Business Strategy and Human Resource
Management at Contract Companies in the
Manufacturing Sector
Makoto Fujimoto
Researcher, The Japan Institute for Labour Policy and Training

Takuma Kimura
Doctoral Candidate, Department of Economics, The University of Tokyo

Summary
In line with the revision of the Worker Dispatching Law and changes
in corporate policies on the use of contract services, it is becoming
increasingly important for contract companies to review their businessstrategies and develop human resource management policies that
correspond with their business strategies. The essay has classified major
business strategies of contract companies and examined the relationshipbetween human resource management practices and business strategies atcontracting companies by using data from surveys and case studies. First,
it has found that companies constantly generating high earnings areequipped with production site management, hiring, and personnel
management (evaluation and training) systems that suit their respective
business strategies. Second, companies pursuing a business strategy ofhandling high-skill operations and improving operation management,
which are likely to be increasingly important, are not necessarily active indevising human resource management policies that suit this businessstrategy. Contract companies themselves must make efforts, but it is also
necessary for client companies to review their current policy on the use ofcontract companies which gives priority to cost reduction and supply ofneeded amount of manpower in order to remedy this situation.

1. Introduction
Production sites in the electric and auto industries have been expanding
the use of contract workers in order to reduce personnel costs and turnlabor cost into a variable costs since the 1990s (Sato, [2001] Denkisoken,

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Business Strategy and Human Resource Management at Contract Companies in the
Manufacturing Sector[2004] Sato, Sano, Fujimoto, and Kimura, [2004]).1 Contract workers
now provide labor services that are indispensable for manufacturing goods
at many productions sites. Contract companies have been growing sincethe 1990s by increasing clients through price competition and their ability
to supply needed number of workers anytime.2
However, as the number of contract workers increases, however,production sites using contract workers can experience problems such asincreased burden of training these workers, disruption of work
coordination and even decline in productivity and product quality (Kimura[2002a], Sato, Sano, and Kimura [2003]). Because the ban on worker
dispatching for production duties has been lifted by the revision of theWorker Dispatching Law from May 1, 2004, the use of contract
companies in compliance with the law is becoming even more important.3
In line with such changes, an increasing number of client companies
now expect contract companies to handle more high-skill operations andhave the capacities to manage operations in addition to supplying
personnel speedily and steadily at low price. The competition is expected
to intensify because temporary staff agencies will be entering the market
of worker dispatching for manufacturing duties as the revised Worker
Dispatching Law takes effect. For this reason, it is becoming increasingly
important for contract companies to practice strategic management thatputs their business resources to effective use.
1

The use of contract workers expanded as contract workers increased their number as an alternative
to regular employees, seasonal workers, fixed-term workers, and part-time workers (Nakao [2003]).
Many contract companies were started in the 1990s when the use of contract workers increased.
Even though they are not large-scale companies, many of these companies have been growing
steadily (Sato and Kimura [2002] and Shirai [2001]).
3
The biggest difference between on-site subcontracting and worker dispatching in the Japanese law
is that contract companies give instructions and orders to workers in the case of the former whileclient companies give instructions and orders in the case of the latter (see Sugeno [2002] for a
detailed discussion on the definitions of “on-site subcontracting” and “worker dispatching” in theJapanese labor law). However, on-site subcontracting in the manufacturing sector was often done ina similar fashion as worker dispatching (Sato and Kimura [2002] and Sato, Sano, and Kimura[2003]). Since companies could not use worker dispatching for manufacturing jobs because of legal
regulation, and authorities gave them some leeway by not rigorously regulating such form of
subcontracting. “On-site subcontracting” discussed in this essay refers a contract arrangement inwhich contract workers hired by the contractor (contract company) engage in work for the clientcompany at the client company. This essay discusses contract companies which do not have any
capital relationship with client companies and have concluded contracts for manufacturing
operations with multiple companies.
2

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It is important for companies to establish human resource management
practices that suit their business strategies if they want to generate highprofits (Youndt M.A. et al. [1996], Cappelli.P. ed. [1999]). This isparticularly true for contract companies – more so for them thancompanies in other industries – which derive their earnings mainly fromlabor services provided by contract workers.
As noted above, contract companies are now expected to handle
technically challenging operations and to be able to provide onsite
operation management. For this reason, it will probably become essential
for them to promote long-term commitment from contract workers, raiseskill levels of contract workers, and train onsite production managers bydevising training programs and compensation system.4
In order to address the issues outline above, this essay will firstclassify business strategies of contract companies. Then it will examine
how contract companies are practicing human resource management thatsuit their business strategies and to how widely such human resource
management is practiced among contract companies by drawing upon the
results from cases studies and surveys. It will conclude with a discussionof future direction of human resource business in the manufacturingsector.

