How Japan Can Compete:
Executing the Ambidexterity Strategy and Managing
Change for the DX and the post-COVID-19 Era

By Ulrike Schaede
University of California San Diego*
School of Global Policy and Strategy
November 2020*

The author is indebted to Susumu Katayama, who translated this report into Japanese, based ona first draft from an AI translator. The author is also grateful to Shinya Fushimi, Alberto Moel,
Ando Naoki, Charles A. O’Reilly III, Carsten Schaede and many interview partners in Tokyo andSilicon Valley for detailed conversations about the DX, digital manufacturing, ambidexterity, andHR management processes. I thank Reiko Kanda, Ayumi Kitajima and the NIRA team for very
helpful editorial suggestions.

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Abstract
This report covers 4 areas: 1) Japan’s competitiveness in the new era of“digital manufacturing”, 2) the execution of the ambidexterity strategy, 3) how
Japanese companies can manage culture change, and 4) how strategy and culturechange require a new, elevated role of HR practices.
The digital transformation (DX) and the post-new coronavirus world
require new strategic positioning, if companies want to benefit from the new
business opportunities. This report shows how leading Japanese companies are
already competing powerfully in digital manufacturing. One tool for the newstrategic positioning is the ambidexterity framework. While many Japanesemanagers are already familiar with ambidexterity, the mechanisms on how to
execute this strategy are still not well-known. This report introduces three models
that help with the execution of ambidexterity. The first is the alignment model,
which shows that successful strategy execution requires a tight fit between thecritical tasks (KSF), people, HR systems, and corporate culture. The second is the
DISCC model of how to manage culture change. One component of this culturechange model is a fundamental change in HR and performance incentives. An
example of a new process is the third model, the 9-Box Grid. This offers an
example of a tool that links an employee’s assessments with incentives andindividualized training, tailored to each employee’s goals. The tools of culturechange and HR can be combined to create a new alignment for a company’s
innovation strategy, and this will result in new capabilities to compete in thedigital transformation.
The digital transformation (DX) is combining with the COVID-19 pandemic
to bring a large disruption to all global businesses. While this increases
uncertainty, it also brings new opportunities to accelerate change andreinvention. This report shows that many of Japan’s leading companies are wellpositioned to compete. It introduces examples from digital manufacturing tohighlight these competitive strengths. It is also suggested that now is the time torevisit the role of HR in large companies, not just as a support unit but as a criticallever in motivating and retaining employees and implement strategy change. To
execute the dual strategy of ambidexterity and to run separate alignments within
one company requires new leadership approaches. The tools presented in thisreport give managers examples and frameworks for how to think about managing
corporate culture change and positioning their companies at the new global
competitive frontier.

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Table of Contents
1.

Introduction: Two Shocks – The Digital Transformation and COVID19

2.

Strategy Change for the Digital Transformation
1. The Digital Transformation – Definitions
2. Industry 4.0: The Disruption of the Production Automation
Pyramid
3. Japan’s Main Competitors in Digital Manufacturing

3.

The Execution: Ambidexterity and the Alignment Model
1. The Framework: Managing 3 Business Horizons at Once
2. The Execution: Building the “Tasks-People-HR-Culture” Alignment

4.

Managing Corporate Culture Change: The DISCC Model
1. What is Corporate Culture?
2. The DISCC Model: Managing Culture Change
3. Changing the Workplace Behavior Toward Efficiency andProductivity
Examples: Innovation Tourism – Workspace and Office Design –The Value of Time

5.

People Management: Toward a New HR Function
1. The Costs and Benefits of Lifetime Employment
2. Workstyle Reform
3. HR Function Reform
4. Example: The 9-Box Grid
5. New Structures for Innovation with Telework

6.

Conclusion: Leadership for the Digital Transformation

4

Table of Exhibits
Exhibit 1: Value Creation in the Digital Manufacturing Age
Exhibit 2: The Competitive Landscape in Digital Manufacturing (Examples)
Exhibit 3: Top Applicants in AI (by number of patent families)
Exhibit 4: Innovation Strategy Map
Exhibit 5: Different Business Unit Time Horizons
Exhibit 6: The Alignment Model for Monozukuri Businesses
Exhibit 7: The Alignment Model for New Innovation Businesses
Exhibit 8: The DISCC Model of Culture Change
Exhibit 9: The 9-Box Grid for Performance-Potential Evaluations

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1. Introduction: Two Shocks – The Digital Transformation and
COVID-19
In 2011, Takeo Hoshi and Anil Kashyap wrote a NIRA report titled “Why Did
Japan Stop Growing”. 1 They pointed at the various structural challenges ofJapan’s postwar economic structure, including inefficiencies in the SME and retailsectors and an outdated financial system, the ageing and shrinking society, andmacroeconomic factors such as mounting debt, stubborn deflation and a weakcurrency. They also highlighted what they perceived as policy mistakes, such as
the creation of so-called zombie companies and insufficient monetary easing,fiscal spending, and deregulation. As economists, they looked at the larger settingof Japan’s economy overall, and found that, at the macro level, Japan was facing
many severe challenges.
However, when zooming in on the micro level – the individual company – thestory is much more positive, and also more polarized. It is true that many
Japanese companies, especially smaller ones, are being threatened either bytechnological change or globalization. Some larger companies are also struggling
to change. These companies explain the low average productivity levels identified
by Hoshi/Kashyap. Yet, it is also true that many large Japanese companies,
including traditional ones, are undergoing a huge transformation. And newer
firms such as Rakuten, Uniqlo and Softbank have also emerged as global players.
At the micro level, there are strategies and opportunities for individual companies
to change and compete.
This has already begun, and I have called this transformation of leading
Japanese companies a “reinvention”. 2 With this reinvention is meant the second
phase of “choose and focus” and strategic repositioning. The first phase began
after the banking crisis of 1998, when many large firms began to exit nonprofitable businesses, launching a phase of rethinking their core businesses. But
even as companies sold off non-performing businesses, they held on to their
existing core businesses.
The current, second phase – choose and focus 2.0 -- began in the mid-2010s,
when Japan’s leading companies began to think about strategic repositioning in
more structured ways. The concept of “ambidexterity” became very popular,
because it offers an analytical framework for how to continue to compete in the
1
2

Hoshi/Kashyap (2011)
Schaede (2020)

6

current core businesses (that were important to maintain cash flow andrevenues) with potential future core businesses (that are to be explored). The firstcompanies to embark on this were either facing a crisis, or had leaders able toanticipate a coming crisis. For example, in 2000, Fujifilm CEO Shigetaka Komori
realized that analog photography was at a peak, soon to be replaced by digital
cameras. Eventually he even changed the company name to show this identity
switch, away from a “photographic” film company, and toward digital imaging,
advanced materials and health sciences. A few years later, Panasonic announced
that it would turn from a B2C company to B2B. Meanwhile, Komatsu and Toyota
started to remake themselves as “service” companies. New players emerged,
such as Keyence and FANUC, and many of the new competitors were not widely
known, even within Japan, such as JSR, Nitto Denko, Hirose Denki, THK, Advantest,
Cosel, or DISCO. As these companies became highly profitable global competitors,
many others followed suit.
Further momentum was added with the “Hitachi shock”, when Hitachi -arguably the most diversified company as well as the “gold standard” of Japan’s
electric machinery industry – announced a pivot to become a data solution
provider and a smart infrastructure player, entering new businesses such as smart
cities, smart energy and grid technology, and transportation-as-a-service. This
moment was a shock because it undermined the excuses by other large, highly
diversified companies that change was impossible: if the largest company could
do it, all others could as well. As Hitachi began to carve out or sell its many
subsidiaries, including the very successful Hitachi Chemical, the signs were clearthat Japan’s business reinvention toward a new style of competitiveness hadtaken full swing.
Still, many people, including many in Japan, continue to doubt that Japan cancompete. In particular, it is said that Japanese companies will not be important
players in the digital transformation. For example, in July 2019, SoftBank Group
CEO Masayoshi Son called Japan an “underdeveloped” country in the use of
artificial intelligence in businesses, lagging behind China and even Southeast
Asian countries. “Japan once was a leader in technology but has become anunderdeveloped country in AI. It is in a pretty bad situation so Japan needs toawaken.”3 Outside Japan, too, it is often assumed that U.S. companies such as
Google, Amazon, Microsoft, Facebook and Apple (GAMFA) have already takenover the “cloud” and lead in the data collecting and data analyzing realms as well3

“Japan 'underdeveloped' in use of AI technology, says SoftBank's Masayoshi Son”, Japan Times,
July 18, 2019.

