Japanese Management Systems - Essay Example

?Japanese Management Systems To what degree are Japanese firms becoming more oriented towards shareholder value and with what consequences for their management and organization? Executive Summary The paper deals with the various facets of management systems in Japan. Japan is perceived to be one of the highly industrialized nations of the world and the contribution of the management system of the country towards such growth is widely acclaimed. The paper commences with an “Introduction” of the management systems with special emphasis on shareholder value. Next, it deals with Japanese Management Systems followed by the chapter of “Empirical Evidence towards Japanese Firms Becoming More Oriented Towards Shareholder value”. The paper also puts forward the rationale or the reason of having such importance to the concept of shareholders’ value and this is dealt in the fourth chapter. The consequences that are faced with regards to the changing scenario of global trade and finance by the Japanese organisations are dealt in the next chapter. Last but not the least, a dedicated “Conclusion” chapter summarises the key finding of the study. Table of Contents Executive Summary 2 Introduction 4 Japanese Management System 5 Reason behind the Adoption of the Shareholder Value in the Functioning In the Japanese Organisation 9 Consequences Faced By the Management of Japanese Organisation 11 Conclusion 14 References 16 Bibliography 19 Introduction ‘Shareholder Value’ is one of the most commonly used concepts in today’s business organisations. It is determined to provide with the value to the organisation’s shareholders’ investment. The value is provided to the shareholders as this contributes in the management’s capacity to enhance earning, increase the share price and dividend. To be more precise, shareholder value is addition of the entire strategic decision taken by the management that further has the ability to affect the organisational capacity to increase the sum of ‘free cash flow’ over the time (Investopedia, 2011). This helps the management of the organisation to take decision regarding the enhancement of the profitability of the firm as well as increases chances of enhancing the return on investment (ROI) which has been invested by the shareholders. To generate profit, the organisation cannot take random decision; this will rather decline the shareholder value and also can affect the reputation of the organisation. Shareholder value is dependent on the perception and the trend of the market in which the organisation is operating and towards the ability of the corporation to produce returns to its shareholders in present as well as future context. Providing maximum returns on the investments of the shareholders help in holding their interests in the organisation. Putting it in the equation, Shareholder Value = Current Performance + Expectations for Future Performance (Davis, 2011). This helps the organisation to gain the sustainable growth by enhancing their short term and long term goals and achievements. This further helps the organisation to retain its shareholders interests in the long term basis. The paper will study the reason behind the Japanese organisations to be more oriented towards the shareholders’ value. The paper also includes the consequences faced by the management of the organisations due to incorporating of the shareholders’ value. Japanese Management System Industrialisation has always been an essential part of the Japanese development. The management systems practiced in the organisations are highly dominant in nature. And, in addition to this, economy of the nation plays a vital part in influencing the organisational development as well as tended the management to modernise in the process. During 1980s, Japan was considered to be the second largest economy in the world. This was possible because of the contribution from the industrial sectors. After the Second World War, the country is observed to have changed tremendously with regard to its economical growth and industrial growth as well. This economic well doing of the country was termed as ‘economic miracle’ but later, after it burst, was named ‘the bubble’ (Secicomp, 2011). The management system practiced in Japan was very different than the management system practiced in other nations. Confucianism can be observed in the management practice of the organisations. This signifies the loyalties of the Japanese labours are undoubted or Confucian. But with the changes in the market, the management system too has changed in the process. In the modernisation of Japan, the liberal market forces have played a dominant role in the organisational operations. The capital market and the stock market prices are very sensitive in nature that further tends to change the functioning of the organisations. Management practices were highly influenced by the price hike in the stock market, so managers needed to change in accordance with the price change (Secicomp, 2011). Japan has experienced recent changes in the model of capitalism which has been greatly associated with the growth of diversity that has been experienced in the corporate governance practices. This has also influenced the management practice of the Japanese organisation. In the due course, the employment practices have been observed to be drastically changing in an attempt to meet the changed requirement of the environment of the organisation where it operates its business. This can also be considered as an attempt by the industries as well corporate governance to bring diversification in the industrial practices. It has been seen that the Japanese are very loyal in characters towards their tradition. This can be seen even in their industrial practice, they very rarely let go their traditional practices which can also be considered as their tradition approaches of management (Jackson, 2009). Evidence towards Japanese Firms Becoming More Oriented Towards Shareholder value Management of the organisation in Japan are highly influenced by wider social institutions for example education system, culture, political system and financial system. Japan is always considered among the countries that have embraced industrialisation much before to many other nations. Many globally functioning industries, such as camera manufacturing, vehicle or car manufacturing, machinery tools manufacturing and automobile among others are highly dominated or influenced by the Japanese management systems and organisations. Industrialisation has rapidly as well as speedily grown in Japan. This was because of the easily availability and loyalty of human resource in Japan. A few of the examples of well structured wage systems can be observed in Japan. And, not only this, the quality of the product is also the other factor which has enabled Japan to attain the leadership in the market during 1980s (Hayashi, 2002). But the history of Japan’s industrialisation is not as glorious as it seems, it has gone through various