4

Contract workers mainly engage in simple tasks, and their number is reduced or increased
according to outputs. They have common features with shagaiko (external workers) who functioned
as a “buffer” against “fluctuations of demand for low-ranking semi-skilled workers” and increased
after the 1950s in Japan (Yamamto [1967]). According to Itozono [1978], the wage system for
shagaiko did not include any mechanism of annual wage increase, and wages were increased only
when unit contract prices were increased. According to Kimura [1974], however, shagaiko in thesteel industry were divided into highly mobile unskilled workers and specialists with low mobility.
Companies sought to encourage the later to make long-term commitment by offering them a right toenter company dormitories and pay raises. According to Chubusanseiken [1998], worker
dispatching agencies and contract companies in the auto industry have training programs and skill
evaluation and merit pay system to promote skill development among contract and dispatchedworkers who handle works involving engineer-designing. These companies have been able tomaintain satisfactory retention rates.

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Business Strategy and Human Resource Management at Contract Companies in the
Manufacturing Sector

2. Classification of Contract Companies by Business
Strategy
Executing and managing production duties are the main services
contract companies offer. Therefore, a contract company’s businessstrategy is determined by types of operation the company handles and its
policy on operation management. To be specific, business strategies ofcontract companies can be classified according to the extent to which
companies are trying to increase their value added by handling high-skill
operations and improving operation management. Therefore, the following
section will classify business strategies of contract companies by employing
the two criteria: policy on operation types and policy on operation
management.5
2.1 Classification by Policy on Operation Types
Contract companies’ policies on operation types can be classified bytheir workers’ skill levels. If a company attaches importance to operations
requiring highly technical skills in order to add value to its services, it will
have to have human resource development system for its contract workers
such as training programs and a skill-based wage system. Moreover, it isalso important to devise promotion and pay-raise schemes and encourage
workers to make long-term commitment to develop human resources
effectively. We will refer to such policy of emphasizing skill developmentof contract workers for the purpose of handling high-skill duties as the“development” type.
In contrast, if a company focuses on operations that do not require
highly advanced skills, there is not much need for the company to invest
in human resource development and devise promotion/pay-increase
schemes and other measures for promoting long-term commitment.
Because such company can not differentiate itself by the quality of humanresources, it will have to add value by offering low contract fees, which
are realized through curbing personnel costs, and supplying contract
5

In classifying business strategies, we have referred to the classification of key determinants ofcompetitiveness of mental mold manufacturers in Fujimoto [2003].

107

workers speedily and steadily.6 Such policy of emphasizing speedy andsteady hiring and deployment of contract workers will be referred to as the“acquisition” type.7
2.2 Classification by Policy on Operation Management
The second way for contract companies to add value to their services
is assigning onsite managers and improving operation management(Kimura, [2002b]). Operation management of contract companies can bedivided into two levels of just operating production lines (carrying out
actual manufacturing duties in the production process) and managing
operations including giving instructions and administering quality control.
Policies on operation management can be divided into two types
depending on whether it is administered by the contract company or theclient company. The policy in which the contract company administers
operation management for the client company in addition to operatingproduction lines will be referred to as the “the contractor-managed” type.
The policy in which the contract company specializes only in operatingproduction lines and relegates production management to the clientcompany will be referred to as the “client-managed” type.
In the case of the “contractor-managed” type, companies can generate
more value added than companies of the “client-managed” type by
providing operation management even if they do not handle high-skill
operations. Companies following this business strategy can add morevalue to their services by raising their productivity because they can
independently manage and improve their operations. On the other hand, it
6

According to the “Second Survey on Business and Human Resource Management Strategies at
Contract Companies” (survey on branch offices), 70-75% of the sales of contract companies islabor costs for contract workers. Therefore, the extent to which personnel costs can be curbed
affects cost reduction efforts at such companies.
7
If we assume that these two business strategy types more or less correspond to the differentiation
strategy” and the “cost leadership strategy”, then human resource management policies of the“development” type and the “acquisition” type should more or less correspond to the “commitment
maximizing HRM” and “cost reduction HRM” discussed by Arthur [1992]. Human resource
management of contract workers, who constitute a highly mobile workforce, should also be linked
with business strategies of contract companies. For companies trying to realize differentiation
through operation types and improvement of operation management, the originality of service israrely an important factor. Their strategy is to take advantage of their skill levels and avoid pricecompetition by entering the market that competitors may find it difficult to enter.

