What Japanese companies must do to create a second Economic Miracle

Once vaunted for their efficiency and innovation, Japanese companies today have lost their way. They appear to be in an uncharacteristic funk, moving sideways, like the country’s economy. Readers will learn what steps Japanese managers can take to restore their companies’ lost luster.

In the late 1940’s, when I was a kid, I recall that my Aunt Agnes gave me a set of small cars. They were made in Japan and lasted for about five minutes until they fell apart.  The incident was emblematic of the widely held feeling at the time that equated “Made in Japan” with junk.

Around the world that perception soon began to change, when the “Japanese Miracle” – so-called because many believed it was a miracle that Japan could recover so quickly from the devastation the war had wrought – began to take shape, in 1950. By the late 1980’s, Japan had grown to become the second-largest economy in the world, in large part due to its ability to produce high quality products, including automobiles.  There was even serious talk that Japan might surpass the United States as the world’s largest economy. Even I had come to believe in the miracle; I had gone from hating my junky toy cars to loving my four, real Japanese cars because of their high quality.

But the Japanese Miracle ended abruptly in 1990 and the era of the “Lost Decades” began.   Japan’s economic bubble burst and  land values declined, stock prices fell, loans went unpaid, and banks were bankrupted.  Unemployment reached a new high.  National debt grew.  Japanese governmental bonds were downgraded.

Then, just as Japan’s economic picture began to improve, in the first years of the new millennium, the subprime crisis in the United States in the mid-2000’s impacted Japan.  At about the same time, China surpassed Japan as the world’s second-largest economy.  And if that wasn’t enough, Japan was rocked by a major earthquake in 2011. The resulting tsunami resulted in a level of destruction not seen since the bombings of World War II.


The need to stimulate innovation

These days, Japan is at a crossroads.  It needs to decide how it can become a global economic powerhouse and still maintain the essence of its culture.  This article suggests a solution, namely that a national focus on innovation  — or becoming significantly more innovative – could create a second Japanese Miracle.

But, in a globalized, ultra-competitive business environment, in which other countries can produce quality products, one question must be asked – and answered: How can Japan restore its competitive advantage?

The need for Japan to become more innovative was highlighted in a 2011 survey of Japanese executives.   Paramount among the concerns about their country’s future, was the need to improve every facet of how new products and services were developed. [1]

Japanese executives have good reasons to be concerned about innovation.   Although their country has excelled at reverse engineering and making incremental improvements to existing products, Japan’s capacity to create new products and services is weak, so much that this glaring inability has become an obstacle to Japan’s long-term success.  The country is the third-largest economy in the world, yet it ranks only 25th on the INSEAD’s 2012 Global Innovation Index.  [2]

One might ask why a country that is so good at devising creative ways to improve existing product is so poor when it comes to creating new products and services.  The answer to that question, like so many things in Japan, is found in its culture.

This article will focus on a key aspect of Japanese culture, “harmony.”  As the article will explain, this harmony is a double-edged sword. While valuing harmony has enabled the successful quality- improvement movement, it has also greatly slowed the development of new products and services.

As the article will also describe, Japanese companies can unleash their innovative potential within the cultural framework of harmony.  Executives in other countries should keep in mind that they too can use the same approach to re-ignite innovation in their countries.


The importance of harmony

Harmony (wa) is a very important aspect of Japan’s culture.  Harmony both among individuals and within organizations has its roots in harmony with nature.  The importance of the Japanese being in harmony with nature is understandable, given the history of Japan.

About 13,000 years ago, at the end of the Ice Age, the ocean level rose and what is now Japan was separated from the mainland of Asia.  The inhabitants of the islands that became Japan–probably no more than several thousand people–were stranded.  Fortunately for them nature endowed their new islands with everything needed to survive. For thousands of years, this rich land supported a growing, homogenous population that lived very close to nature.  In today’s Japan, the importance of harmony with nature is reflected in folklore, sayings, rituals, religions and Japanese gardens.


Harmony and decision-making processes

To understand the impact of harmony on the Japanese decision-making process we should go back to the end of World War II.    Entire cities were destroyed during the war, as was much of the Japan’s industrial base.  Then came the Japanese Miracle, which catapulted Japan into its place as the second-largest economy in the world.

The key contribution to the Japanese Miracle came in 1950 when the Japanese Union of Scientists and Engineers had the foresight to invite an American statistics professor, W. Edwards Deming, to provide classes to industry leaders, managers and engineers on quality control techniques.  Deming convinced Japanese corporate leaders that the way for Japan to grow its economy and to compete in the global marketplace was to produce high-quality products.