7

as the development of autonomous systems, machine learning, and deep AI.
Chinese companies such as Alibaba and Tencent are often also considered strong
in this area. In contrast, Japan and Germany are widely seen as providers of thenecessary hardware at best, or bystanders of the digital transformation at worst.
Is this view correct? This report argues that it is not.
To be sure, the COVD-19 pandemic is bringing another set of uncertainties.
Japanese companies have long been known for a “wet” and “high context”
culture that is relational and collectivist, and places emphasis on human relations,group work and due process. Japan’s employment structure was geared toward
this setting, with lifetime employment and reciprocal relationships between
companies and their employers providing stability over time. The “membershipsystem” provided a particular set of rights and responsibilities that was very
helpful for the postwar period of rapid growth. In reality, by the time the 2019
Workstyle Reform program was instituted, the system had already begun tochange.4
The COVID-19 crisis has further accelerated the shift to revising existing
HR processes, with the sudden shift to telework (working from home). This will
fuel ongoing trends, such as the turn to individual careers paths, new types of
performance evaluations, and pay-by-job category (as opposed to company size).
Telework will also accelerate the shift away from a focus on process, which isincreasingly difficult to measure, to one on outcome. A more salient role of HR,
with new evaluation tools, will help in this shift. Competition for talent means
there is not much time to waste. Winners in the new work settings will becompanies that are fast to structure new workflows in proactive, forward-looking
ways, and find new mechanisms that allow teleworkers to collaborate andinnovate.
In combination, the digital transformation (DX) and the COVID-19
pandemic are a cause for great concern, as they create tremendous uncertainty
about the future. For companies that want to change, this crisis also presents anopportunity to accelerate, or even take more radical measures. Crisis invites andfacilitates innovation and renewal.
This report introduces several management tools to implement change. It
argues that the DX brings new innovation opportunities for Japanese companies
that are already strong in smart infrastructure, digital manufacturing processes,
and edge computing. In contrast to what people often say, it is still unclear who
4

Schaede (2020)

8will win, or what the industries of the future will even look like. Meanwhile,
several Japanese companies have quietly risen to jockey for position.
This report will look at what it takes for Japanese companies to repositionand compete in the DX. It is organized as follows. It begins, in Section 2, withdiscussing digital manufacturing as an example how Japanese companies cancompete in the DX. While the spotlight is on manufacturing, the subject matter
applies equally to emerging technologies (e.g., blockchain and AI) in the service
industries.
Section 3 looks at the tasks of designing the dual strategy needed to
execute ambidexterity. It introduces the alignment model as a framework tohighlight several management levers for positioning the company to compete in
the future, including innovation streams, corporate culture change and new
human resource management systems.
It will become clear that the execution of the ambidexterity strategy
requires a new mindset. Section 4 offers the DISCC model as a framework for how
to manage culture change. With the ongoing digital transformation and shift totelework, which may remain in some form after COVID-19, the old “way of doing
things” will no longer work. The DISCC model is a 5-step model that indicates how
culture can be managed.
Section 5 discusses how to redesign HR processes to complementambidexterity and culture change. The chapter begins by laying out the costs andbenefits of lifetime employment. It then suggests a more comprehensive,
individualistic, and motivational approach to HR, with the goal to help companies
to retain not only talent, but also the benefits of lifetime employment. The “9box grid” model is offered as one example of how companies may approach thisdifficult task. Traditional practices may no longer suffice in the telework/DX world,and each company will find their own approach. This section presents somesuggestions.
Section 6 concludes on the role of leadership, and suggests a silver lining:
the current crises present a good opportunity to accelerate the change processes
that many leading Japanese corporates have already begun. It is in the hands of
top managers to grab the moment and guide this process. Change management
cannot be delegated or outsourced.
Finally, readers may wonder how this positive analysis can coexist with
the Hoshi/Kashyap view of the Japan that stopped growing. The answer is thatthese two can both be true, because we are analyzing different parts of the9economy. Hoshi/Kashyap looked at overall macroeconomic data. In contrast, thisreport only focuses on the best of Japan’s economy. And here, the 80-20 rule
applies: 20% of companies account for 80% of the vibrant, successful, efficientand innovative parts of the Japanese economy. This report focuses on those 20%
and lays out what some of them doing to change internal culture and HR tocompete in the 21st century.

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2. Strategy Change for the Digital Transformation
2.1. The Digital Transformation - Definitions
The digital transformation – the DX – is opening new technology andbusiness horizons. In the language of the DX, the internet-of-things (IoT) meansthat most things will have a chip and can interact. “Industry 4.0” refers to a new
manufacturing paradigm in which all machines and parts are equipped withwireless connectivity and sensors to create an interconnected system that canvisualize the entire production line and make decisions on its own. Blockchain
represents new algorithms that can help make supply chain management,
logistics, freight, retail, insurance and banking become more efficient. “Big data”
is short for the collection of information from all these sensors and machines, and“artificial intelligence” (AI) means that the machines will eventually be able tolearn and teach themselves. Finally, “5G” is the new communication technology
base needed to accommodate this vast amount of data exchange at tremendous
speed, and the “cloud” is the equipment that can store, scrape and analyze all theinformation that can now be gathered through the new sensors and connected
systems.
All this brings new technology frontiers and new business opportunities,
from autonomous systems and advanced system solutions, all the way to therequisite infrastructure components, such as sensors, actuators, and bin-picking
robots. The question is, how can Japan compete in this DX?
It is often said that the U.S. and China will be the big winners in this DX,
and GAMFA will share the gains with a few Chinese companies. In reality, however,there are many areas in the DX where Japanese and German companies currently
have the upper hand – in particular in the so-called “digital manufacturing”,
where the technology frontier is about advanced manufacturing system solutions.
Many of the new autonomous production processes, 5G sensor systems andcomputing processes are not connected to the cloud, but rather located on the“edge”, i.e., embedded in the production location or autonomous system, andgoverned through so-called edge computing. Japanese and German companies
are world leaders in this area.
While the analysis in this report applies to all companies and industries,
we will take a closer look here at the strengths of Japanese companies in digitalmanufacturing, because this is the DX that is closest to becoming a reality. The
following corporate culture change applies similarly to the service sector,

11especially given that these boundaries are about to disappear as manufacturing
companies begin to build out “as-a-service” business models.

2.2. Industry 4.0: The Disruption of the Production Automation Pyramid
The question for Japan’s leading manufacturing companies is how to beplayers in the Industry 4.0 manufacturing process technologies, and how totransition to the “digital monozukuri” world. That is, two separate opportunities
present themselves: (1) to compete in the design, administration, and control ofthe digital shop floor (gemba), and/or (2) to exploit the new technologies forsuperior production processes. Although industry 4.0 does not yet exist, it isalready becoming clear that Japanese companies are positioning to become
leaders in the future DX shopfloor processes and technologies.
In the analog days of making cars, electronics and electric machinery, thegemba workers were guided by foremen who coordinated production processes
among each other. With the development of numerical controls and robots
beginning in the 1960s, more and more automation set in. Since then, engineers
think about shop floor automation as a pyramid with four levels. At the bottom isthe gemba, the shopfloor, where machines make things. These are equipped with
devices, such as sensors, that feed information into the control level, where theminute details of the production are governed. Up from there are three levels
that form an intricate hierarchy of software systems that each perform distinct
parts of the manufacturing process.5
Industry 4.0 is the general term used to refer to the disruption of thecurrent industrial system. In the future of manufacturing, all parts and all fourlevels of the current pyramid are unified. All parts and machines are equippedwith a sensor, and 5G will provide the bandwidth so they can communicate
quickly at all times. As a result, all production information can be known in realtime. Production is much faster, machine-run, and governed by machine-learned“digital kaizen”. The final product also has a “digital twin”, which is a data file withall information regarding a part, throughout its lifetime. This allows the5

On top of the shopfloor with its individual machine, the SCADA (supervisory control and dataacquisition) level generates network information, such as making two robots interact with eachother. One level up is the MES (manufacturing execution system) which gives the concrete
production orders to the machines. The top level is the ERP (enterprise resource planning) whichruns the entire production run, such as what type of product is to be built, in what quantity, andwith what parts. For details, see any textbook on operations, such as Groover (2016). The
following is based on interviews with engineers and experts in operations management.

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manufacturer to follow the parts even after then have been inserted into end
products, sold, and used.
The “cloud” then stores all information needed for this process. In thisnew world, everything is known: where all the necessary parts are, where they
are shipped to, and, over time, whether they have any defects, how customers
are using them, what repairs are necessary in the future, and so forth. Thisknowledge allows optimization to a point where there will be no holdups or
downtime caused by human error.
However, as of 2020, none of this exists yet. The platforms are still being
built, and 5G is still being installed. Robots exist, of course, but they cannot talkseamlessly to each other yet, and there are no digital twins. And most importantly,
there are still no “use cases” (applications) for the value-added of this digital
gemba and its extensions in the cloud and AI-based optimization. Yet, it is certainthat global manufacturing is moving in this direction. Who will win in thiscompetition will be determined in the future, but the preparations for this race
have begun.