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Business Strategy and Human Resource Management at Contract Companies in the
Manufacturing Sector

is easy for contract companies following the business strategy of the“client-managed” type to curb personnel costs and offer services at low
price because they do not have to assign personnel for administering
operation management.8
Business strategies of contract companies can be classified into thefour types shown in Figure 1 by their human resource development
policies, which are determined by their operation types, and policies on
operation management.
Figure 1: Business Strategy Types of Contract Companies

Operation
Management
PolicyContractormanaged type
Client-managed
type

Operation types/ Human Resource Development Policy
Development type
Acquisition type
Development/contractorAcquisition/contractormanaged typemanaged type
Development/client-managed Acquisition/client-managed
type
type

3. Human Resource Management and Business
Strategies of Contract Companies
In the previous section, we have provided a theoretical overview ofbusiness strategies of contract companies. In the following section, we
will first examine the issues contract companies following the four typesof business strategy consider important in managing onsite subcontracting
business by using data from a survey on contract companies (The “Second
Survey on Business and Human Resource Management Strategies at
Contract Companies”).9 We will select three constantly high-performing
8

In onsite subcontracting, onsite managers who give instructions and orders to contract workers at
production lines are often assigned by contract companies to client companies free of charge.
Contract companies provide such service because it can lead to continuous contract relations withclient companies and more orders from them even though it might not generate immediate profits.
9
The “Study Group on Utilization of Human Resources and Human Resource Business in Production
Sites” organized by the authors at the Institute of Social Science, the University of Tokyo conducted
the survey. The study group prepared two types of questionnaire: one for head offices of contract
companies and another for branch offices. The former covered contract companies’ business strategies,
human resource management policies, and responses to the removal of the ban on worker dispatchingfor manufacturing jobs. The latter included questions about hiring practices and compensation systemof contract workers. The study group has compiled a list of contract companies from information
provided by industry associations and internet research and directly mailed copies of the questionnaire
for head offices to these companies. As for the questionnaire for branch offices, the study grouptargeted companies that are participating in the study group or members of industry associations. The

109

companies of the “development/contractor-managed” type and the“acquisition/client-managed” type out of the eight case-studied companies
and examine human resource management practices they are conducting
in pursuit of their business strategies.
Concerning the case studies, we have decided to discuss only
examples corresponding to the “development/contractor-managed” type
and the “acquisition/client-managed” type because only these two fit thestrategies of the companies that are continuously performing well among
the case-studied examples. However, these two models are diametrically
opposed with each other in respect to the two criteria used for classifying
business strategies: 1) whether the company is handling high-skill
operations or not 2) whether the company is seeking to implement
operation management or not. These two therefore have common featureswith the “development/client-managed” type or the “acquisition/contractormanaged” type. For this reason, it is possible to make inference abouthuman resource management polices of the other two types by examining
examples of the “development/contractor-managed” type and the“acquisition/client-managed” type.
3.1 Management Policy Classified by Business Strategy
First, we examine the distribution of the four business strategy types
among the companies that responded to the survey on contract companies.
In classifying companies by policy on operation types, companies which
listed “improving contract workers’ skill level” as one of the issues they
considered important (multiple selection from 14 items) are classified ascompanies of the “development” type, and those which did not aregrouped into the “acquisition” type. With regard to classification by policy

study group mailed each of these companies 1-3 copies of the branch-office questionnaire along with acopy of the questionnaire for head offices and requested them to distribute questionnaires to theirbranch offices to be mailed back to the Institute of Social Science. Both of the questionnaires were
mailed and collected between mid-November in 2003 and late January in 2004.The study group sent
questionnaires to 983 companies and received 123 effective responses. The effective response rate was
12.5%. The study group distributed 206 copies of the questionnaire for branch offices and received
70 effective responses with an effective response rate of 34.0%. See Sato, Sano, Fujimoto, and Kimura[2004] for a detailed discussion of the results of the survey.