ups and downs. The organisation and the managerial practice of Japan are derived by the social, political as well as economical condition of the country. Japanese people are observed to be self disciplined and loyalty is considered to be their character (INSEAD, 2011). The economic as well political system of the nation, Japan has influenced the industrialisation traditionally and also in the modern days. The market forces that are being experienced in the nation are determining the management practices adhered by the organisations. The presence of the government of Japan can be observed in development of the industrialisation. After the effect of the economy bubble experienced in the nation, it was observed that the investors or shareholders were rarely showing any interests in the industrialisation. Thus, government of Japan took an initiative of introducing provision to support the shareholder value but it is not compulsory in nature. Though, the corporate houses are implementing it mandatorily in Japan. This is done to gain the attention of the maximum investors by the firm. In addition to this, the corporate governance of Japan also supported the interest of the shareholders and emphasises on maximising the shareholder value (INSEAD, 2011). The economic condition of Japan, after the globalisation emerged in the country, became more oriented towards profitability. Before the introduction of globalisation, it was noticed that Japan was considered to be the leader in the market but after the introduction of new players (nations) in the market, as a result of globalisation, Japan seemed to be losing its position in the market. With an intention to regain back the position, Japanese companies took the option of maximising Shareholder value to be the better option to generate capital from the market through the shareholders involvement and invest in the productivity of the organisation. Thus, the companies, by providing greater return on investment, tried to generate more shareholders from the market (INSEAD, 2011). According to the corporate law of Japan, it is quite evident that the shareholders are treated as the owners of the organisation and management necessarily need to work according to the interest of the shareholders. This is considered to be the duty of the management to serve the interests and needs of the shareholders. The shareholders’ value and enhancement of the profitability are considered to be the next most common and popular goals seen among the largest Japanese companies. In the year 2008, about 92% of the Japanese large firms are considered to be engaged in providing the Shareholder Value (Joerg & et al., 2008). Prior to this, in the year 2007 it was observed that approx 78% of Japanese firms were Shareholder Value oriented in comparison to approx 83% of French organisations in the global market scenario (Allen, et al., 2007). This indicates that the orientation of Japanese firms towards shareholder value is rapidly increasing. According to the document issued by the OECD in the year 1999, titled ‘The OEDC Principles of Corporate Governance’, the organisations need to operate its business in accordance with the interest of their shareholders. According to the issued document, the shareholders are the major and very important parts of the organisation and so their interest needs to be highly served by it (Lazonick & O’Sullivan, 2000). After the major rise in the economy of Japan, the nation was to face declination in the prosperity in its economic growth. The nation was initially considered to be the leader in the market in various fields of operations. With tremendous pressure experienced by the industry as well as the government, the nation has found a way to maintain balance in the competition level along with coordinating it with the modern economy. This helped in promoting and establishing cooperation among government of the nation and the industry (Vogel, 2006). The Japanese management system in the process of remodelling its industrial practices to meet with need of the modern demand of the industrialisation, tend to tremendously be inclined in adopting American practice of management. Moreover, due to the economy bubble burst, the investors were disgraced and lost trust on the industry. Providing Shareholder value can also be taken as the way of establishing trust back in the company. This was initially introduced by the Reagan administration. It tended to augment involvement of the shareholders by increasing the importance of the shareholder value concept in the management practices of the organisations performed in Japan by easing antitrust rules. Thus, this attempt of increasing shareholder value facilitated in the mergers and acquisitions process. This Reagan administration measure of management also proposed reduction in corporate income taxes which provided the organisation with the greater amount that were tended to be used for the purpose of mergers (Allen & et al, 2007). Reason behind the Adoption of the Shareholder Value in the Functioning In the Japanese Organisation Japan’s economy has played an important role in incorporating shareholder value by the organisation in a major part. In this context it can be observed that Job tenure is identified to be long in the nation and the workers are found to be well skilled compared to the other nations. But the distributions of the wages are observed to be quite low in accordance with the INSEADand skill of the employee. It has been observed that the workers or any of their representatives were capable of taking part in the process of managerial decision making which was the part of the traditional approach of the Japanese management. But according to management practices, Japan is getting influenced by the western management practices, the labours or employees are no more involved in the management of the organisation. Hence, with the emergence of the westernisation in the practice of Japanese industrialisation and the management practices in the nation, the management of the organisation is getting inclined towards providing the Shareholder value. This has proved to be very effective for the organisation to raise their investments as well as gain better economy. This has also helped the organisation to attain maximum profit by enhancing their profitability but ignoring the other objectives i.e. employees interest and customers interest among other (Vogel, 2006). The other reason behind the adoption of the Shareholder value is the US industrialisation model. To be more precise, after the bubble burst in 1991 which compelled the nation to lose its position as a leader, Japan got inclined towards the US practice of industrialisation and started to incorporate it. As it is very well knowed that US is a capitalist country where capitalism is the major concern in economy practices. US’s industries were oriented towards providing Shareholder value. The Japanese companies in the process of incorporating the practices of the US industries too adopted major importance