2.3. Japan’s Main Competitors in Digital Manufacturing
For Japanese companies, this Industry 4.0 disruption offers a great
opportunity. Japan is globally known for leadership in monozukuri, as well as in
the equipment needed to manufacture. The core competence in making factories,
designing system engineering, mechatronics and robotics comes from the highdemands of the world’s best manufacturers, many of which are in Japan. This
opens two opportunities: the first is to compete in the design of new production
processes, including the advanced systems solutions, at a globally leading leveland become a standard setter in the new technologies. The second is tocollaborate with the world’s best manufacturers to create the first real “use case”.
This means, to find the applications where Industry 4.0 can truly benefit from big
data and AI in the cloud, and then be a first mover in building out theseapplications fast.

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Exhibit 1: Value Creation in the Digital Manufacturing Age
Source: Adapted and expanded based on a chart from METI (2018), p.22

Exhibit 1 is a presentation of where value (profit) can be created in thethree separate domains of the future world of digital monozukuri. The bottom
layer represents the current production level at the gemba, divided into machines
and equipment on the left, and software systems on the right. This is today’s main
location of profit generation. The arrival of the first players in DX are now opening
in the middle layer. This consists of integrated systems that offer solutions andservices that enhance manufacturing, such as AI-generated forecasting models of
whether an engine needs a repair. Here, profit is earned by providing advanced
system solutions. These include advanced equipment and plant installations, newproduction process solutions, logistics, customization and single-piece production,and the creation of synergies through platforms that allow optimization at various
parts of these steps. Advanced software tools and supply chain management
solutions will also be needed. This new middle level is at the forefront ofcompetition now, as it is a new “blue ocean”—i.e., wide open and uncontested
market space – and in factory automation.
The upper layer of Exhibit 1 is the cloud. The application of the cloud for
manufacturing is still in the distant future, and it will probably not be realized any
time soon. But the vision is that this upper layer – knowledge generated from thedata that are collected through the new connectivity – will create value by
providing feedback loops into the value creation on the shop floor. This is
expected to be a “gold mine”, i.e. a valuable new source of revenue. Famously,
Alibaba’s founder Jack Ma has referred to data as the “new oil”. This means we14

can think of data collection as the new oil drilling, and of data mining through AI
as the new the oil refinery.
Reflecting Japan’s monozukuri strengths, Japanese companies are very
important global players in machinery, sensors and robots. As of 2019, industry
observers suggested the following main players in each of the layers: Keyence,
FANUC, Omron, Okuma, Mitsubishi Electric, Yaskawa, Fuji Electric and Yokogawa
Electric and several mid-sized companies on the software side. There are manysmaller companies in Japan that dominate certain aspects of this technology.
They have fierce competitors from Germany, not only from Siemens, butalso Trumpf, Bosch and Dürr. In the U.S., there are Rockwell Automation andHoneywell on the equipment side, although in general, American firms are seen
as somewhat weaker in this area. In software, Western companies such as
Siemens, SAP, ABB, Autodesk and Schneider Electric are strong competitors.
Exhibit 2 lists the main competitors at each of these levels. Whereas U.S.
and Chinese companies are comparatively weak at the gemba, they currently
dominate the cloud, datamining and AI research. In 2016, China’s Midea acquired
the German robot maker Kuka in order to build a gemba presence, but the merger
is widely considered a failure.6 This showed, yet again, how strong the position ofGerman and Japanese companies is in some areas of the gemba.
Exhibit 2: The Competitive Landscape in Digital Manufacturing (Examples)Japan(examples)

Advanced Shopfloor Equipment
and Software
Keyence, FANUC, Yaskawa, Omron,
Okuma, Yamazaki, Fuji Electric,
Nikon, Advantec, Kawasaki Heavy,
Mitsubishi Electric, Yokogawa
Electric, etc.

Integrated Systems:
Platforms for
Advanced System Solutions
Edge Computing
Mitsubishi Electric, FANUC, Edgecross Consortium,
DMG Mori, Hitachi, Denso, FANUC (FIELD),
Fujitsu, NEC
Mitsubishi Electric (eF@ctory), Hitachi(Lumada)Software Services:
Data and Cloud
SoftBank, Preferred
Network, NEC

Germany(examples)

Siemens, Trumpf, Bosch, Dürr, SAP; Siemens, SAP, Bosch, Dürr, Adamos/Software AG
Europe: ABB, Schneider Electric
Zeiss, Software AG,(Cumulocity IOT),
AdamosSiemens (MindSphere)

Siemens

UnitedStates(examples)

Rockwell Automation, Honeywell

Amazon AWS, Google,
Microsoft, IBM, Oracle,
Cisco, Intel, many
startups

Rockwell Automation,
Honeywell, Xerox, Autodesk

China(examples)

Alibaba, Huawei

The battle in this middle layer is about offering edge computing
technologies, as well as the platforms that connect these new processes. The first6

https://technode.com/2019/03/29/midea-kuka-80-profit/

15

refers to the unifying gemba computing system that will govern everything thatused to be the production pyramid. Within Japan, Mitsubishi Electric is fast
emerging as a leader in edge computing, in particular through its e-F@ctory
product and capabilities.7
Regarding the platforms, two different types are now emerging. The firstare single-company platforms. Some of these are open, but many are proprietary(closed). Together with Siemens’ Mindsphere, a global leader in this area iscurrently FANUC, which in in 2016 launched its FIELD platform. FIELD allows
manufacturers to connect all of their automation equipment to a FANUC serverwhich also offers software applications for lowering equipment downtime andimproving operational efficiency. This is an open platform, so that users can add
their own application, or buy FIELD apps written by device manufacturers, suchas robots, sensors, and machinery. In contrast, Hitachi’s Lumada platform islimited only to Hitachi clients and processes, with the goal to increase trust in andusage of the platform. The goal is to collect all data from all Hitachi businesses
and their customers, and thus create knowledge through connectivity that issemi-proprietary. The U.S. tried to compete in this area through GE with its Predix
platform, but this attempt failed and was discontinued in 2018.
The second type of emerging edge computing platforms are set up as free
and open consortia. The goal is to create the industry standard in edge-computing
manufacturing platforms, by being first to market and creating network effects:
the more users, the higher the utility. The business goals are data collection andoffering edge-computing services. In Japan, in 2017 six companies launched the“Edgecross Consortium” to establish IoT standard connectivity for edge
computing, led by Mitsubishi Electric Corporation (MELCO), together with
Advantec Co., Ltd., Omron Corporation, NEC Corporation, IBM Japan, Ltd., andOracle Corporation Japan. The main competitor from Germany is Adamos, built
by a group of machine-tool companies. Which of these platforms will win remains
to be seen, but it is already clear that Germany and Japan are strong players withlittle competition.
The top level – the cloud – is widely assumed to be dominated bycompanies from the U.S., the GAMFA. These companies are investing heavily inbuilding out operating systems, cloud mechanisms, and AI applications. The trade
war between the United States and China that began in 2016 has greatly curtailed
some of the Chinese competitors, in particular Alibaba and Huawei. However,Japanese companies are making inroads here as well. Exhibit 3 shows that in 2019,7

For more, see https://www.mitsubishielectric.com/fa/sols/efactory/index.html

16

eleven of the top 20 AI patent holders are Japanese firms. While it is true thatsome of the most important developments may not be disclosed in patents, thetable nevertheless underscores that it would be wrong to discount Japanesecompetitive strength in this field.
It is important to note that the competencies required for competition in
the cloud are very different from those on the gemba. However, a directconnection to edge computing exists. A question for the future competition, then,is whether latecomers will be able to leapfrog, or whether synergies among theJapanese competitors can be created.
Exhibit 3: Top Applicants in AI (by number of patent families)
Source: Wipo (2019)

Finally, the shift to digital manufacturing means that many of Japan’s
manufacturing firms are crossing the border to becoming service sector
companies. For example, Hitachi Ltd. and Mitsubishi Electric are now focusing to17compete as advanced system solution providers and leaders in edge computing.
Meanwhile, NEC is expanding efforts in AI applications and vision and facialrecognition technologies. Companies like these are no longer traditional
manufacturers. Rather, they are shifting their business models from “pipes toplatforms”, and from making things to also providing services, or selling “things”
as services. To give but one example of such a business model change, Siemens –Hitachi’s direct competitor in Germany – is already shifting away from sellingtrains to the German Railway company, and toward selling the service of runningand maintaining trains (TaaS: transportation as a service). Likewise, carcompanies worldwide are preparing to no longer sell cars to individuals but torent them out with subscription services, under the header of “MaaS” (mobility
as a service). This means that revenue models are shifting, away from spot sales
to recurring profit from service subscription income. As the DX takes hold,traditional ways of thinking about sectors of the economy, total factor
productivity, and employment are also changing.
And most importantly, for the large companies, the DX means that inorder to compete, it is necessary to develop new core competencies and to
manage a new dual strategy. In this dual approach, companies constantly
enhance their traditional business and also build new strengths for the newcompetitive tasks. This, too, has already begun among the leading companies.