The techniques Deming introduced were very compatible with the cultural value of harmony.  For example, Deming had 14 key principles for quality improvement.  One principle is to “Break down the barriers between departments.”  Deming’s perspective on teamwork, and his other teachings on quality improvement, fit perfectly with Japan’s cultural values of harmony and consensus.

The nemawashi-ringi decision process

Decision-making in Japan is different than it is in the West.  Americans in particular use a top-down decision approach.  Upper managers make the decisions, and employees are expected to execute it. There is typically little if any attempt to reach a consensus among those affected by the decision.

In contrast, Japanese decision-making is based on harmony and consensus.  The process begins with nemawashi, a term that is itself is related to nature and means to dig around the roots of a tree to prepare it for being transplanted. (Literally, ne meaning roots, and mawasu, meaning go around.)  In practice, it means that the groundwork for a new proposal must be carefully prepared in advance if it is expected to take root, survive and prosper.  This preparation includes talking with those affected by a new proposal, getting their reaction and feedback, and modifying the proposal accordingly.

The nemawashi decision-making process is diffuse, recursive, nonlinear, and multi-step. The steps listed below present a more structured picture of the process than what actually occurs, because in fact the process is very informal.


1. Middle managers are the key players in the nemawashi process.  Typically, a senior manager will “suggest” to a middle manager that they work on a specific problem.

2. The middle manager seeks the opinions of relevant personnel in the organization regarding possible solutions to the problem.  Those consulted may be top management, their surrogates, lower management, workers, and others in the organization that affect, or are affected by, the problem or proposed solution.

3. The coordinator assembles and assesses the information gathered in Step 2.  In an iterative process of revision and feedback, a plan of action takes shape that is acceptable to most, if not all, interested parties.


4. The coordinator prepares and circulates an informal document describing the problem and the proposed solution.  Through a process of negotiation and/or persuasion, agreement is sought from parties that affect, or are affected by, the proposal. If agreement is not obtained, the plan is revised and the informal approval process begins anew.


5. Once there is informal approval, the coordinator prepares a formal proposal, called a ringi-sho.  The formal proposal is circulated among parties affected by the proposal, including top management.  Each party approves the document by affixing a personal seal.  If the document does not gather a sufficient number of seals, especially from top management, the plan is abandoned or sent back for further consideration.

Advantages of nemawashiringi

The nemawashiringi process is grounded in the need to maintain harmony within the organization while at the same time make sound decisions.  Another significant advantage of the nemawashiringi process is that once a proposal is approved it can be rapidly implemented because all the relevant parties are on board. This is in contrast to Western processes, which can encounter obstacles during implementation, even from parts of their own organization.

Disadvantages of nemawashiringi

The nemawashiringi decision making process has been criticized on three counts:

It is slow.  It may take months, perhaps years, for an idea to work its way through the nemawashi-ringi process and be implemented.    In the past, this did not pose much of a problem.  But in today’s rapidly changing global environment there are increasing demands on companies to make faster decisions just to maintain their competitive position.  Although there have been some recent attempts to streamline the product-development and decision-making processes in some Japanese companies, it is too early to tell whether they are succeeding. [3]

It is focused on improving existing products rather than developing new products.  Japan has long been noted for having the ability to improve existing products.  That is an important competency, but in the current global environment it is not sufficient to ensure long-term success.

It suppresses innovative ideas.  The nemawashi-ringi process can allow good ideas to wither and die.  This harmony-based process that requires agreement by multiple parties makes innovative ideas vulnerable to being “shot down” by anyone who disagrees with the proposal. This means individuals or groups may feel intimidated about presenting new ideas for fear of failure or losing face.


Criteria for an innovative decision-making process

The challenge is to find a new way to achieve a quantum jump in innovation in Japanese firms, but in a way that is compatible with the Japanese culture of harmony and consensus building.   Any solution to this dilemma should have three components.

The solution should promote harmony with nature and with others

Throughout the ages, nature has taught the Japanese an important lesson:  Nature does not behave in linear ways.  Through a new branch of science called complexity (nonlinear) science, we in the West are just beginning to understand that nature evolves in nonlinear ways.  Historically, the West has viewed the world as being linear, with any nonlinearity thought of as an aberration.  [4]

The difference between linear and nonlinear perspectives is reflected in the decision-making processes used in the West and Japan.  The Western world’s decision-making process is linear and rational, and reflects the influence in the West of the ancient Greek philosophers and their logic.

On the other hand, the solution to the innovation problem proposed in this article – for Japanese companies — is a natural, nonlinear process that is congruent with the desire for harmony with nature and with others.