110Business Strategy and Human Resource Management at Contract Companies in the
Manufacturing Sector

on operation management, companies that emphasize “onsite operation
management by employees of the contract company” as companies of the“contractor-managed” type, and those that do not are classified ascompanies of the “client-managed” type.
The “acquisition/client-managed” type is most numerous (52companies) among the 123 companies that responded to the survey,
followed by the “development/contractor-managed” type (29 companies)
and the “development/client-managed” type (31 companies). The numberof those in the “acquisition/contractor-managed” category is very small (9companies).
Since the survey used in this analysis is not based on random sampling,
the distribution of the four business strategy types may not necessarilyreflect the distribution in the industry as a whole. What is certain, however,is that a substantial number of companies attach importance to either
high-skill operations or improved operation management while there aremany that emphasize neither of them.
In Figure 2, responses concerning business strategies and business
management policies are cross-tabulated to show the relationship between
the two. Furthermore, we conducted the Chi-square test to examine andcompare the differences of response rate of each item between companies
pursing a given business strategy and the other companies.
Overall, many companies attach importance to “responding to orders
requiring a large number of personnel”, “improving productivity” and“securing clients from diverse industries” regardless of their businessstrategies. This is perhaps a reflection of the peculiar state of the industry
in which companies are trying to expand market share amidst fierce pricecompetition.
Looking at the classification of contract companies by businessstrategy, we find that a number of the companies of the “acquisition/client-managed” type attach importance to “securing clients from diverse
industries”, and few of them listed “improving productivity” and“handling R & D and designing.” It can be argued that the goal of the“acquisition/client-managed” type is to handle contract operations that canbe executed at the current skill level in a wide range of industries rather

111

than seeking high-skill contract operations.
Figure 2: Issues Currently Considered Important in Managing
Subcontracting Business (multiple answers possible, %)Providing Services Frequency %at Low Price
χ²

Development/
Acquisition/
Development/
Acquisition/client-managed client-managed contractor-man contractor-man
aged
aged
10
19.2
1
3.2***
5
55.6***
5
17.2

Total

21

17.1

Frequency %χ²11( .212)21.2***

12(5.613)38.7

6(10.157)
66.7

19( .005)65.5***

49

39.8

Securing Clients
Frequency %from Diverse
χ²
Industries
Responding toFrequency %Orders Requiring a χ ²
Large Number of
Personnel
Handling Office and Frequency %Sales Workχ²

28

(14.150)
53.8***

9( .022)29.0

2(2.916)22.2

9(11.916)
31.0

49

39.8

22

(8.603)42.3

10(2.019)32.3

3(1.257)33.3

17(1.602)
58.6*

54

43.9

2

3.8

0

0.0

0

0.0

4

13.8**

6

4.9

Handling Work in
the PhysicalDistribution Sector
Handling R&D and
Designing

Frequency %χ²

9( .245)17.3

6(2.125)19.4

3( .498)33.3

7(6.113)
24.1

25

20.3

Frequency %χ²1(.643)
1.9**

4( .024)12.9

1(1.015)11.1

5( .222)
17.4

11

8.9

%

6

(5.694)11.5

4( .798)12.9

0( .056)0.0

8(2.907)27.6**

18

14.6

%

2

( .818)3.8

3( .099)9.7

1(1.665)11.1

4(4.598)
13.8

10

8.1

14

11.4

7

5.7

26

21.1

Improving
Productivity

Handling Quality
Frequency
and Production
χ²Management
Starting andFrequency
Expandingχ²Commissioned
Production at theCompany’s
Factories
ProvidingFrequency
Consulting Services χ ²
concerning
Contract Works
Handling Orders for Frequency
Short-time Works χ ²
Lasting for about
One Week or so
Expanding theFrequency
Geographical Area χ ²
for Sales Activities
N( .010)(2.282)(2.366)

%

3

5.8*

( .133)1(3.023)
%

1

1.9

11

21.2
( .008)
52

3.2

1

3.2

3

22.6
( .052)31

33.3*(1.438)

7(4.639)2( .469)7(4.175)( .116)(2.734)(2.511)%( .440)22.2*(5.619)3(4.944)1

11.1( .586)924.1**

10.3(1.373)

7

24.1( .115)29

123***; 1% Significance Level **; 5% Significance Level *; 10% Significance Level

Few of the companies of the “development/client-managed” type
listed “providing services at low price.” This is perhaps because companies