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3. The Execution: Ambidexterity and the Alignment Model
The DX is bringing new opportunities for all Japanese companies in allindustries. To compete through this wave of disruptions requires that companies
find new extensions of the existing business, even as they continue to enhancetheir existing businesses. In manufacturing, new possibilities are emerging in theconstruction of infrastructure (smart cities, smart energy, micro-grid), new meansof transportation (self-driving or flying cars, new trains, etc.), new machines(robotics, drones), and of course the input parts, components, and materials thatwill increase the functionality of these new product offerings. In the service
industries, the DX and blockchain open new opportunities in logistics, retail,insurance and banking. Profit is made in new business models that capture value
along the entire solution chain. Exhibit 4 provides a framework of the emerging
opportunity set, and maps how to think about business portfolio expansion.
Exhibit 4: Innovation Strategy Map

The two axes are technologies and customers, and each has existing andnew areas. The questions to ask for each box are:Box (1): How can we continue to compete powerfully in the current,
existing core business, through kaizen, efficiency enhancement, etc.
Box (2): How can we take current technologies and sell them to new
customers in new markets, including new applications of current
technologies or new global markets?

19

Box (3): How can we help our current customers by developing newtechnologies and new applications?
Box (4): How can we develop completely new technologies andapplications for new customers? In other words, how can we survive
the DX disruption by adding new competencies that allow competitionin the newly emerging market opportunities?
Great companies everywhere typically already operate in boxes (1), (2)and (3), and constantly extend their current technologies and markets. This
involves mostly incremental innovation, and carefully planned extensions andadditions to the current core. For example, over the past 20 years the Toyota
Motor Corporation has continually improved its manufacturing skills (Box 1), has
successfully extended car sales into new markets (e.g., pickup trucks for the U.S.
market (Box 2)), and developed the Prius hybrid car for existing customers (Box 3).
The challenge is Box 4: moving into completely new customer needs withnew technologies. This is much more difficult. Even though many companies saythey do this, in reality they face tremendous challenges. This is because extending
into Box 4 requires a dual strategy, with a new development and execution
framework. In the Toyota example, Box 4 is about entering the MaaS business byoffering transportation services with self-driving or self-flying cars (drones).
However, adding this new line of business necessitates different engineers, a new
approach to R&D, a new business and profit generation model, and overall a new
business focus on speed and breakthrough innovation. Running these businesses
at the same time is called ambidexterity.8
Yet, already several success stories are emerging in Japan. For example,
Fujifilm has extended its long-standing core competencies in photo film andcameras (Box 1) into new types of films for input materials, such as polarizer film
(Box 2), medical devices and medical imaging systems (Box 3), and has extended
its R&D into cosmetics, pharmaceuticals, and regenerative medicine (Box 4). In
the case of JSR (originally known as Japan Synthetic Rubber) , the company is still
Japan’s largest producer of synthetic rubber, but it has also built new businessesin specialized polymers for semiconductor production and polarizer andbrightness films for LCD panels (Box 3) and is extending into life science materials(Box 4). Nitto Denko, one of Japan’s leading materials and adhesives company,

8

For a detailed background on the framework of ambidexterity, please read O’Reilly/Tushman2016 (translated into Japanese 2019), O’Reilly/Tushman (2004), or Tushman/O’Reilly 1997.

20

has long pushed its innovation envelope through this process, which it calls“sanshin”, the “three new”, referring to boxes (2), (3), and (4).9There is a reason why great companies constantly think about all fourboxes: Box 1 will eventually mature and decline, and if the company is notprepared for competition in new industries, it will face extinction. While thisbrings great pressure to innovate, the difficulty lies in the execution. To executeambidexterity successfully, the company has to manage different business units
at the same time that are all at different stages of their life cycles. How can thisbe done?

3.1. The Framework: Managing 3 Business Horizons at Once
Ambidexterity is now a very popular framework in Japan, because it
addresses precisely this challenge of preparing for the future while maintaining
to run the current core business.10 In the ambidexterity model, the different life
cycles of the businesses in the 4 boxes are referred to as three “horizons”. Exhibit
5 draws the business life cycle line for 3 separate horizons, to highlight the overlap.
Exhibit 5: Different Business Unit Time Horizons
Source: adapted and expanded from Coley / McKinsey 11

9On Fujifilm, see Komori (2015); JSR: https://www.jsr.co.jp/jsr_e/rd/policy.html; Nitto Denko:
https://www.nitto.com/us/en/about_us/concepts/businessmodel/
10O’Reilly/Tushman (2016, in Japanese 2019), Kato/O’Reilly/Schaede (2020)11
E.g., Coley (2009), O’Reilly/Tushman (2016, in Japanese 2019)21

So-called “Horizon 1” businesses (red line) are the current core, maturebusinesses. These are very important, because they generate revenues and cash
flow that stabilizes the company and guarantees continued operations. Thesebusinesses should be managed toward stable revenue generation, with a focus
on kaizen, operational efficiency and cost reductions.
The harsh reality is that most Horizon 1 (H1) businesses have a declining
growth and profit potential, and will eventually phase out when the product life
cycle ends. Until that happens, the company should use and exploit thosecapabilities, markets and revenues. In addition, H1 businesses contribute theassets and cash flow that can be used to grow the H2 and H3 businesses.
Most companies have also already created Horizon 2 (H2) businesses(yellow line). These are the future profit generators, and they have room to growand prosper. Revenue growth potential is higher than in the mature sectors, but
so is uncertainty. These businesses should be managed toward increasing
revenue and market share growth through new customer acquisition. They often
invest in further product and production process developments.
Eventually H2 businesses will also mature. Therefore, companies always
look to the future and develop explore H3 businesses (green line). This refers tobuilding completely new capabilities that are not yet represented in the businessportfolio. In these “Box 4” businesses, companies venture into new technologies
for new customer needs, to compete into the future. Yet, because the future
customer or market is still unknown, these H3 businesses require
experimentation, ideation, and incubation.
These Horizon 3 (H3) businesses are the future of the company, anduncertainty is high, while revenues are minimal or zero. Certainly, in the initialstages, these “explore” businesses demand more resources than they earn. This
often creates internal competition, envy, resistance, and other expressions ofhierarchy and power. These sentiments may kill the new fledgling business before
it has had a chance to fly. Not only in Japan, but globally there are innumerable
examples of companies that missed the next business opportunity because ofinternal infighting and a culture clash between the old and the new businesses.
But it is necessary to run these three horizons at the same time, in-house.
If they don’t, they miss out on the new business opportunities. The opposite of
the ambidexterity strategy is the so-called “Dejima strategy”. It is well known that
this refers to the island in Kyushu that isolated the foreign traders andmissionaries during the Tokugawa Period. In business, Dejima projects are22

allowed to work separately and independently from overall corporate strategy. 12This is much easier to manage and therefore many senior executives prefer it.
However, the problem with the Dejima approach is that there may be no positive
spillover effects between the current business and the future activities, and thismay eventually damage the company. For the company overall to be able toleverage its innovation, it should incubate and scale the new technologies inhouse.13 This means, all three horizon businesses are being managed at the sametime. The DX may wipe out may of today’s businesses, and has made this moreurgent.
This is why ambidexterity has become popular lately. It describes a dual
strategy. On the one hand, companies expand their competitiveness in theexisting core and growth businesses. On the other hand, they build new
structures that support speedy, risk-taking breakthrough innovation. These are
two distinct management assignments, and senior managers is in charge ofcombining the two approaches. And it is this execution that is the most difficult
aspect of the ambidexterity framework.

