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Decision Making in Japanese Organizations

Yonatan Reshef
School of Business

University of Alberta
Edmonton, Alberta
T6G 2R6 CANADA

The original article is taken from JETRO (Japanese External Trade Organization)

Have these two diagrams printed out before reading this article:

  • Typical Corporate Organization Chart
  • Reporting Channels for QC Circles
  • The organization and employment practices of Japanese companies and those of U.S. and European firms differ in many respects, and these differences have important implications when dealing with Japanese firms. Although the general organizational structures of Japanese companies are similar to those of companies in other nations, a major distinguishing feature appears to be the presence of numerous viable mechanisms for bottom-up communication, both formal and informal. This is closely related to the emphasis on maintaining a family-like atmosphere, which encourages more discussion and a greater degree of informality in communication. The sense of a company being similar to a family is reinforced by such factors as the commitment of the employee to the company until retirement, the practice of age-linked compensation and responsibility, the system of job rotation that emphasizes the development of generalists rather than specialists, and an approach to evaluation that emphasizes experience, personality, and, in effect, the ability to train and lead subordinates like a senior family member. 

    Some of the principal implications of these characteristics for decision making are the following:

    With certain exceptions, full responsibility for making decisions of importance is seldom delegated to a single individual. However, as in any efficient organization, routine decisions within established guidelines are handled by individuals. There is a proclivity among Japanese employees to discuss all aspects, particularly of major decisions, in detail with parties who are likely to be affected by or interested in the decision. Serious conflicts can develop if affected sections or departments are left out of the decision-making process. Intersectional conflicts of interest can complicate and lengthen the decision-making and implementation processes.

    While initially the decision-making process may be slow in comparison to a system where authority is delegated to an individual, the implementation of the decision reached can be rapid. Smooth execution of any decision requires the cooperation of all sections affected by that decision, even where authority is highly delegated and individuals have substantial decision-making powers. Quick decisions made without consideration of all concerned parties may lead to the implementation being sabotaged or delayed by those who must ultimately carry out the orders. In the Japanese system, interested parties have at the very least had their views heard and are therefore usually more willing and prepared to go along with the decision.

    It should be kept in mind that every Japanese company is different. While the previously mentioned generalizations appear to hold and provide a contrast with U.S. or European decision-making practices, there are companies in Japan, especially those directed by their founders, whose decision making is Western in character. Decision making in companies led by the founder, or "one-man" companies, as they are described in Japan, can be particularly complicated, since a U.S. or European style of management is sometimes superimposed on a Japanese style. The middle and lower levels of the organization think of themselves as a uniform group of workers, while the founder thinks of himself as the leader of the company. For this reason, decision making can be a mixture of styles, with some decisions made by the president himself and others by the consensus method, with the president giving the final go-ahead.

    Internal Communications

    One point that appears to distinguish Japanese companies from their counterparts overseas is the structure of internal communication channels. Japanese companies' channels for bottom-up communication are probably the most obvious of these and have been the subject of much attention. However, these communication channels can only be understood properly in the overall context of information-channeling policies and structures. While these policies and structures obviously vary among companies, some general traits can be identified. 

    Japanese firms generally have more extensive formal and informal communication channels than Western firms. This is because Japanese managers tend to have a broader conception of those who need to be informed of particular items or decisions than their Western counterparts. 

    An example of a formal communication channel that is used both by Japanese and Western firms is the teian boshu, or suggestion box system, through which useful employee suggestions are rewarded with monetary or other types of recognition. A formal communication channel that Japanese managers and their Western counterparts use somewhat differently, however, is the circulating memo. Within the administrative sections of many Japanese companies, memos containing both major and minor news are stamped kairan (for circulation) and passed from desk to desk within the section. At the discretion of the section head, a kairan memo may have a list of managers' names attached to it and be circulated vertically or horizontally outside the section. While Western companies also circulate memos, the Japanese practice is distinguished by the larger number and broader range of people reached. 

    Indeed, a Japanese manager in doubt as to whether he ought to pass on a certain item of information to his colleagues is far safer to inform them. One top executive of a major Japanese corporation reflected for a long time on his sudden fall from favor and concluded that his greatest mistake was to heed the advice of a subordinate who considered some data inconsequential and suggested that it not be circulated. His colleagues admitted that the data concerned was not particularly vital, but their trust in his willingness to share information was damaged, and they could not function in confidence with a manager guilty of withholding or disregarding information. 

