Innovation: Where does it come from?

Yoshito Hori, president of GLOBIS University, managing partner of GLOBIS Capital Partners, shares his views from an entrepreneur's perspective.

On the surface, the Japanese economy and the U.S. economy look quite different.

The U.S. economy is a dynamo, endlessly spawning new corporate titans like Apple and Google, which ranked number 1 and 2 for market capitalization in this year’s Fortune 500, despite being just 38 and 16 years old, respectively.

Japan is different.

Yes, there are a few huge corporate newcomers like online shopping mall Rakuten (founded 1997) and IT conglomerate Softbank (founded 1981), but the majority of the country’s biggest and best-known firms date back to before World War II. That’s true, for example, of Canon and Toyota, both of which were established in 1937. Panasonic, meanwhile, dates back to 1918, making it almost a century old.

But given that there are seven Japanese firms which are over one thousand years old, 100 years old is actually relatively young! The most ancient of these seven companies, the building firm Kongo-gumi, was established in the year 578, making it 1,436 years old (or around 90 times Google’s age).

Does the presence/dominance of long-lived enterprises like these mean that the Japanese economy is unable to renew itself through creative destruction, as some Western commentators argue?

No, absolutely not.

In the U.S., you certainly get a lot of very visible churn. Old companies die, new and innovative ones spring up to take their place.

In Japan, nothing much seems to change on the surface, but in fact the old companies are quietly evolving into completely different businesses.

The best recent example of this is Fujifilm and the way it responded to digital photography, an existential threat to its old film-based business model.

While Kodak stood paralyzed in the face of change, Fujifilm actively diversified into new fields like cosmetics, chemicals and components. It also bought full control of the FujiXerox joint venture to expand its presence in document management and print solutions.

In 2012, The Economist, which usually likes nothing better than blasting Japanese companies as slow-to-change stick-in-the-muds, lavished praise on Fujifilm and its visionary CEO Shigetaka Komori. “Kodak acted like a stereotypical change-resistant firm, while Fujifilm acted liked a flexible American one,” it said.

(For me, one recent proof of Fujifilm”s extreme adaptability was the news that its Instax mini, a Polaroid-like instant film camera, is actually outselling its digital cameras in Asia. How’s that for a bold and counterintuitive gambit!)

A similar “stealth transformation” happened with Japan’s big trading companies.

I worked for one of them—Sumitomo—in the 1980s. True to its “trading company” moniker, Sumitomo then made 90% of its $300-$400 million in annual operating profit through trade. But in 2014, the same firm made between $3 and $4 billion, 90% of which came from investments. Sumitomo is no longer a trading company; it’s an investment company. The name’s the same, but the business isn’t.

I attribute Japanese companies’ ability to self-transform in this way to two things.

ONE: Japanese companies invest heavily in research and development.

Jesper Koll, head of Japan equity research at JP Morgan, likes to point out that even during the depressed 1990s corporate Japan invested the equivalent of 3.4% of GDP in investment. (In Japan 80% of R&D is conducted in the private sector. By contrast in the U.S. around half of R&D is militarygovernment-related.) That heavy spend produced new technologies like Toyota’s hybrid cars and Toray’s carbon fiber—as well as Fujifilm’s ability to make anti-aging creams or optical films for LCD displays.

TWO: Japanese invest heavily in educating all their employees.

Japanese firms like to hire people based on personality and potential, rather than their being pre-equipped with the perfect professional qualifications/experience for the job. The companies then spend time and money educating these people internally. This has a double benefit: it makes employees more loyal and helps create a genuine “learning organization,” able to change as radically as Fujifilm and Sumitomo did.

As the founder of a business school, I know about this difference first-hand. At my school, the MBA course accounts for between one-quarter and one-third of revenues, just as at Harvard or any other U.S. business school. It’s in the rest of the business, where our model and the American model diverge.

My school generates the bulk of its turnover from delivering in-house educational programs tailored to specific company needs. These programs are taught two days a month over ten months to groups of 30 managers. Only after everyone has benefited from the program, are a few members of the group selected for the CEO and general manager positions. This democratic approach fosters a sense of inclusion and helps spread a high level of skill and knowledge widely in the firm.

American companies, by contrast, tend to preselect a few stars for promotion to the upper echelons of management and send them—and them only—off to business school for intensive management courses. (These so-called “executive open courses” account for the bulk of non-MBA revenues at American business schools.)

I am not going to argue that one approach or the other is better. As I said at the start, these are two quite different economic models.

In the U.S., R&D and education are generally handled externally. As a consequence, older firms can have trouble with radical self-transformation. New companies, however, always spring up to replace them and do the things they can’t do.

In Japan, R&D and education tend to be handled internally. That means that old companies, despite appearing monolithic and slow, can often be nimble, flexible and capable of change.

(At the same time, I do wish we had more venture businesses in Japan!)

Have you ever been part of a genuine learning organization that could evolve organically in response to changing market conditions? Or what about the opposite—have you belonged to a fossilized organization incapable of change?

Why not share your experiences with us?

Photo: docstockmedia / shutterstock

Author

Mr. Yoshito Hori established GLOBIS Management School in 1992 and GLOBIS Capital Partners in 1996. In 2003, GLOBIS started its original MBA program which, in 2006, received accreditation from the Japanese Ministry of Education and gained “university” status. GLOBIS started a part-time MBA program in English in 2009 and a full-time MBA program in English in 2012.

A Harvard MBA graduate and former Sumitomo Corporation employee, Mr. Hori founded the Entrepreneurs’ Organization (EO) Japan Chapter in 1995 and became the first board member from Asia in charge of Asia Pacific region in 1996. He also served on the World Economic Forum (WEF)’s New Asian Leaders Executive Committee and Global Agenda Council on New Models of Leadership, as well as the Harvard Business School Alumni Board from 2005 to 2008. Currently, Mr. Hori is a board member of the Keizai Doyukai (Japan Association of Corporate Executives), and serves as co-chair of WEF’s Global Growth Companies.

In 2008, he launched the G1 Summit – a Japanese version of the WEF’s annual Davos forum. This led to the foundation of G1 Summit Institute in 2013, which Mr. Hori serves as Representative Director.

Just days after a huge earthquake struck northeast Japan in March 2011, Mr. Hori launched Project KIBOW to support the rebuilding of the disaster-affected areas. The following year Project KIBOW was incorporated as the KIBOW Foundation, which Mr. Hori serves as Representative Director.

An avid enthusiast of the Japanese game Go since age 40, Mr. Hori has been Director of the Nihon Ki-in (Japan Go Association) since June 2013.

Since October 2013, Mr. Hori has hosted a weekly TV program in Japan called Nippon Mirai Kaigi (Japan Future Conference). He has authored several books including Visionary Leaders who Create and Innovate Societies, Six Dimensions of Life, and My Personal Mission Statement.

Mr. Hori received his BS in Engineering from Kyoto University and his MBA from Harvard Business School.

He is an avid swimmer and enjoys spending time with his family, especially his five sons.

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