3.2. The Execution: Building the “Tasks-People-HR System-Culture” Alignment
The tool that helps execute the ambidexterity strategy is called the“alignment model”. Developed in U.S. management research, this framework
posits that the successful execution of a given corporate strategy requires thetight alignment of four separate components of corporate management.14 It is
the role of leadership to organize and proactively manage these four aspects ofmanagement execution components on a daily basis. Specifically, these are:
Critical tasks or key success factors (KSF) refer to specific economic
activities and outcomes needed for the desired company strategy. In terms ofmanagerial economics, these are the four or five activities necessary to earn a
profit. For example, if the company’s strategy is to be a low-cost producer, thetask includes operational efficiencies that cut production costs. In industries withhigh fixed costs, the KSF is to ensure high capacity utilization at all times.
People 人材 refers to the motivation, competencies and mindset of
employees that are needed to accomplish the critical tasks. This does not mean
12

METI (2017)
O’Reilly/Binns (2019)14
The alignment model is also known as the “congruence model”. See also
Kato/O’Reilly/Schaede (2020)13

23

laying off or replacing people. Rather, it is to reorient the existing workforce
toward the needed mind- and skillset. Sometimes, augmenting the team withnew knowledge may be helpful. This factor is about guiding employees toembrace the corporate strategy and critical tasks, and help them perform in theirmain assignments. The employees’ mindset should tightly match the critical tasks,
if the company wants to have labor productivity.
HR Systems refers to the structure, metrics and systems for people
management, including assessment metrics and incentives that anchor the
standards for promotions and rewards. Employees everywhere have a keen senseof what the true metrics are by which they are assessed. They also constantly
watch their colleagues’ careers. If there is a mismatch between the critical tasks
or what management says, and the metrics on which pay and promotions are
determined, employee behavior will deteriorate and undermine the successful
execution of the strategy.
Culture refers to the behavioral norms within the company that define
what type of behavior is important. This is partially described in a company codeof conduct. The other part of it is tacit and shared based on initiation and social
construction when employees are first hired into the company. (This will be
discussed in more detail in the next section.)
The important insight is that these four factors have to have a tight fit. For
any strategy to be successful, there must be a tight alignment between the four
components. In other words, they should form an internally consistent system.
However, this alignment is different for each business horizon. In terms of
Exhibit 4, the alignment for Box 1 is very different from Box 4. In terms of Exhibit
5, this means that the task-people-HR-culture fit for H1 business is completely
different for that of H3 businesses. To manage a company that pursues the dual
strategy requires running two separate alignments simultaneously.
Exhibit 6 presents the alignment of a typical, successful Japanesemanufacturing firm. 15 In such a case, the strategy is to grow and build global
market share through high-volume, high-quality, low-cost mass production. To
accomplish this, the critical tasks are to drive costs down through incremental,
continuous improvement (kaizen), and efficient, preset processes oforganizational learning. The competencies and mindsets of employees arearound functional expertise, such engineering skills, a willingness to follow orders,

15

Schaede (2020)24

short feedback loops and a knack for operational excellence (doing a job
conscientiously, and precisely as described).
Exhibit 6: The Alignment Model for Monozukuri Businesses

The HR Practices are designed to foster and reward compliance with rules
and PDCA (plan-do-act-check) cycles, adherence to standard operatingprocedures, and contribution to embedded learning in these procedures. Fromthe HR perspective, this works best if everybody is promoted in lockstep, andlifetime employment works very well toward this goal. The corporate culture istypically top down (or middle-down), and include discipline, compliance,
meticulous order execution, teamwork and hard work for long hours. The
leadership role is to clearly lay out direction, motivate employees to achieve clear
metrics (e.g., sales targets), and to celebrate results so as to foster team spirit.
The result of this alignment is a very powerful manufacturing process. To this day,this alignment is necessary for excellence in Japanese manufacturing industries.
In contrast, the alignment needed to foster future, H3 businesses iscompletely different. The new type of innovation is breakthrough, not kaizen, andit has to occur at high speed in deep-technology areas. To build this new capacity
for innovation, new key success factors should be clearly identified, so that theentire tasks-people-structure-culture alignment can be adjusted accordingly. As
shown in Exhibit 7, the goal with this innovation strategy is to be an agile

25

technology leader. This requires breakthrough ideas. To do so, the KSF include
deep-tech excellence, fast sensing and seizing, and rapid new businessdevelopment.
To accomplish this, people should be encouraged to be creative, open to
diversity and confrontation, and risk-taking. They should be rewarded andpromoted for doing this, through individualized career paths that bring out theirbest entrepreneurial ideas, longer-term metrics that are tailored to productdevelopment cycles, and initiatives to build bridges across functions in thecompany. The culture of an innovative company is about curiosity, trial-and-error,
tolerance and being different. Many of the HR features of this new businessalignment have already been included in the 2019 Workstyle Reforms. Thissuggests that many companies want to make room for such more flexible
structures.
Exhibit 7: The Alignment Model for New Innovation Businesses

There are already several companies in Japan that are shifting tomanaging the dual strategy, with its dual cultures. To change the mindset toward
design thinking, some companies have hired creative designers from architecture,
fashion or interior design. Others have hired foreigners, to shake up theestablished ways of the core business culture.

26

Finally, a very important ingredient to the alignment model is theleadership by senior management. Their role is to change the tone of theorganization, its incentives, key goals, and its culture, and to enable the dual
strategy. As we will see below, the reason is that the execution of the dual
strategy means changing the corporate culture of the entire company, toward
more openness for coexistence and co-creation.

27

4. Managing Corporate Culture Change: The DISCC Model
It is sometimes said that changing the culture of a large Japanese
corporate is more difficult than changing the course of a big cargo ship: it takes
time, it is hard work, requires everybody to participate in the change, and it
usually causes a lot of turbulence. Mid-level managers may resist because they
are risk-averse, and change is too fast for their tastes. Younger workers may thinkthat progress is too slow. In general, managing culture change is very difficult, andthe larger the company the more difficult it is to reorient employees toward new
ways of work.
Even among General Managers there is often resistance to such drasticchange, and competition for resources. The existing H1 and H2 (“exploit”)
divisions generate most of the revenues, and they often want to grow further.
They may be unwilling to subsidize the new, loss-leading divisions. Many
employees may see the rise of the H3 businesses as a threat and be worried that
their older divisions will lose status if the new businesses are successful. And, theexisting corporate culture tends to be deeply engrained. Often people simply do
not want to, or cannot, change their mindset toward more risk-taking andtolerance for mistakes.

4.1. What is Corporate Culture?
Corporate culture is sometimes translated into Japanese as “bunka”(culture in the sense of tradition, history and folklore) or “corporate DNA”. Bothare misleading, because it is impossible to change bunka or DNA. However,corporate culture refers to a shared set of norms that define the “right” behavior
in a company. A better translation is the “in-house yarikata”, namely “way we dothings in this company”. Some companies may be more conservative and stricter
in their rules; others more permissive. These differences show that the rules of
behavior are man-made, and therefore, they can be changed.
Although a company’s culture can have a long tradition, it is still manmade, as it reflects the behavioral rules spelled out by its leadership. Over time,
it can be adjusted to whatever purpose it needs to serve. 16 Therefore, whensenior management is in charge of proactively changing the strategic direction ofa firm, what that really means is that it is in charge of changing the “way of doing
things”.
16

See Waldman/O’Reilly (2020)

28

In Japan, in general, the norms of behavior are to be polite, to be appropriate,
and not to cause trouble or inconvenience.17 At the company level, the meaningof “appropriate” is defined in two ways. One is the code of conduct, which spells
out in detail what the company’s right behavior is. In addition, all companies havetheir own understanding and norms of what is expected from all employees.
These reflect a shared, tacit understanding of the right behavior. And, these aredifferent for each company.
These behavioral norms are set by example, socialization, and daily
sanctioning. A new employee who joins a company will try to fit in well, andtherefore picks up cues from the surroundings. This is due to the so-called “social
proof”, a human desire to fit in by mimicking the behavior of others. Within ashort while, the employee will have adopted the culture of his new employer.
Moreover, new employees in Japanese companies usually go through an initialtraining, where these norms are also enforced.
At the division level, managers and colleagues guide employee behavior, by
rewarding the right choices and admonishing or punishing behavior that is
considered wrong. The manager is very powerful: even within one company, twodivisions may have different sub-cultures, depending on the bosses. This meansthat a boss can set the tone of the workplace. Likewise, the CEO can set the toneof the company.

4.2. The DISCC Model: Managing Culture Change
In the U.S. there is large body of research on culture management, and on
how senior management can lead corporate renewal and change. This research
has identified five primary ways in which culture can be changed. 18 These fiveelements can best be summarized as the DISCC model, as shown in Exhibit 8. Thismodel suggests that to change the culture, senior managers must engage in thefollowing behavior:(1) Direction: Senior managers give strong, consistent signals to all
employees about the new vision, including a clear articulation of what the newculture (way of behavior) is, and they lead by example;(2) Involvement: Senior management invites broad participation in thechange efforts by employees at all levels of the company, by giving employees
17
18

Schaede (2020)
O'Reilly/Chatman (1996)29

assignments such as contributing to the new vision, mid-term plan or position
paper;(3) Showcasing: Senior managers give vivid examples of the new culture,and practice the new behavior in front of employees;(4) Celebration: Senior managers give awards and social approval for
those who have changed and dared to adopt the new norm, e.g., thanking people
who speak out or challenge the status quo;
(5) Change in HR Practices: These 4 steps are accompanied by a reform of
the HR system, including selection, training and promotion, in support of the newculture.

