Mroczkowski, T. and Hanaoka, M. (1989). Continuity and change in Japanese management. California Management Review, Vol. 31, No. 2, pp.39-53.

With the rise of the yen Japanese companies have shifted to competing on quality, innovation and product leadership while remaining focused on improving cost structures through automation.

This means that changes may have to take place in Japanese management practices – specifically lifetime employment and seniority-based wages.

“This article assesses the magnitude and direction of the changes in the employment and promotion systems inside Japanese companies.”

> The Romantic Myth of Japanese Management

Three ‘inherent weaknesses of Japanese management’:
(1) Lifetime employment and ‘groupism’ encourages dependency and stifles creativity.
(2) Discrimination against non-lifetime employees.
(3) ‘Promotion gridlock’ for middle management and young outstanding employees.

> Continuous Evolution and the Crisis of Japanese Management

Japanese management practices have always been fluid – evolving according to economic, social and competitive conditions.

Before WWII: Status promotion system (shikaku-seido) dividing workers into ‘white’ (shokuin) and ‘blue’ (kouin) collar classes with promotion structures within but not between categories.

After WWII: The American occupation brought changes – labor laws and union growth, management training, wage system change. Companies started to recognize ability and skill as well as seniority.

1950s-60s: Industrial expansion resulted in labor shortages. What we know recognize as ‘Japanese management’ began to be introduced at this time – participative management, lifetime employment, grade ladders, integrated functions.

1970s: The ‘peak’ of ‘Japanese management’. Low growth and the introduction led to fewer hirings. The average age of employees increased, leading to wage cost pressure and few chances for advancement. The reaction of management was to increase flexibility in employment and reward systems – temporary transfers and flex-time as well as decreasing the emphasis on seniority and increasing merit based compensation.

1980s: The high dollar in the early ’80s aided Japanese competitiveness but its rise in 1986 put many companies under pressure – bankruptcies and unemployment increased.

* Major Challenges to Japanese Management System  – mid 1980s

(1) With the rise of the yen, companies needed to figure out how to reduce labor costs without major layoffs.
(2) Motivating workers in a changing environment.
(3) Blending old system advantages with the need to promote creativity and initiative.

> The Emergence of a New Management Paradigm

* Restructuring Methods of Employment and Wage Control

How to reduce employment/labor costs? Hiring freezes, elimination of overtime (these two common in the West), job rotation, employee reassignment (perculiarly Japanese). Wage, salary and bonus cuts shared by all levels of the company. Layoffs are not as harsh as in western countries because companies make use of an inter-company leasing and transfer system called igyoushu kouryu.

> The New Motivational System: Performance-Based Evaluation and Rewards

* The Changing Importance of Seniority

The importance of seniority has been decreasing since the late 70s. Low hiring rates made it hard for companies to keep increasing the pay of their senior employees. This has resulted in a change to motivation and reward structures – early retirement is being promoted and wages are being capped when an employee reaches his mid-40s.
It is important to note that seniority has never been the only thing that has determined pay in Japan – education and job-related skills also played a part while loyalty and peer pressure were considered enough to motivate employees. Further, top employees were kept motivated by interesting work, training and earlier promotion.

* Performance Appraisal Japanese Style

The shikaku system has gradually been merged with a performance and merit based system. Remember however, that Japanese concepts of performance and acheivement are different from those in the West – for example the ‘merit rating’ (jinji kouka) and the performance measure of gyouseki. Western methods are being introduced to Japanese companies. Individual acheivement based systems are likely to become more popular.

* Redesigning the Employment Relationships

The system of lifetime employment is changing. A survey of young Japanese workers found that they prefer the ability to change jobs to the security of lifetime employment.

Most companies now prefer to keep ‘core’ employees for life (this can be as small as 10%). Also, various hiring methods are used, with an increasing focus on hiring specialist contract workers and part-time employees as opposed to graduate recruitment.

> The Multi-Track Employment System

Japanese managers are trying to retain the advantages of the old system (group harmony, employee loyalty, cooperation) while reducing the inflexibility of lifetime employment and facilitating the creativity and initiative of their employees. It is hoped that this will be done through a ‘multi-track employment system’. On the one hand employees can be hired into the reduced ‘life’ track, being transferred horizontally and/or promoted vertically. This opens up hiring into other tracks (women, part-timers and specialists). This leads to greater flexibility in promotion and remuneration.