    The degree of informal communication within Japanese firms is distinctive. Even when the information is not of enough significance to merit a memo, Japanese managers will usually call colleagues who might be interested. Job rotation, which has exposed them to the perspectives of various sections and departments and has allowed them to develop personal relationships with staff members throughout the company, has also made them aware of the needs and interests of other parts of the company. Sharing information is not just a favor done for a friend or merely in keeping with good business practice; a manager's effectiveness, and ultimately his company's success, depends on his keeping well informed, which in turn requires the assistance of his peers. 

    On the whole, it may be concluded that Japanese companies possess more extensive in-house information channels than Western firms. These formal and informal information networks transmit information both vertically within the corporate hierarchy and horizontally between the various departments of a Japanese company, largely at the discretion of lower-and middle-level managers.

    Decision Points

    The decision-making structures of Japanese companies, like their information channels, are fundamentally the same as those in Western firms. However, even though most of the major differences in decision-making processes between Japanese and Western firms are matters of style, these differences can have significant impact on company performance and are important factors to consider when dealing with Japanese companies. 

    Japanese firms' information-gathering and dissemination and decision-making structures can be visualized as a network of information channels linking decision points at the top, middle, and bottom of the corporate pyramid. Lower-level managers pass on information, solve problems that do not involve expenditures, and formulate solutions to bigger problems with their peers and superiors. Middle-level managers pass on information, solve larger problems facing their departments that involve spending within certain limits, and decide upon solutions to corporate problems to submit to top management based on their own and their subordinates' ideas. Top managers receive information, define problems, formulate solutions, and decide whether to accept, amend, or reject proposals originating from lower levels. 

    Various analyses of the top-down and bottom-up aspects of Japanese decision-making processes have resulted in some confusion. One fundamental point that these models often fail to adequately convey is that all important decision are approved by the Japanese firm's top management. The only significant difference between top-down and bottom-up decisions is that the former are formulated at the top, while the latter are reached at the middle or bottom levels of management and sent up to the to for final approval. At what level a decision is formulated depends entirely on its content, and this is clearly defined in the practices and policies of the company. 

    Statements such as "the president or the board sets goals and policies," "well-timed decision in crisis situations are the sort of decisions top managers should make," and "goal-setting is the job of top managers" are found in Japanese management textbooks and are almost never disputed. Virtually all Japanese businesses have very clear rules concerning what types of decisions and what expenditures can be approved at specified management levels. In general, decisions involving corporate strategy, investment and crisis management are discussed and decided on at the top of the corporate hierarchy by the president and the board of directors.

    Examples of Decision at Different Levels

    One example of a top-level decision involves a certain company's resolution to expand its production capacity. A tentative policy decision was arrived at following discussions between middle and upper management based on long- term objectives, which had been set by the board of directors. The next step to be taken was to determine how this expansion of production capacity would be financed. To aid him in making this decision, the president turned to his finance department for recommendations. Members of the finance department discussed the question and drew on the advice of banks and underwriters outside the firm. This information was then presented to top management who weighed the issues and made further recommendations. Finally, the actual decision was made by the president. A decision of this magnitude involves some discussion and the reaching of a consensus, but is essentially a top-level matter decided by the president or top management. 

    An example of middle management formulating a company's final decision, is the case of a firm that found itself at a disadvantage in export markets because of a major product's inappropriate specifications. Relevant information was quickly gathered and analyzed by middle managers involved in exports and transmitted to senior management. The middle managers then discussed the problem among themselves and concluded that it could only be solved by remodeling parts of the production plant Because such a move would require a substantial expenditure, they submitted a proposal to the president. The president found the middle managers' case convincing, and quickly decided to approve the necessary expenditure. Only a relatively small number of managers at the middle and top of the company were involved in this decision. 

    The system for formulating decisions at the lower or middle levels of Japanese companies involves the preparation and circulation of a ringi-sho, or roughly a "project proposal." Under this system, after informal discussion of a proposal, which may involve various levels of management and other employees, an individual or group within a section takes the initiative by writing it up in ringi-sho form. The proposal is then circulated among interested parties, usually accompanied by a verbal explanation by one or more members of middle management. After careful discussion among all the interested parties, various modifications are proposed. When all parties reach a consensus, the appropriate persons affix their seals to the ringi-sho and it is sent to those responsible for making the final decision. 

    For a proposal involving an expenditure that must be approved by a director, the pattern of circulation for a ringi-sho would be as follows: after some preliminary discussion the ringi-sho is prepared by the division making the request. The ringi-sho is then transferred to the company's administrative section, which is responsible for processing and routing these proposals. Next it is forwarded to the administrative sections of the divisions concerned, and, after revisions and approval, it is submitted to the board of directors. After the directors approve and affix their seals to the proposal, it is returned to the company's administrative section, and then to the division originating the request for implementation, after possible modification in accordance with management's wishes. 