Exhibit 8: The DISCC Model of Culture Change

The recent example of AGC provides some context on how this can be
19 When Mr. Takuya Shimamura took over as the CEO of AGC in 2015, hedone.
began his change effort with clear statements about changing the company froma glass- and windows manufacturer to an advanced materials company. He also
articulated clearly that he wanted to end the previous culture of fear about
reaching profitability goals, and shift to a culture of open dialogue and joint
problem-solving (Direction). He formed task groups of mid-career employees andcharged them with writing a new vision for the company (Involvement). To
exemplify the new culture, he launched a series of more than 100 townhall
meetings with employees at all levels of the company, and told employees to
19

Kato/Schaede/O'Reilly (2019)30

prepare and ask questions. He listened carefully and thanked those who asked
the most challenging ones (Showcasing the new, frank communication patterns
he wanted to create). Employees who were quick to adjust and take on thechallenge were thanked publicly, and people representing the new culture were
promoted into leadership positions (Celebration). All of this occurred while the
HR practices (hiring, training) were also adjusted to emphasize the new culture ofopen dialogue. Using these five levers, Shimamura-san began transforming the
AGC culture from one characterized by fear to one of teamwork to make alldivisions stronger. Visitors to AGC reported to be surprised how openly young
employees approached senior management.
As this example makes clear, culture change can be very time-consuming,
effort-intensive hard work, and it is squarely in the hands of corporate leaders. It
cannot be delegated, because direction-setting has to come from the top. It also
cannot happen overnight, as it takes time to guide and nudge people to embrace
the new norms of the appropriate workplace behavior. 20 Many different
mechanisms come into play to convince workers to accept the new systems. For
example, at one large manufacturing company, over a period of three years, thesenior management team tirelessly organized more than 200 face-to-facemeetings with employees, and conducted workshops and organized contests, tocreate employee buy-in and overcome employee concerns over uncertainty
regarding the new system.21

4.3. Changing the Workplace Behavior Toward Efficiency and Productivity
Culture change means incentivizing people to change their behavior. It
also means a change in their aspirations, i.e., toward a new self-identity of what
they can do and how they should contribute to the company. In many Japanesecompanies, employees still think of themselves as order-takers until they arepromoted to a certain level, and until that time, the hours worked or the effort
expended are understood to be the most important aspects of performance.
Process orientation is very important in the monozukuri alignment, but it
hinders the transition to the new innovation alignment. For new processes ofinnovation, a focus on outcomes and “getting things done” is more relevant thanprocess, and efficiency and productivity are also more important. This may
require a new behavior that is opposite from the traditional workflow. In addition
20
21

For more on the theory of “nudging”, see Thaler/Sunstein (2008).
Interviews by author, Tokyo, 201931

to changing behavior, people also need a new mindset about the value of timeand output. New management techniques and incentives will help nudge
employees to change their views on what matters for success. To show how someJapanese companies have started this transition, we now look at three examples
of how company behavior may be changed.22
Example 1: “Innovation Tourism”
As we saw in Exhibits 6 and 7, to compete in the new “agile technology
leadership” strategy, people’s mindset has to shift from incremental tobreakthrough innovation, and to outside-the-box thinking, risk-taking and a new
tolerance for mistakes as learning. Such a mindset shift cannot just be orderedfrom the top; rather, this type of reorientation has to be slowly groomed andcarefully guided.
One example of a program to push this shift are the activities many
corporates have launched under the heading of “open innovation”. 23 The original
concept included various processes of free innovation exchange, including
crowdsourcing. However, in Japanese the term is often used to refer specially toprocesses and activities to open up corporate R&D processes and an innovation
mindset. A 2017 government report estimated that more than 70% of large firm
innovation activities were done completely in-house, in what was called the “selfsufficiency syndrome” (jimae-shugi).24 Open innovation was the idea of shaking
up these processes and encouraging people to infuse new ideas and methods into
the encrusted structures. This could be done by bringing in new ideation from theoutside, through acquisitions or investment in startup companies, and throughmid-career hiring.
One important aspect of open innovation was to engage in CVC (corporate
venture capital) and work with startups, especially in Silicon Valley. In the early
2000s more than 200 Japanese companies launched their own venture funds, andfor the decade between 2008 and 2018, it was estimated they invested in overmore than 2,000 Silicon Valley startups. 25
Moreover, more than 500 Japanese firms now have “innovation offices”
in Silicon Valley. While some of these offices spearhead CVC investments andscout for startup technologies, others are also used to conduct culture change
22

The following is based on interviews in Tokyo and Silicon Valley, spring 2018-2019.
For the original concept, see Chesbrough (2005)
24
METI (2017)25
METI (2019), and database constructed for the years 1996-2012, see Sasaki, Masato, andUlrike Schaede JFIT Working Paper. La Jolla: UC San Diego.
23

32

workshops. They design structured, professionally coached training programs forthe visitors from HQ. These labs range from small to quite large, with local
employees and regular employees dispatched from HQ. The staff organizes andteaches workshops, such as in design thinking and brainstorming exercises, aswell as strategy seminars and local tours.26 Some of these offices have built thiscapacity into a new business of its own that is earning profits for HQ by runningconsulting programs for other Japanese companies.
The explicit goal with this “innovation tourism” is to pull employees out of
their comfort zones. California is widely known to be culturally loose. It is also
famous for novel approaches such as design thinking. Many program participantsalready arrive with a different mindset from the time they step off the airplane.
Structured conversations about visions of the future of the company that are
possible in California would probably not work in the HQ in Japan. And althoughthese visitors may not be able to transpose California workplace culture to Japan
based on just one short visit, they may return with a broader view of what is
possible in a global market setting.
Example 2: Workspace and Office Design
Many large companies are now using office redesign to change themindset of their employees, and pull them out of ossified routines. The purpose
is to change behavior around taking initiative, and focus on outcomes rather thanprocess.
Traditionally, Japanese companies are often credited with inventing the“open floor” office plan, with its highly structured layout that allowed one toassess the entire office hierarchy in just one look. From their desks in the farcorner, division managers can constantly watch and assess the efforts of their
entire unit at all times. This office layout is a good fit with the traditionalmonozukuri alignment (Exhibit 6).
However, in the new global competition and in light of the DX disruption,
efficiency and outcomes are becoming more important than process. To reorient
the employee mindset and break open rigid structures, some companies haveswitched to a “free address” office layout. Employees no longer have theirassigned desks, but only a locker for their belongings. When they arrive at workin the morning, they pick a space that fits theirs needs of the day’s assignments.
The purpose is not just to be more modern and attract new young talent, it is also

33

about creating a new setting that changes the old routines and introduces new
fluidity and creativity. 27
Some companies have found that the transition to the new office design
can be quite difficult. Managers face difficulty in finding their subordinates andassessing their performance. In one IT company that occupies two floors in an
office tower, an employee was charged with building a new, highly detailed
location software that would enable people to spot their colleagues. Conversely,
for subordinates the free-address office can cause new anxieties on how to proveto their bosses that they are working hard. If their desk is far away from the boss,
how can they show their effort?
This new uncertainty is often uncomfortable for both, but it is in fact theintended effect of the new structure. It reorients workers away from process andtoward a new emphasis on outcomes. Some companies report that, initially,
employees choose to sit at the exact same place every day, to ensure theirpresence was noticed. But after a few months of realizing the new possibilities
offered by the free-address design, they often begin to choose spaces that help
in the day’s assignments, and more fluidity can be introduced.
As a result, employees are now looking for new ways of showing output,
just as managers are searching for new assessment skills. As we will see below,
the COVID-19 crisis has further accelerated these trends and needs, due toexpansive telework. The combination of these changes is beginning to shift the“People” and “HR Practices” boxes in the alignment model of almost all large
Japanese companies.
Example 3: The Value of Time
Productivity are about using time efficiently. Traditionally, many Japanesecompanies have valued due process above an individual’s time. This is reflected
in a large number of meetings that many people have to attend. There are manyother examples of such time-intensive activities in Japanese offices.
One reason for these processes is that, traditionally, Japanese corporates
viewed an employee’s time as something they own. Spending time was seen as
an employee’s dedication, rather than an opportunity cost to the company. Still

27

Based on interviews and multiple office visits, Tokyo, March 2018. See also Masumi Koizumi,“Office makeovers focus on comfort and productivity as activity-based working takes hold inJapan”, Japan Times, May 2, 2019.

34

to this day, meetings in Japan often do not end on time, and rushing such “endlessmeetings” is seen as impolite.
However, the Workstyle Reform (see below), with new rules on vacation
time, maternity leave and other accommodations, will require a shift to viewing
time as a scarce resource. Companies that want to attract and retain young talent
are advised to structure more individual-centered workdays. The labor shortage
will bring more pressure to view time as a cost, and to structure workplaceroutines around getting things done. Telework will further push the attention
toward outcomes, even though many companies still spend a lot of employee
time on long web-based meeting with many participants. How to address this is
the topic of the next chapter.

