there’s a transferable model from these companies that we have studied, to our corporations over here.