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How to revive Japanese innovation

Companies must cut middle management layers that block entrepreneurial ideas

| Japan

Sixteen years after graduating from Harvard Business School, I find that many of my American classmates, now in their mid-40s, have semiretired. They are, as they say, managing their own money.

The drive for self-made success drives bold innovation. But it helps concentrate wealth in so few hands that today top 1% of households own more wealth than bottom 90% combined. Populism and social unrest is the result.

If today's U.S. is at one extreme of the innovation/stability spectrum, Japan lies at the other. Long gone are the days when Japanese inventions such as the Sony Walkman wowed the world. Japanese unicorns, privately owned startups with the estimated market value of $1 billion or above, are so few that there is a sad silence after Mercari, the online flea market operator, went public in June.

Patents granted by the U.S. Patents and Trade Mark Office offer a yardstick to compare the vibrancy of innovation around the world. Japan still ranks second only to the U.S. itself for the number of patents granted to innovators from a single country. But Japan is in decline, as the share of U.S. patents granted to Japanese-origin innovators has been slipping since 2011. Meanwhile the EU and the rest of the world (excluding the U.S.) have been on the rise, driven by South Korea, Taiwan and China.

However, white-collar salaried workers, an endangered species in the U.S., are still the bedrock of the Japanese middle class and of social stability. A stable job in a large Japanese corporation is still highly respected. According to a 2018 government survey, 75% of Japanese say they are satisfied with their lives.

How did Japan get here? First, rapid aging overshadows any other domestic change. In the early 1980s Japan was the youngest country in the Organization for Economic Cooperation and Development, with just 9% of population over 65. Today this senior segment accounts for 28%, the highest among OECD members. Aging has kept more middle-aged managers in their posts, blocking younger rivals. With a lack of labor mobility, the hierarchy has become top-heavy. Younger managers feel frustrated but lack the risk-taking capacity to leave and join a startup, as their American, European or Chinese counterparts might.

Hence the stagnation in innovation. Both in terms of its corporate history and its payroll, Sony was still a young company in 1979, the year it released the Walkman. Forty years, later, Sony is a corporate empire where the most profitable activity is no longer electronics but finance.

Second, the financial bubble that burst in the early 1990s shattered national confidence, in a blow from which we have never fully recovered. The innovation drought is aggravated by a lack of diversity, a secret sauce for new ideas. Japan fails to tap the power of women or foreigners.

Third, innovation in the post-internet world is frequently driven by software, making traditional Japanese competitiveness in hardware less useful than before. This is compounded by the terrible mistake of adopting mobile telecommunications standards different from much of the rest of the world -- cutting Japan off from the technological mainstream at a critical moment.

The danger is that Japanese business may be dying a slow death, stewing in complacency. It is the frog in slowly heated water which never jumps out of the pan. We cannot suddenly become Americans. But how can we revive innovation without risking our stability?

As a management consultant, I observe no lack of will from Japanese managers to promote innovation. In fact, there is almost too much will and not enough vision. "New business development" or "innovation" labels often adorn the titles of new divisions. Innovation becomes a self-defining end in itself.

But without a clear vision of the future, companies opt for a boring formula for concocting so-called new business ideas that combines an analysis of internal technological strengths with an externally provided examination of potential growth markets, often taken from third-party research.

While superficially logical, this approach seldom yields results. For one, real innovation should be creating markets. Aiming at existing markets is like driving and looking only in the rearview mirror.

Moreover, so-called strengths may be subjective since they are assessed by the same managers that developed them in the first place. Growth sectors are hard to define at the appropriate level of detail. Even if both are properly articulated, mechanically combining them only breeds me-too ideas lacking in originality. There are no breakthroughs.

Successful innovations, by contrast, often start with an executive fanatically convinced of a vision. With the Walkman it was "What if you could listen to your own music on the plane?".

The manager with the vision scrambles to leverage the company's technological or marketing resources. While the concept may not be applied initially to the best application, a company can eventually meander its way to find the right markets. Facebook did just this, having begun as a college networking site.

Top managers, if they themselves are not the evangelists, must provide long-term support by protecting commercially-promising innovations, separating them from the rigor of the bread-and-butter businesses.

The advance of artificial intelligence opens a new door for Japanese companies -- a late entry into the booming digital market. They can bring their traditional strengths in hardware to the sector now that machines as well as people are being connected together by AI and the internet of things. Connected cars and smart home appliances, for example.

In large organizations, which lead the way in management best practice, cutting through layers so that managers can directly expose themselves to ideas is the key. Some companies successfully use in-house venture capital or business plan competitions. But spotting and funding ideas is not enough. Knowing the risk-averse attitude of many Japanese, top executives must not penalize innovation failures but encourage the creators to try again.

This may sound like wishful thinking. But it is not. There are wonderful Japanese precedents. Honda Motor, a big established company with 70 years of history, has always focused successfully on innovation. Take for example, Asimo, the trailblazing humanoid robot it started developing in 1986 and commercialized only in 2000. Honda is more open and less seniority-obsessed than many Japanese groups.

In services, Recruit, a personnel recruitment company founded in 1963, pioneered the commercialization of a matching mechanism between supply and demand for workers, which it has now extended to other fields, such as locating wedding ceremony venues for couples. Today it is one of the big Japanese winners from the internet, where its offerings are ever more scalable.

Innovation does not require that everyone aspires to be Elon Musk or Mark Zuckerberg. The not-so-flamboyant Japanese salarymen (and women) can manage it too. It can be less personal, more corporate, and focused more on the long term than in some other countries, given the financial resources of cash-rich Japanese companies. It can tap into the many faucets of expertise readily available in such organizations. If Japan could unlock the internal entrepreneurism within existing organizations, it could show the world an alternative to the American model, one in which innovation can coexist with social stability.

Nobuko Kobayashi is a partner with A.T. Kearney, a global management consulting firm. Based in Tokyo, she specializes in the consumer sector with a special focus on multinational corporations operating in Japan.

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