    As these examples indicate, the decision-making structure of Japanese firms is quite similar to that of Western firms. The most notable difference is that Japanese corporations possess a specific structure for generating problem-solving proposals at the lower and middle levels of management. The ringi-sho system allows the section or bureau closest to the problem to devise solutions on its own without usurping management's overall control. This structure would be ineffective, however, without the willingness of employees and managers at every level to consider the company's problems and devise solutions. 

    Another aspect of decision making that is perhaps less well known is that employees and managers, in addition to their normal full-time duties, often make voluntary commitments of their time of informal problem-solving groups. Top managers in Japanese companies sometimes assign managers and employees from various departments to project teams, the aim of which is to solve problems that concern them. Moreover, when middle- or lower- level manager spots a problem that concerns more than his section, in addition to informing his superiors and the sections concerned, he will often take the initiative to assemble an informal project team. These teams, which usually consist of the heads of the sections concerned or their representatives, sometimes meet after hours or in informal settings. When they reach consensus, a ringi-sho listing the informal project team as the originator is sent up for approval.

    The Role of Middle Management

    The successful operation of the information-channel and decision-making structures described hinges to a large extent on the role of Japanese middle management. It is the middle managers who route information, encourage their subordinates to prepare problem-solving proposals, and compile or refine these proposals in the form of ringi-sho. Top management relies on middle management to supply specialized knowledge and to maintain most of the company's contact with other companies and organizations. The Japanese middle manager is crucial to the smooth operation of the Japanese firm, and his role is significantly different from that of his Western counterpart. 

    The average Japanese middle manager has worked in his company for 15 to 20 years and is only beginning to enjoy rapid increases in wages and responsibilities. He knows his company, superiors, peers, and subordinates very well. Such a manager holds a post between section head and department head and has access to most of the company's information resources. He is expected to know who is interested in or affected by the information he may come across and is responsible for routing it to all those concerned or involved. 

    Middle managers are closely involved in the formulation and writing of ringi-sho. They are the immediate superiors to whom employees with suggestions come, and they know which other section and bureaus should be involved in discussions. When a proposal is agreed upon, a middle manager draws on his experience to prepare the ringi-sho, it is returned to the middle manager, who must renegotiate with all parties concerned and send around a revised version. 

    His experience, personal contacts at all level s of the company, and quick access to hard data make the middle manager a trusted aide to top managers, and the recommendations of middle managers on ringi-sho are treated with confidence and respect. With the data and human resources they are able to draw on when researching and formulating proposals, middle managers play a crucial role in making or breaking a given ringi-sho. While the final decision- making authority is vested in upper management, the recommendations off middle management often provide the basis for these decision. 

    When top management makes a decision independently and only informs the middle managers later, the middle managers must take the time to explain it to their subordinates, persuade them to cooperate willingly, and coordinate the execution of the decision with other sections or departments. 

    The middle manager is the link between top management and lower management and employees. In the Japanese social context this connection is far more than a link in the chain of command. Like middle managers in other countries, the Japanese middle manager must respond to the questions, complaints, and suggestions of his subordinates while at the same time following the orders of his superiors. When the views of his superiors clash with those of his subordinates, he must achieve what is described in Japanese as iken no chosei or an "adjustment of opinions." In practical terms this means that the middle manager must soothe employees' damaged pride at not being consulted or at having their opinions overruled, convince them of the correctness of their superiors' decision, and elicit their willing efforts in successfully executing the new policy. If he fails to achieve this, he must at least let the employees know that he is sympathetic to their feelings and request them to bear with the policy even if they do not agree with it. Of course, if employee objections are extreme or well founded, the middle manager must return to top management to explain the problem and perhaps try to obtain a modification of the decision. 

    In situations involving an adjustment of opinions, the trust the Japanese middle manager has earned from his subordinates and his ability to articulate arguments in a convincing way become extremely important. Unlike his counterparts in U.S. and European firms, he has virtually no power to hire and fire but is required to work out compromise solutions. 

    The Japanese middle manager needs a significant stock of goodwill among those around him to succeed, and developing it is seen as a major part of his job. Goodwill and trust must, of course, be based on mutual interest and respect. Employees want able leaders who will train them for higher positions, while middle managers want able, loyal, and diligent subordinates. Thus, employment in Japan is not simply an exchange of work for wages. It is also the development of rewarding social bonds, the gaining of the respect of others, and the establishment of a sense of responsibility. 