112

Business Strategy and Human Resource Management at Contract Companies in the
Manufacturing Sector

might not able to recover returns on their human resource investments ifthey set service fees too low. It can be assumed that companies of thistype specialize in operation types that require highly specialized skills
such as those provided by engineers.
“Providing services at low price”, “providing consulting services
concerning contract works”, and “handling short-time operations lasting
for a week or so” are prevalent responses among the companies of the“acquisition/contractor-managed” type. Judging from their emphasis on
handling short-time operations at low price, companies in this category
seem to specialize in light manufacturing works utilizing short-term
temporary workers. The reason why few companies belong to thiscategory is probably because it is difficult for companies to cover thecosts of operation management with the value added that can be generated
form manufacturing works of the acquisition type.
Many companies in the category of the “development/contractormanaged” type listed “improving productivity”, “handling office and sales
works”, “handling quality and production control”, and “providing
consulting services concerning contract works.” It can be concluded thatcompanies in this category seek to handle more high-skill operations bytaking advantage of skills of their contract workers.
3.2 Human resource Management Matching the Company’s
Business Strategy
Using the examples of three companies of the “development/contractormanaged” and “acquisition/client-managed” types, the following section
will empirically analyze how human resource management and businessstrategies of contract companies relate to each other.10
All the three case-studied companies have been generating large
10

For this section, we have selected three companies practicing human resource management arecompatible with their business strategies from the eight contract companies interviewed by Sato,
Sano, Fujimoto, and Kimura between April and September of 2003. The informants wereinterviewed according to the following schedule: at Company A, the president, executives, andchief manager were interviewed between 10:00-12:00 on September 18, 2003; at Company B, thehead sales manager was interviewed between 10:00-12:00 on July 24, 2003. ; at Company C, thepresident and the executive manager were interviewed between 13:45-15:45 on April 23, 2003, andthe chief of a branch office was interviewed between 13:00-15:00 on August 14, 2003.

113

profits continuously for the past several years and are ranked among theindustry’s top 30 companies in sales. Company A follows a businessstrategy of the “development/contractor-managed” type; it pursues apolicy of adding value to its services by handling high-skill contract
works and improving its operation management. In contrast, Company B
and Company C follow a business strategy of the “acquisition/clientmanaged” type which emphasizes the company’s ability to supply contract
workers speedily and steadily, rather than handling of high-skill
operations, as the main competitive edge. Company A and Company B
operate nation-wide while Company C covers several prefectures in aregion in Japan.
The Figure 3 summarizes findings form the case studies of the threecompanies. The rest of the section will compare and contrast characteristicsof the business strategies and human resource management of the threecompanies.
Company A follows a policy of realizing high value added throughimproving operation management and handling high-skill operations that
require workers to take a relatively long period of time before mastering
the necessary skills. In contrast, Company B and Company C attach more
importance to speedy and steady supply of contract workers than handlingof high-skill operations as the factor differentiating them from othercompanies. Company B actively and widely carries out sales activities andapproaches factories of different sizes in order to find new clients.
Company B emphasizes speedy deployment of necessary number ofcontract workers as one of key determinants of competitiveness. Company
C attaches importance to maintaining long-term business relations withexisting client companies and securing more orders from them.
Human resource management practices of the three companies
correspond with their business strategies. First, we compare their hiring
methods. Company A assesses candidates’ possibilities of quit by looking
at their work history and whether the facilities of the commutation aregood and screen candidates with the high possibility of quit at the
selection process in order to maintain a high retention rate. It also gives
candidates tours of workplaces prior to the start of work so that contract114

Business Strategy and Human Resource Management at Contract Companies in the
Manufacturing Sector

workers will not be quitting their positions after their assignment.
Figure 3: Relationship between Business Strategy and Personnel
Management at High-performing Companies
Company A

Company B

Company C

Business Strategy
Type
Features ofBusiness Strategy

Development/contractor-managed Type
-Handling high-skill
operations-High value added
achieved throughimprovement of labor andoperation management

Acquisition/client-managed Type-Active and wide search
for new clients-Staying competitive
through speedy supply ofcontract workers

Hiring Policy

Hiring practices aiming toencourage long-term
commitment (recruitmentof workers fromworkplaces connected withclient companies,
screening process,pre-placement tours ofworkplaces etc.)-Placement of “leaders” incharge of labor andoperation management-Managerial support
provided by onsite
managers and production
managers in the head
office-Skill evaluations forcontract workers-Offers of regular
employment contracts andwage increases based on
skill evaluations