The solution should foster knowledge creation

The field of complexity science has illuminated that nature, in addition to being nonlinear, is self-organizing.  Self-organization, also known as spontaneous order, is found in biological, physical, economic, and social systems.  Self-organized groups are important because they are a source of knowledge creation, which in turn is the key to innovation in organizations.

To paraphrase the American humorist Mark Twain, “Everyone talks about knowledge creation, but nobody does anything about it.”  But wait!  Someone has!  That person is Ikujiro Nonaka, who is generally considered the world’s leading authority on knowledge creation.  Professor Nonaka was born and raised in Japan, worked in industry in Japan, earned advanced degrees in the United States, and then became a professor and consultant in the United States and Japan.  His theories on knowledge creation are popular all over the world.

It is Professors Nonaka’s work on the concept of “ba”—a shared space for knowledge creation—that in my opinion illuminates the potential for self-organization in a business organization whether in Japan or elsewhere.  [5]

While this article makes the case that it is the self-organizing ba that will form the basis of knowledge creation and innovation in corporations, simply forming a ba is not enough.  The ba must utilize the decision process that will enable it to be effective. The process is described below.

The solution should fit a centralized, hierarchical organization

At first glance, the notion that employees should freely self-organize in the workplace does not seem to be a fit for the hierarchical structure of most business organizations.  Yet it is self-organized groups that provide the promise of creating new knowledge, the key ingredient of innovation.  And of course, innovation, especially for Japan at this time, is critical to the long- term survival of companies and Japan itself.

The challenge is to find a way for the typical hierarchical organization to exploit the knowledge creation potential of self-organized groups.  Here are three suggested steps that will allow this to happen.

Step 1: Top management should encourage the formation of self-organized groups. Self-organized groups are the engines of innovation.  Top management should set expectations that for middle managers to form self-organized groups (ba) around an innovative idea.  Top managers need not be concerned that the self-organized groups would go off on a tangent.  This is because the self-organized groups would conduct a preliminary evaluation of their own proposal using the process described below. This would ensure that the self-organized group is grounded in reality, as well as minimize the possibility of a failure, something that would cause someone to lose face.

Top management should also provide the support needed for the self-organized groups.  This support may include secretarial services, time away from regular jobs, and a collaborative infrastructure that would allow self-organized groups to form and operate in a seamless way with the growing number of Japanese entities around the world.

Bottom line? Whether an organization succeeds in significantly increasing innovation depends on top management’s enthusiastic support of self-organized groups.

Step 2:  Self-organized groups would form spontaneously. Middle mangers would form, on a spontaneous basis, a self-organized group.  A group might form as a result of work relationships, among friends who attended the same university, social or recreational groups within the company, or contacts with others in the same corporate family.  A group would form when individuals discover a common problem or an opportunity to develop a new product or service.  The importance of “opportunity” cannot be overstated.  Although “solving problems” is important, it is “finding opportunities” that will be the deciding factor in whether innovation processes will truly succeed. (This is described more fully below, in #1.)

Step 3:  Rapid evaluation of ideas.  The members of the ba would then evaluate their own proposal using a streamlined variation of the Strategic Assumption Surfacing and Testing approach developed by Richard Mason and Ian Mitroff.  [6] The streamlined version is called Rapid Evaluation of Ideas (REI), and it is described below.  The REI process has been developed through 20 years of research, consulting and use in graduate strategy classes. [7] A key aspect of this process is that it stimulates the generation and sharing of tacit and explicit knowledge that Professor Nonaka and his colleagues say are critical to knowledge creation and innovation.  [5, 8]


How to implement the Rapid Evaluation of Ideas process

The decision-making process described below was specifically designed to be used by self-organized groups, though it can also be used with other kinds of groups and committees.  It works best with a group leader or facilitator.  It can be used in face-to-face settings or virtually, using collaborative software.  The Rapid Evaluation of Ideas process is:

1. The group formulates a tentative proposal focused on a specific opportunity or problem. The self-organized group formulates a statement such as “Our company should do X.”  The statement should be short and contain just one idea.  If there is more than one proposed idea, each should be evaluated separately.  It is called a tentative proposal because it will probably be modified as additional knowledge about the topic develops during discussions with affected individuals and groups.

2. The group identifies stakeholders.  Stakeholders are individuals or groups who affect (or are affected by) the tentative proposal.

3. The group prepares a list of assumptions for each stakeholder.  The wording of each assumption is important—“What do we need to assume about Stakeholder “X” in order for the tentative proposal to be successful?”  Assumption statements should be short, easy to understand and contain just one idea.  A word of caution: While the group will want to discuss assumptions as they are listed, discussion at this time is basically a waste of time because putting it off until later ensures that it will be more productive.