35

5. People Management: Toward a New HR Function
Many Japanese companies have already recognized the necessity to
become ambidextrous, and have begun processes of new business development.
Many have also realized that they should change their culture to adjust to thetimes. However, to truly execute both, the HR function also has to be revised.
The confluence of the DX, the Workstyle Reform, and the sudden COVID-19
shock toward telework offer an opportunity to fundamentally revisit what role
HR can play, or how it can contribute to productivity increase and employee
retention. The goals of HR reform, then, are to create a fit with the changing
corporate culture, and to harness the capabilities of workers at all levels ofaptitude by structuring individualized training and promotion courses.
Until now, the rigid settings of Japan’s lifetime employment system havebeen a strong obstacle to corporate reform. These restrictions come in threeforms: (1) the systemic obstacles to layoffs; (2) the reputation costs of layoffs;
and (3) the desire to maintain the positive aspects of lifetime employment. As aresult, the HR function has long been viewed as an administrative function,
without impact on strategy or execution. However, the 2019 Workstyle Reform
and the sudden shift to working-from-home (WHF) and telework in 2020 haveincreased personnel policies options. This presents an opportunity to proactively
reform the HR function and to accelerate necessary change.
5.1. The Costs and Benefits of Lifetime Employment
Discussions of lifetime employment in Japan are often held from theperspective of either society (providing stability) or political economy (whatvoters want or what the employment agencies can afford). But viewed from theperspective of the individual large company, different aspects come into play.
From the corporate strategy viewpoint, Japan’s lifetime employment system
entails both significant benefits and substantial costs.28 And, at this time of great
disruptions, the question is how to preserve the benefits while reducing the costs.
On the positive side, lifetime employment assures employee loyalty anddedication. Employees identify with the company, they embrace teamwork,
comradery and knowledge sharing. Due to perceived equality, wage parity, andlockstep promotion, morale and motivation are high. Equality may often be afaçade, to abide by the behavioral norms of being polite. But this can also be28

Pfeffer/Baron (1988), Schaede (2008, Chapter 9)36positive, as there is no open competition between employees and everybody cansave face.
Companies are also in charge of training, and, while they carry the fullcosts of employee education, they also fully earn the payoffs from theseinvestments. The very targeted on-the-job training contributes to organizational
learning, and honing company-specific areas of expertise. Because older
employees are not worried about being replaced, they are happy to acquire newskills and proud to transfer knowledge to younger workers. New businessexploration and development is made easier because people are less resistant totransfers into new assignments. They know that their salary remains unchanged
and they will not lose their jobs. The company has more control over intellectual
property and fewer concerns about leakage. It is also much easier to handle CEO
succession, and to grow and select good in-house candidates.
On the negative side, lifetime employment is expensive. It turns labor into
a fixed cost and requires outlet valves to adjust to cyclical downturns, such as amore flexible cadre of non-regular workers. Moreover, the highest cost factors
are so-called “hiring mistakes”, namely people who turn out to not be a good fit
or who lack the requisite skills but who cannot be laid off. This explains why HR
managers are typically risk-averse in hiring and prefer to hire people whose
personality profile is a good match, regardless of potential. Over time, hiring moreof the same will limit a fresh influx of ideas from young employees.
Limited work mobility also means there is little cross-fertilization or fresh
blood. The employee structure is bound to become top-heavy as the workforce
ages, which is expensive in terms of benefits and pensions. To get ahead, people
face huge pressure to please their bosses, and this can cause a tendency to
become a “yes-man” – doing as told and never speaking out.
In the 21st century, global competition and performance expectations
have made the downsides more expensive, and the upsides more difficult topreserve. The need for new processes of innovation and reinvention translates
into a need for a different type of workforce: more independent thinkers thanconscientious soldiers.
As a result, the Workstyle Reforms attempt to address the rising labor
shortage and the new work expectations of younger people by introducing a new
fluidity into the system to adapt to the times, while upholding an employee’s
option to pursue a lifetime career.

37

5.2. Workstyle ReformOn April 1, 2019, the “Reforms of Work Practices”, or “Workstyle Reform”(hataraki-kata kaikaku) went into effect. These reforms are encompassing andtouch on many aspects of benefits, vacation time, overtime rules, etc.. 29 The
Workstyle Reform reflected some of the already ongoing changes in large firms,
and taken together, they have begun to normalize some of the most excessive
outgrowths of the lifetime employment system, such as excessive work hours.
And, they offered a golden opportunity to redefine the contributions of HR to the
execution of corporate strategy.
Going forward, pay will increasingly be determined not by tenure but job
category, performance and achievement. No longer will all workers be promoted
and rotated in the same way. Wage parity will be replaced with differentiatedassignments based on personal assessments. This shift to meritocracy
necessitates a clear articulation of goals and benchmarks, to justify differential
promotions. As a first step, HR functions will benefit from building new skills in
performance evaluations.
At the same, as is well-known, the shūkatsu hiring system is also being
revised, and hiring is beginning to occur all year long, not just in April. This is ahuge disruption for HR departments. They need to redesign the traditional
apprenticeship-like training program in the first few years of employment. Goingforward, training and coaching programs will become much more modular andindividualized.
And, there will be a shift in the definition of what is “fair”. In the oldlifetime employment system, fair meant equal. In the new system, it will come tomean equitable. Star talents that are not treated equitably will leave the company.
This is now more likely because of the labor shortage and fast-rising labor mobility.
And, the shift away from “equal” is likely to introduce a new type of intra-officecompetition and infighting. At one level this can be healthy, but it may also
promote resentment.
In terms of wages, the reforms spell the end of wage parity. Pay will be
determined by job category and performance, and no longer by the size of thecompany. The rising number of job changers are introducing so-called “horizontal
benchmarking”, namely, a wage comparison across companies by job category.

29

For more detail, see JIL (2018), Schaede (2020), Vogel (2018)

38

Telework, and WFH (working-from-home) bring another set of changes,
as they push the shift toward a new focus on outcomes rather than process, andon evaluating accomplishments rather than attitude. And it is at this moment intime that Japanese companies have the opportunity to make revisions in their HR
system that are aligned with an ambidexterity strategy, culture change, and theability to retain talent and increase labor productivity.

5.3. HR Function ReformIn the United States, the HR function in large corporates has three main
components: (1) attracting and retaining talent, (2) benefits, including pay,promotions, leave, insurance, etc.; and (3) legal compliance with labor laws andrules. In the U.S., HR is a clearly established and respected profession. At the
Academy of Management, the largest global academic management association,
there is a specialized HR track. In U.S. business schools, students can specialize instudying Organizational Behavior and HR, and academics produce research andhave positions in HR Management. There are also many specialized societies,
certifications, and professional training programs. A core aspect of this training is
how to structure incentives, how to motivate people, how to conduct
performance assessment, and how to coach individual employees to fulfill theirpotential and improve over time. The HR function can be important for discussionof strategic change and corporate renewal.
In Japan, one can say that the HR function has the following threecomponents: (1) employment contracts: to hire, and to administer non-regular
worker contracts; (2) benefits, including pay, overtime pay, and more recently
sick leave and maternity leave; and (3) training and adherence to internal“business rules”, including dress codes, behavioral rules, and work safety rules.
There are only few courses at business school on motivation, incentives, orcoaching, and few professors conduct in-depth research on the matter.
What is more, while the HR department has a core of specialists toadminister benefits and training programs, the managers of HR divisions, as well
as senior managers of HR, are often on two-year rotations. The administrative
staff, while well-trained, typically have little power to introduce change ordevelop a new vision of their own. As a result, they tend to be risk-averse, and inorder to reduce problems they prefer to hire people who fit the corporate culture
and can be expected not to cause trouble. They are unlikely to be involved instrategy change conversations, as they are mostly seen as implementors. While39

this may be true elsewhere, arguably the constraints imposed by lifetime
employment rules limited Japan’s HR function more.
In terms of assessment, corporate Japan has long reflected the grading at
schools, where pupils receive two grades: performance and attitude. In a worker’s
annual assessment, the aspects of performance and attitude are typically mixed
into one grade, and most companies use a single 5-point scale, from S (superior)
to the grades A, B+, B and C. Assessment tools such as 360-degree feedback are
not typically used. The stress on attitude has led to the situation where workers
are often eager to show effort, by working long hours, abiding by protocol, andbeing liked and behaving well.
Because layoffs are difficult, few people ever earn a C. This is similar toother countries and systems, where most workers receive an “above average”
grade. The big difference is that in other countries, people who receive a “C”
grades are either laid off or strongly urged to relocate. Because job markets are
more fluid in other places, they may choose to leave to look for a better fit.
Assessing “performance plus attitude” with one mark works very well forthe monozukuri alignment in manufacturing and exporting. It works less well inan era of competing through innovation. Not only has the labor shortage andrising job market liquidity given more power to employees, so that mediocre
grades or unfair assessments may cause exits. The sudden, large-scale onset oftelework under COVID-19 means that “attitude” can no longer be easily measured.
With telework, the meaning of “performance” is changing away from following
the guidance or doing a task as told in a given time to a much greater focus on
outcomes.
Going forward, corporate HR departments face three main challenges.
How can they turn the annual assessment into a “fair” (equitable) process that
motivates people? How can they retain workers and help them to perform at their
best? And, how can they measure a worker’s contribution to the company at atime when attitude can no longer be observed? As it is no longer possible to watch
people at all times, motivation has to become part of the overall HR management
system and be geared toward outcomes.