Speedy supply andplacement of contract
workers with the use of aregistration system

Acquisition/client-managed Type
-Developing long-term
relationships with existingclients-Maintaining a stablesupply of contract workers
for developing such
relationships
Steady supply of contract
workers with using
informal networks among
foreign workers ofJapanese descent

System ofOperation
Site Management

System of
Evaluation andDevelopment-Sales reps (doubling as
operation operations
managers) inspectproduction sites at clientcompanies to provide
labor management-“Leaders” in charge oflabor management
No evaluation or treatment
systems for rewarding
skills development ofcontract workers

Cooperation between
onsite managers handlingcommunications withclient companies andonsite managers handlinglabor management ofcontract workers andinterpretation works
No evaluation or treatment
systems for rewarding
skills development ofcontract workers

Company B maintains a human resource database registering thosewishing to work as contract workers. Even when the company cannot
secure a sufficient number of personnel through regular hiring, it can
supply manpower timely by recruiting those who are registered. Company
C, which consists mainly of immigrants of Japanese descent (descendentsof overseas emigrants returning to Japan), utilize informal networks
among immigrants of Japanese descent for reliable recruiting. It has a listof immigrants of Japanese descent wishing to work and utilizes the list in
hiring new contract workers.

115

Company A adopts a hiring method that places weight on promotionof long-term commitment from contract workers in order to handle
high-skill operations and train personnel who can manage operations. In
contrast, Company B and Company C give priority to an ability to supply
necessary manpower, and they have managed to hire and deploy contract
workers timely by using a registration system and informal networks.
With respect to production site management, Company A has amechanism of operation management maintained by “leaders” selectedfrom contract workers to handle management of contract workers andoperations. In contrast, Company B rarely assigns operation managers to
production sites at client companies. More typically, it sends sales
representatives hold operation managers currently to inspect production
sites at different client companies. Company C does assign “leaders” toproduction sites at client companies, but their jobs are mainly taking
attendance and supervising production lines, and they rarely handle
operation management. At these two companies, onsite managers limit
themselves to labor management and do not get involved in operation
management.
In respect to evaluation and development systems, Company A
employs contract workers without limiting their contract periods andoffers pay increase and a chance to be employed as a regular employee
based on skill evaluations. In addition, it occasionally conducts job
rotations to expand the skill range of contract workers. It also regularly
holds training sessions for “leaders” to develop their managerial skills. As
shown above, Company A is seeking to develop human resources throughskill evaluation and training systems, but Company B and Company C are
not very active in providing training for contract workers to raise theirskill levels and have not developed skill-based evaluation and treatment
systems.
As discussed above, each of the case-studied companies has hiring,
onsite management, evaluation and development systems that suit its
respective business strategy. Judging from these three cases, it can beargued that all high-performing contract companies are active inmaintaining human resource management system that are compatible with116

Business Strategy and Human Resource Management at Contract Companies in the
Manufacturing Sector

their business strategies.

4. Implementation of Human Resource Management
Practices Matching the Company’s Business
Strategy
It is essential for contract companies to devise human resource
management practices that support their business strategies if they want topursue their business strategies and maintain high performance. The threecases above are success cases of contract companies maintaining highperformance by implementing human resource management measures thatare compatible with their business strategies.
It is not easy, however, for many contract companies to implement
such human resource management measures. One reason for this isbecause contract fees and profit margins determined by them put a limit
on how far companies can let skill levels of contract workers to bereflected in treatment. Another reason is because placement of contract
workers is often up to the circumstances concerning personnel at clientcompanies.
Based on data from a survey, the following section examines how
human resource management practices correspond with their businessstrategies at contract companies as a whole rather than targeting highperforming companies. Our analysis combines data from a survey targetinghead offices of contract companies concerning business strategies and asurvey targeting branch offices concerning implementation of humanresource management policies.
However, we will only compare the “development/client-managed”
type and “acquisition/contractor-managed” type because few samples forthe “development/contractor-manage” type and the “acquisition/clientmanaged” type could be found and our earlier discussion of cases studies
dealt with only these two types as well. The following section willcompare companies of the “development/contractor-managed” type andthe “acquisition/client-managed” type regarding implementation of wages
increase, which is considered effective for promoting high retention and117raising skill levels of contract workers, and rotation, which expands the
skill range of contract workers and develop their skills.
4.1 Pay Raise
Figure 4 shows the proportion of companies which review wages ofcontract workers according to skill level and the length of service. 2/3(66.7%) of companies of the “acquisition/client-managed” type do notreview contract workers’ wages unless contract unit prices are increased
through negotiations with client companies. In contrast, nearly half of thecompanies of the “development/contractor-managed” type (46.7%) review
wages regardless of whether unit prices are reviewed by client companies
or not. This is perhaps an indication that the skill-based wage scheme ismore established among companies of the “development/contractormanaged” type.
Figure 4: Pay Increase for Contract Workers (%)