4. The group examines each assumption and assigns a number to reflect its importance. Individual assumptions are rated on their Importance on a scale of 1 to 10 (10 being high).  There are a number of manual, paper and pencil, or electronic methods of generating the rating, such as using collaborative software.  In Japan, it is important to have anonymous ratings of the assumptions because of the belief in harmony, politeness, and concerns about not losing face.

5. The group rates assumptions on Certainty.  As was the case with the ratings on Importance, individual assumptions are rated on Certainty on a scale of 1 to 10 (10 being high).  There are a number of manual, paper and pencil, or electronic methods of tabulating the rating, such as using collaborative software.  In a group meeting, anonymous ratings of the assumptions on Certainty are the fastest if collaborative software is used.  It is important for the facilitator to suppress discussion of ratings of individual assumptions at this time—discussion will come later.

6. The group plots assumptions on a two dimensional scale.  At this point, there will be a list of assumptions, with each having been rated on Importance and Certainty.  Each assumption is numbered and the number is then plotted on a two dimensional matrix.

7. The group analyzes the plot and identifies the next steps.  The group particularly focuses on those assumptions that were rated high on Importance and low on Certainty.

8. The group collects additional information.  In most cases there will be the need to gather information regarding those assumptions that were rated high on Importance and low on Certainty.  Usually one of the group members will volunteer to gather information regarding specific assumptions.  In Japan, it is important to gather information via personal contact with knowledgeable individuals who affect, or are affected by, the proposed idea.  Other sources of information include telephone calls, meetings with other groups in the company or the corporate family, Internet research, review of statistical information, customer surveys, social networking, financial analysis, or other appropriate means.  During this process additional sharing of explicit and tacit information occurs, which Nonaka says is important for knowledge creation.

9. After a week or so of gathering information, the group members meet again. The group discusses the new information that group members have obtained through personal conversations or other research.

10. The group determines the next steps.  The group discusses the findings of the information- gathering activities.  The discussion usually generates new insights into the proposed action because new knowledge, both tacit and explicit,  was illuminated in the previous steps. The group then decides on the next step, which could be any one of the following:

  • To modify the assumptions (usually adding new ones) and repeating the steps starting with #4 above.
  • To modify the tentative proposal and repeat the steps starting with #2 above.  (This is a typical outcome because of new tacit and explicit information that will come to light during the information-gathering step.)
  • To discard the tentative proposal entirely.
  • To prepare a formal proposal for the nemawashiringi process.


The future

Japan needs a second Japanese Miracle if it is to survive and prosper in today’s dynamic global environment.  The good news is that a recent survey of Japanese executives indicated that they are aware of this need to once again adapt to a changing environment. [1] The bad news is that the decision-making process used in Japanese companies is not well suited to generating the innovative products and services that Japan needs to compete globally in the future.  The traditional nemawashi-ringi decision process is slow, and tends to focus on improving existing products rather than on developing entirely new products or services.

One hopes that Japanese companies will modify their existing decision-making process to stimulate innovation and at the same time capitalize on the traditional Japanese values of harmony and consensus.



[1]  Japan Management Association, Management News, 40: 2012  http://www.jma.or.jp/en/ Accessed April 10, 2012.

[2] INSEAD, 2012.  Global Innovation Index. http://www.globalinnovationindex.org/gii/main/fullreport/index.html, Accessed August 23, 2012.

[3] Hammerton, R. (2012).  Akio Toyoda slices through Toyota bureaucracy to put excitement first. http://www.goauto.com.au/mellor/mellor.nsf/story2/E3510866FFF951D4CA2579DC000AF7AC.  April 10.  Accessed April 22, 2012.

[4]  Campbell, D., J. Crutchfield, D. Farmer, and E. Jen. (1985). Experimental mathematics: The role of computation in nonlinear science. Communications of the ACM, 28, 374.

[5]  Nonaka, I., and N. Konno. (1998). The concept of “ba”: Building a foundation for knowledge creation. California Management Review, 40 (Spring), 40.

[6]  Mason, R. O., and I. I. Mitroff. (1981). Challenging Strategic Planning Assumptions. New York: Wiley.

[7]  O’Gorman, D. (1990). Hanson Engineers, Incorporated. Annual Advances in Business Cases.  Midwest Society for Case Research.

[8]  Nonaka, I., and H. Takeuchi. (1995). The Knowledge-Creating Company. New York: Oxford University Press.