The Digital Revolution: Why is Japan not in the lead?

“Corporate strategies were shaped by the domestic competitive dynamics that proved disadvantageous in global markets.” 

- Prof. Kenji E. Kushida, Stanford University

The digital revolution took the world by storm in the 1990s, ushering the Golden Age of American technological icons such as Microsoft, Sun Microsystems, LINUX, IBM, Google, Apple, and IDEO, to name a few. Meanwhile, Japanese telecommunication firms also pioneered cutting-edge networking technologies such as ISDN (Integrated Services Digital Network), DSL (Digital Subscriber Line), highly sophisticated wireless systems, and internet content platforms. So why haven’t we seen Japanese companies leading the digital transformation?

When asked, experts in the Japanese telecommunications industry air a long list of grievances that essentially point to issues in two key areas: business models and design thinking.

Services vs. manufacturing on the global stage

Let’s start with the business models. The United States has long enjoyed a highly flexible labor market. Corporations wasted no time identifying IT’s enormous potential for business process transformation in terms of cutting payroll. Consequently, they refashioned business administration and customer services around digital solutions, resulting in an overall transformation of their business models. Sales staff began to disappear from department stores. The handling of customer inquiries, orders, and complaints shifted to automated menus. E-commerce and e-banking quickly followed. Digital operations swept the globe.

Japan, on the other hand, has a highly regulated and rigid labor market, where lifetime employment and strict, seniority-based career paths prevail to this day. Lifetime investment in employees has always been a prominent competitive advantage. With no interest in cutting payroll, companies left business processes—and models—unchanged. Rather, IT was applied to production. Increasingly sophisticated products were created for a lucrative and fiercely competitive domestic market while global markets moved on. Japanese firms then found themselves in the peculiar position of leading with no followers.

US firms applied digital transformation to solve the how of competition—services. Japanese firms, on the other hand, aimed for the what—manufacturing. In the end, services won out with their proximity to customers and markets. This proved a potent learning point on the global stage.

Innovation by design: the new form of competitive advantage

Experts cited communication by design thinking as the other core reason for US companies dominating the digital revolution. While the theory and practice of design thinking have been around for over a century, information technology was the catalyst in bringing this practice into the mainstream. Digital technology relies on developers and end-users for equal and simultaneous involvement in the creation process. The term itself was coined by IDEO in the United States in the early 1990s and immediately found an enthusiastic following. American financial institutions, front-runners in the digital revolution, remodeled their workforce to prioritize IT initiatives. As an example, Goldman Sachs replaced 600 traders with just 200 engineers.

Co-creation

Design thinking requires simultaneous and equal input from all stakeholders, but customers in Japan simply do not co-create. IT service providers are responsible for providing ready-to-use, fully customized products. The customer’s role is to take possession of these products upon delivery. System production remains both analogous and developer-driven, and therefore extremely time-consuming. When markets move fast, products can become obsolete by the time they are delivered to the customer!

Looking to the future: a changing landscape

It’s not all bad, however. Subject experts were upbeat on the prospects of narrowing the digital gap between Japan and other markets. In a recent education reform, the Ministry of Education is planning to introduce a flexible major-minor degree system that allows students to pursue studies in multiple disciplines ranging from the humanities to the sciences. This could enrich the future talent pool, allowing educators to nurture engineers in multiple disciplines and thereby adapt to identifying more diverse customer needs.  

Customers, of course, may not be willing to wait for the next generation of engineers. For the sake of co-creation, flatter hierarchies, as well as more versatile workstyles, roles, and initiatives, may be a good place to start now.

Photo: metaworks

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