    Managers develop goodwill and rapport in many ways, from attending parties with subordinates and taking an interest in their personal and other problems to participating in company-sponsored trips. The bonds of friendship and loyalty thus cultivated outside the workplace are considered to be of the utmost importance to effective administration, and the ability to develop these personal relationships is essential to advancement. Thus, in addition to objective performance standards, Japanese managers are evaluated on their ability to develop and utilize personal rapport and strong bonds of loyalty.

    A Broad Perspective

    One important factor underlying the Japanese corporate decision-making system is the preference of Japanese managers for analyzing problems from a broad perspective. This is a traditional corporate attitude, and today's top managers are now training middle managers in this analytic approach just as they were once trained themselves. 

    While its philosophical origins are a matter for scholarly research, in practical terms this preference begins with the employee's commitment to career-long employment with one firm. All new employees in most Japanese firms undergo orientation training programs usually lasting between one and two weeks. These programs are devoted to instructing employees of their company's position in the market and the larger business world and its long-term development goals. This approach encouraged employees to anticipate their future within the context of the firm's growth in a broad and long-term context, rather than focusing on rapid personal advancement. 

    By the time an employee rises to middle-management level, he will have experienced the broadening effects of job rotation through many divisions of the company and made w wide circle of friends throughout the organization. He will be very familiar with the system of extensive consultation and consensus decision making. Hence, it is not surprising that Japanese managers as a whole have a strong preference for viewing situations from a broad perspective. 

    In general terms, this approach to analysis may differ in some respects from that taken by many Western firms. In the West, careers are usually structured around specialties, and the ideal manager tends to be an individual who makes quick decisions based on accurate analyses of hard facts and who can generate profits every quarter. While Japanese managers respect the strong points of this business styles, they tend to prefer the broader knowledge and perspective a group lends decision making. They also prefer analyses based on a larger number of criteria, including social, political, and strategic factors and do not restrict themselves to quantitative analysis alone. Well deliberated and broadly accepted decisions are aimed for whenever possible, even if the process is slow, rather, than quick decisions, which are more likely to prove wrong or impracticable. Finally, Japanese managers prefer to consider the profit potential of a decision in the long as well as short term. 

    At the risk of perpetuating misleading stereotypes, one might say that American businesspeople view decision making as a discrete event, involving a few crucial facts and people and taking limited time. It is a hurdle to be cleared quickly and efficiently, without losing the momentum that will carry the company over the next one. The Japanese managers, however, tend to think of decision making as a subtle and complex process, involving many facts and a large group of people of varying importance and having a number of potential side effects that might turn out to be either highly rewarding or embarrassing years later. A decision might be likened to choosing a path leading from a clearing in the forest where it must be decided which paths might be open and where they may lead. The right direction, in this case, is more important than speed.

    Case Studies of Decision Making

    As the preceding comments have suggested, the Japanese approach to decision making has a number of advantages, including providing channels for bottom-up presentation of ideas and encouraging sense of participation among a broader base of employees, thus facilitating the implementation of proposals. In recent years, however, changes in the operating environment have necessitated the adoption of new approaches to many aspects of business. These changes have included the need, both overseas and in Japan, to delegate decision making to smaller business units, an increase in the amount of capital needed to expand operations and enter new fields, and a growing pressure for quick decision making to best take advantage of business opportunities. 

    One example of such changes in the operating climate stimulating an adaptation in procedure is found in the activities of a Japanese beverage manufacturer. This company's market segment was characterized by relatively undifferentiated products, slow growth in demand, and stable market shares, with the company's own share accounting for about 50% of total sales. 

    One of the smaller companies in the industry, which held a market share of approximately 20%, decided to alter the taste of its product significantly after extensive consumer testing and in-house discussion. The new product proved popular, and that company's share increased about 10 percentage points, thus reducing the shares of the leading manufacturer and other companies in the field. 

    This created considerable concern among the other manufacturers, who responded by introducing a variety of new beverage flavors. As products proliferated, however, manufacturers were faced with leftover inventories of less successful products. The need had emerged for a more efficient information network that would allow fine-tuning of product introductions, manufacturing, and distribution. 

    The leading company decided to invest in an advanced point-of-sale system linking several thousand stores that sold its product. This system was designed to provide on-line, real-time data on sales of the company's products and permit day-to-day adjustments in raw material procurement, production, and distribution. The introduction of this system enabled the company to monitor the performance of products on a daily basis and introduce new products with a minimal risk of overproduction. 

    This is an excellent example of a change in the operating environment stimulating a significant change in the company's decision-making process. By introducing advanced information systems to provide up-to-the-minute data for its decision-making processes, the need for human judgment and decision making regarding many aspects of procurement, production, and distribution was reduced. At the same time, however, the traditional system of decision making regarding product planning and selection was left intact; however, because the data available became considerable more current, the decision process was made faster. 