Development/contractor-managed
type
Acquisition/client-managed type

Number ofsurveyedbranchofficesPay
increase
when unit
prices are
increased

15
21

No payincrease at
all

46.7

Pay
increaseeven whenunit prices
are notincreased
46.7

66.7

28.6

4.8

6.7

Note: Eight companies of the “development/contractor-managed” type and thirteen of the“acquisition/client-managed” type are equivalent to branch offices in this figure.

Even within the “development/contractor-managed” category, however,
over half of the companies reported that they do not either review contract
workers’ wages at all or review wages only when contract unit prices are
increased. Hence, even among the companies emphasizing skill
development of contract workers, many do not give skill-based wage
increase.
4.2 Job Rotation
In respect to job rotation, the proportion of companies which rotate
contract workers among factories of different client companies is 73.3%

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Business Strategy and Human Resource Management at Contract Companies in the
Manufacturing Sector

for the companies of the “development/contractor-managed” type and95.2% for the companies of the “acquisition/client-managed” type. It is
normal for companies to rotate contract workers regardless of theirbusiness strategies.
As for reasons for rotating personnel (see Figure 5), many companies,
both of the “development/contractor-managed” type and “acquisition/client-managed” type, listed “To respond to fluctuations in the workload
and secure sufficient level of manpower” and “to secure employment ofcontract workers.” Few of the companies of either type rotate personnel“To assign workers to positions appropriate for their skill levels”, andnone listed “To train and educate contract workers.” Regardless of theirbusiness strategy types, not many companies are carrying out rotations forthe purpose of developing contract workers.
From above, it is clear that contract companies in general are notnecessarily active in implementing human resource management measuresthat fit their business strategies.
Figure 5: Main Reasons for Rotating Contract Workers (up to two
responses possible, %)Number ofsurveyedbranchoffices

To assign
workers topositionsappropriate
for theirskill levels

To improve To train and To secure To respondtreatment of educate
employmen toworkers
contract
t forfluctuations
with high workers
contractin theskill levels
workers
workloadand securesufficientlevel ofmanpower

Development/contractor11
18.2
27.3
0.0
63.6
72.7
managed type
Acquisition/client-managed
20
25.0
5.0
0.0
75.0
70.0
type
Note: Figure 5 includes only branch offices that rotate contract workers, and therefore thedenominator used for calculating the ratios is different from the one used for Figure-4. Six
companies of the “development/contractor-managed” type and twelve companies of the“acquisition/client-managed” type are equivalent to branch offices in this figure.

5 Conclusion
This essay has shown that contract companies in general are not very
active in practicing human resource management that are compatible with
their business strategies even though those companies that are performing

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well are practicing such human resource management.
One possible reason why companies do not practice such humanresource management is that their business strategies have not been
disseminated among individual branch offices. Another possible reason isthat companies lack expertise on human resource management.
Moreover, even though they expect contract companies to improve
contract workers’ skill level and handle operation management, manyclient companies give priority to price of service rather than the quality of
personnel and human resource management policies in selecting contract
companies. Such attitude can be considered as one of the causes (Sato,
Sano and Kimura [2003]).
To realize effective utilization of contract workers at production sites,
contract companies must make efforts to implement personnel management
measures that suit their business strategies, and it is also important thatclient companies reconsider their current policy regarding the use of labor
contract services.
* This essay is an abridged version of Kimura Takuma, Sano Yoshihide, Fujimoto Makoto,and Sato Hiroki “Seizo Bunya ni Okeru Ukeoi Kigyo no Jigyo Senryaku to Jinji Kanrino Kadai (Issues concerning Business Strategy and Personnel Management at Contract
Companies in the Manufacturing Sector), Nihon Rodo Kenkyu Zasshi 526 (May 2004).

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