of providing shareholder value. This is one of the reasons behind the Japanese companies being more oriented towards providing shareholder value (Vogel, 2006). The bitter experiences for Japan of economic crisis has tended the organisation to adopt market based system of management in the organisation. This is considered to be one of the main drivers of increasing shareholder value in the organisation. And, after the introduction of liberalisation in the market in Japan, the local market has developed to be more sensitive. A little mistake by the management of the organisation can prove to be the reason behind the fall of the organisation irrespective of its large size (Rose & Mejer, 2003). Consequences Faced By the Management of Japanese Organisation The corporate law which is followed in Japan is considered as highly shareholder friendly compared to America and Britain. It has been observed that Japanese shareholders enjoy the right of voting directly on dividends and pay of the executives, this is among the consequences that are being faced by the management of Japan. They even enjoy the rights of expelling the entire board without any prominent cause. If the shareholders want to banish the management group without any serious issues this can be done which stands as the major consequences faced by the management team. This further tremendously pressurizes the management of the firm to enhance the productivity and at times even may affect the management decision. For instance, the decision of the organisation may be more inclined towards the profit enhancing, ignoring the other issues (The Economist, 2007). Another consequences faced by the management of Japanese organisation is that they are adopting the techniques of downsizing with an intention to increase shareholder value. For instance, if the management decides to eliminate one particular unit which does not repay back the adequate revenue which was expected from it, then the management of the Japanese firm usually decides upon closing down the units which can prove to be profitable in the future. And, moreover downsizing involves with sacking employees which results in distrust among the existing employees (Uchida, 2010). The larger portion of the profit is distributed among the shareholders that could have been used by the management for the purpose of enhancing the productivity of the organisation but rather it is being paid off to the shareholders. This is also a consequence faced by the management of the Japanese organisation. They rarely are capable of taking an individual decision as they work under the pressure of the shareholders. The firms are highly pressurised by the shareholders as they enjoy the law which enable them to eradicate the entire management committee without any explanation (The Economist, 2007). After the implementation of the Reagan administration measures in the organisations of Japan, it was observed that a number of managers were seen to be indulged in legal battle with their shareholders with an intention to maintain their control within the organisation also in the markets. The other objectives of the organisation such as providing the employee interest are being subsided to attain the maximum return in the shareholders’ investment (Vogel, 2006). The human resources are getting affected due to the involvement of the organisation in focusing on maximising shareholder values. The employees are no more involved in the managerial decision making practices. Under the pressure of maximising the shareholder value, the organisation is ignoring the human resource development. For instance, it has been observed that the welfare practices of the employees working in the organisation of Japan are poorly developed. This gradually has turned out to be a major concern for the management as the human resource is one of the integral parts of the organisation and with such practices the scarcity of the human resource comes into existence and moreover the workers are paid wages in keeping with the market rate irrespective of their seniority in the organisation. These practices contradict the Japanese traditional practices of management. This stands as the major consequence for the management of the Japanese firms as it questions the traditional practices as well as works against the welfare of the employees (Elger & Smith, 1994). Accommodating Shareholder Value can prove to be very effective for the organisation but only in the short run. As it has been mentioned earlier, providing shareholder values to the investors do contribute in increasing profitability of the firms, but in the long run it can decrease the image of the organisation if they do not emphasise much on welfare of the human resources. For instance, the organisation which accommodates shareholder values as its major interest, fails to pay attention in other objectives of the organisation such as, employees, who are a major part of the organisation. This gradually increases the rate of attrition, which is one of the major reasons behind the fall of the organisation (Lonien, 2003). Conclusion Shareholders are one of the important parts of the organisation. They are the one who support the firm financially. The organisation should provide its shareholders with good and adequate return on investment but should not ignore the other objectives of the organisation. The liberal market has a great influence in the economy of the country. Japan was considered to be leader with respect to the electronic and vehicle manufacturing companies. Not only these companies, there are many other companies too that have helped Japan to gain the position of a leader in the market. But after the raise of the oil crisis which resulted in the bubble burst in Japan along with the introduction of new nations to join the competition in the industry, Japan gradually lost its position. To overcome this, Japanese companies inclined towards increasing profitability as well as decided on providing maximum shareholder value (Forbes, 2011). Maximising shareholder value also provided the organisations with the increase in number of investors. Japanese firms are adopting this strategy because they are focusing only on the advantages that are to be gained by providing shareholders’ value. Initially, when the nation was experiencing an economic depression, it was considered to be a good decision by the management of the Japanese organisations. Though it is a good approach, the nation needs to concentrate on the importance of productivity rather than profitability as well. Due to the changed economic condition of Japan, the industry has been inclined towards adoption of process to maximise shareholder value. Japan has developed an economy which supports capitalism highly that further compelled the industry to adopt shareholder value as the major interest in the organisation. 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The end of diversity?: prospects for German and Japanese capitalism. Ithaca, NY: Cornell University Press. Read More