    Another example of evolution in the decision-making process among Japanese companies comes from a large multinational company with a network covering major markets around the world. This company found that as its operations grew increasingly global in scope, the traditional system of having most decisions reviewed extensively by the head office was too slow and cumbersome. 

    In response, the company began to delegate more authority to its overseas offices. The basic process of decision making was retained, but decision- making authority vested in overseas offices regarding the size of proposed projects was increased significantly. The results of this change stimulated a favorable response from customers almost immediately--they appreciated the considerable greater responsiveness to their requests and proposals and the greater confidence on the part of personnel. 

    The company recently introduced this system into its domestic operations, giving its larger domestic offices located outside of Tokyo increased decision- making authority. In addition, the company decided to reduce the number of major divisions within its headquarters from about 100 to only 30 and to introduce a system of interdivisional task forces for those projects and market sectors that required coordination of the activities of several major divisions. By reducing the number of operating groups, the resources available for investment in new areas by individual divisions was expanded and the authority for final approval of decisions concentrated, yielding greater speed and responsiveness. 

    Along with these organizational changes, the company also introduced a decision-making system that permits managers of departments (which make up the operating groups) to act as sponsors of ringi-sho after they have been thoroughly discussed and approved by middle management. Provided these proposals do not involve expenditure over a specified limit, final decisions can be made by the general managers of the operating groups. 

    For projects requiring investment over the specified limit, the ringi-sho passes to the general manager of the operating group. After his review and approval, the decision can be made by one of the three top decision-making groups or individuals: the management committee, comprising senior managing directors; the investment committee, comprising senior managing directors; the investment committee, consisting of the general managers of the operating groups; or the representative director who holds responsibility for that operating group. The position of representative director in Japanese companies is held by a member of the board who is empowered to represent the company on important matters, including major commitments of funds. In smaller companies, there is often only one representative director, and the title is equivalent to president. In large companies, the title of representative director may be held by several senior members of the board of directors. 

    As this example suggests, Japanese companies are adapting the traditional system of decision making while preserving the ringi-sho and process of bottom-up, consensus decision making; however, by making organizational changes, they are streamlining decision procedures. This, in turn, is making it possible for Japanese companies to respond more quickly to local conditions and proposals and requests from customers.

    Analyzing the Decision-Making Process

    Despite recent modifications made in response to changes in the business environment and the introduction of new information gathering and processing systems, corporate decision making remains more complex in Japan than in other nations. As noted previously, this is because decision- making power in Japanese firms is not concentrated in the hands of a few. While ultimate authority is vested in the top management, the power to make decisions is diffused throughout upper and middle management to a greater degree than it is in Western firms. 

    Overseas businesspeople unfamiliar with the organization and internal dynamics of Japanese firms are sometimes prone to stereotype them as mysterious monoliths, but this is neither an accurate nor informative stereotype. A somewhat more insightful observation is that Japanese firms are in fact very similar to Western firms in their decision-making processes and that differences are mainly a matter of degree. 

    To a great extent this is an accurate view, because similar hierarchical structures and functional divisions, among other frameworks, are used in both Japanese and Western firms. But even if differences in corporate structure are discounted, this view neglects the extremely important question of Japanese business style--the distinctive way ion which Japanese managers make these largely uniform corporate structures work. 

    In general terms, important decisions Involve the input of many sections of a company, even though final approval is left to top management. What distinguishes the Japanese system are the formalized structures for making proposals from below that employees at all levels can make use of. 

    To move beyond charts or models and truly comprehend Japanese corporate decision making, it is essential to understand the complex webs of informal communication and discussion that guide the process. Japanese managers prefer broad communication networks, and, wherever it is useful, they consult with a wide range of colleagues about issues. This takes time but can prevent costly misunderstandings. Japanese managers, particularly at the middle level, as leaders of their section or department, interpret and advocate policies from the broad perspective that considerable data affords them. This means that representatives of outside companies who wish to do business may have to meet a large number of middle managers and convince each one of them to accept their proposal. Also, because Japanese managers are generalists who have been encouraged to develop broad perspectives on business issues as well as highly practical business skills, they tend to consider the long-term benefit for their company when making deals as well as short-term profitability. 

    Dealing with managers under these conditions can be a frustrating experience. But this frustration can be relieved by learning about Japanese corporate decision making and considering how the company being approached will go about making a decision. This will vary according to the type of proposal being made--some decisions can be made by upper management quickly, but many will require talking to middle management and convincing them first. Analysis of the process, based on the generalizations discussed in this booklet and information generated firsthand, is essential for knowing what to expect when approaching Japanese companies.



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