5.4. Example: The 9-Box Grid
Eventually, each company will find its own way of accomplishing thistransition. But it is fair to say that, going forward, all companies will benefit from40

more variegated and sophisticated HR tools used to assess, promote, train andinspire employees. These changes are inevitable, and the new coronavirus,
increased telework, and the return to the regions are giving this change moreurgency.
One example of an assessment tool that would open up new approaches
to motivation and individualized career-path planning is the so-called “9-Box Grid”(Exhibit 9). This model is well-established, and can easily be gleaned from manysources on the internet. 30 Its origins are sometimes attributed to GE and otherlarge U.S. companies, but it is now widely known and used as one of several
approaches.
Exhibit 9: The 9-Box Grid for Performance-Potential Evaluations

The model assesses a worker’s performance as well as potential, and thensuggests individualized training options, as summarized broadly in Exhibit 9. All
30

There are many internet-based sources for this. See, e.g.,https://www.analyticsinhr.com/blog/9-box-grid/, https://www.predictivesuccess.com/blog/9box/, https://bestpractices.clearcompany.com/9-box/index.html, https://cezannehr.com/hrblog/2018/10/what-is-a-9-box-grid/,

41

employees are assessed and categorized into one of the 9 boxes, with appropriate
development, coaching and training courses then determined for each employee.
The purpose is to help employees grow and contribute more to the company byhelping them live up to their potential.
Many specialized HR staff in Japan are familiar with this model, but until
now they have rarely used this tool. Two explanations are usually offered: (1)companies have no way to deal with underperformers, and so the lower box
cannot be used; and (2) the “potential” is hard to assess. Not only would that
require a deep evaluation of an employee, but also a clear articulation by the ofwhat type of potential is desired, so as to assess the employee in relation to thatstandard. Under lifetime employment in the monozukuri alignment, the perfect
employee was the one with the right attitude. Little utility was derived fromassessing potential.31
But now that companies are adjusting to the new realities of Workstyle
Reform and telework, a new discipline and authority around HR management
may help in setting new incentive structures and motivate and retain talent.32
One advantage of using tools such as the 9-Box Grid is the possibility to craft
individual career and promotion paths. For example, employees in the “highperformers + high potential” box (the so-called “stars”) probably already receive
advanced grooming and training. But the model suggests that the other 2 “highs”(high performers, high potentials) are possible A-players if they receive targetedtraining, depending on whether they are lacking in performance or potential.
Moreover, the box in the middle (the so-called “core player”), could either just be
rewarded and respected, or motivated to grow.
Given the looming labor shortage in Japan, the red boxes (medium/low
performance or potential) may soon also become more important. To increase
corporate productivity and profitability, companies are eager to find new ways toincrease the output of medium- or high-potential workers that do not perform
well, perhaps through specialized coaching sessions or by giving them new
assignments or work environments. And finally, as labor mobility increases
companies may also become more strategic in how to separate from the low
potential/low performance workers.

31

https://bizhint.jp/keyword/59000., and interviews with several HR division employees, online
in Tokyo, July 2020.
32
E.g., see 日本企業の「人事評価」に欠けている２つの視点、Toyo Keizai Online, February
20, 2019, https://toyokeizai.net/articles/-/266550

42

What is more, this moment in time invites senior managers to clearly tie
the HR function in the overall strategy change. Assessment shapes aspirations,and can be a powerful motivational tool. And, to compete in the DX and after
COVID-19, clearly getting the best out of the workforce is a very important partof the strategy execution.
5.5. New Structures for Innovation with Telework
Finally, companies may also want to think about how to support
innovation in a time of increased telework. Many companies hope that it will soonbe safe for workers to return to the office. This is not only because someprocesses still require human interaction or office equipment. It is also because it
has long been known that human interaction often leads to new ideas andinnovation. And in this regard, now is the time for managers to think about how
to proactively structure remote work routines so as to invite innovation.33
A key ingredient to innovation is serendipity. That is to say, chanceencounters by people with ideas that bring about better processes, newinventions and new products. Traditionally, serendipity was helped by physicalproximity, when people randomly run into each other, or meet at the officevending machine, in the cafeteria, the nearby lunch store, or a research
conference. Research on clusters has shown that the chance of innovation
success increases when more random run-ins of people, capital and ideas are
triggered. This is why Silicon Valley is such a powerful model of innovation.
Working from home greatly reduces chance encounters for researchers,
inventors, and entrepreneurs. It will become increasingly harder for informalinteractions to foster new ideas. The question then is, how can companies create
serendipity in a world with much less physical proximity?
Some models of contagion suggest that the likelihood of success ofinnovation increases when originators (people with ideas) have more time todevelop and share their ideas, and when receptors (people with businessexperience, budget, etc.) have more time to listen to such ideas. This means thatcompany employees who are working from home may benefit from room in the

33

This section is based on work with Robert Feldman, see “How to Spur Innovation after COVID19”, Nikkei Asian Review, August 28, 2020, https://asia.nikkei.com/Opinion/How-to-spurinnovation-after-COVID-19

43

schedule that allows idea finding, as well as mechanisms to share them with coworkers.
One suggestion is for companies to proactively structure online meetingrooms, such as a 24/7 meeting room. This is a “non-work space” associated withthe company, similar to the cafeteria, or the traditional smoking room of the olddays. The goal is to give people opportunity to meet, ideally in random fashion.
This should be open at all times, so employees can come and go at any time,
including when they need a break, want to catch up on office gossip, are stuck in
a rut, feel lonely, and of course if they want to share an idea. At first sight,
encouraging employees to idle in breakout rooms may seem costly and an
unproductive waste of time. But benefits can be substantial, if unstructured chatreleases new innovative energy.
Some companies already run a daily Happy Hour site, or require “5minutes of chat” prior to the start of a meeting.34 Other use platforms such as
Slack for communication purposes. However, such events do not allow for chanceand serendipity.
Some new e-platforms are now being developed by startups in the UnitedStates to foster chance encounters at online conferences, such as Meetaway.com
or Slack.35 These apps show that virtual rooms can be even more diverse, more
random, and thus more prone to serendipity and innovation than physicalproximity. The digital transformation and machine learning play a role here too,because advances in machine learning offer opportunities to be structured about
raising the odds of ideation and innovation, by guiding the process of who meets
whom in the digital meeting place.
New pressures to foster innovative chance interactions in the teleworksetting are yet another example why companies want to pay great attention to
culture change and the relevance of new HR processes. Crisis is a great
opportunity for innovation. This moment in time offers a chance to be innovative34“So how’s your cat? Panasonic orders chats to fight telework blues”, Nikkei Asian Review, July24, 2020, https://asia.nikkei.com/Business/Companies/So-how-s-your-cat-Panasonic-orderschats-to-fight-telework-blues
35
https://meetaway.com. Some of these new IT-services were originally dating apps, but withthe onset of COVID-19, their owners quickly pivoted into making them conference apps. This is afast-developing new industry. See also “Tech’s Next Big Task: Taking the Office Water Cooler
Virtual”, The Wall Street Journal, Sept. 6, 2020.

44

about innovation and design new workplace rules based on novel mechanisms ofassessment, motivation pay and innovation.

45

6. Conclusion: Leadership for the Digital Transformation
The DX brings big change and a big opportunity. Japanese companies have theopportunity to seize the moment and assume a dominant position in many areas,
with digital manufacturing as one example.
To compete in the new era, companies need to build new processes ofbreakthrough innovation. This necessitates the introduction of new alignments
as well as management practices that allow the co-existence of two types of thecorporate cultures under one roof: one for the current core business, and one forthe future businesses.
But the adoption of the dual strategy by itself is not sufficient to guarantee
success. For the strategy to be successful, it needs to be part of a larger alignmentof critical tasks with employee mindset, culture, and HR practices. To change theculture means building a new definition of what is appropriate behavior, andclearly defining individual assignments and expected outcomes. People will makethis change only if it is recognized in assessments and promotions. This means the
HR function needs to be part of the strategic repositioning effort.
The most important aspect of the alignment model is leadership. The
execution of strategy requires a top-down process. The DISCC process of culturechange can only be launched by the company’s leaders. While involvement andshowcasing are powerful parts of the DISCC model, these are not happenstance.
Rather, they require carefully orchestrated management moves of inclusion andallowing people to have a voice in the project. Having their voices included
increases agreement and facilitates buy-in by with the change toward the newstrategy, vision, corporate culture and associated tasks. The appearance may be
one of empowering all levels of the organization, but behind the scenes, it issenior management that is carefully involving certain employees in meticulously
planned activities.
This has already begun in many Japanese firms. The 2020 crisis and the DX arepresenting opportunities to make various changes fast. Japanese companies arefacing a critical moment in global competition. If they grab it, they can definitely
compete.

46

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