Why Japanese companies do so many different things
This insightful piece explores why Japanese companies like Toto or Kyocera excel across vastly different industries, from toilets to semiconductor components. It delves into economic theories of 'complementary practices' and 'organizational bundles' to explain this unique corporate structure. The article argues that Japan's distinct historical and social context forged a 'J-firm' model focused on long-term survival and deep internal expertise, fundamentally different from the shareholder-driven Western 'H-firm'.
The Lowdown
Japanese companies often exhibit a striking degree of diversification, operating successfully in seemingly unrelated fields. The article seeks to unravel this phenomenon, using the surprising example of Toto, a world leader in toilets and bidets, whose current profitability largely stems from its advanced ceramics division producing electrostatic chucks for memory chip manufacturing. This unusual corporate structure is not an anomaly but a defining characteristic of many Japanese firms.
- Toto's Transformation: Initially a toilet company, Toto's advanced ceramics division, specializing in electrostatic chucks for semiconductors, now drives the majority of its operating profit, fueled by exploding demand for AI-related memory chips.
- Widespread Diversification: This pattern is common across Japan, with companies like Kyocera (ceramics to smartphones), Sumitomo Osaka Cement (cement to optics), Yamaha (musical instruments to motorcycles), and Hitachi (nuclear reactors to IT) all demonstrating extensive, high-quality diversification.
- Contrast with Western Models: Unlike the specialized American firm or the large, state-backed South Korean chaebol, Japanese companies are uniquely diversified, often excelling in niche, high-precision manufacturing.
- The Theory of Complementary Practices: Economists Milgrom and Roberts introduced the concept of 'bundles' of complementary practices, where adopting one practice makes others more valuable. This explains why firms operate with coherent, interdependent organizational systems (e.g., Fordist vs. post-Fordist manufacturing).
- The 'J-Firm' Bundle: Masahiko Aoki identified the distinct 'J-firm' bundle: lifetime employment, internal unions, seniority-based pay, broad employee training, horizontal coordination (like Toyota's andon cord), and insulation from external financial pressure (e.g., shareholder demands).
- Historical Roots: The 'J-firm' model solidified during Japan's '1940 system' of total war mobilization, which prioritized production and employee retention, and was later reinforced by the post-WWII 'Reverse Course'.
- Strengths and Weaknesses: The J-firm excels at 'catch-up growth' and incremental refinement, producing world-class quality in fields like automotive and precision materials. However, its consensus-driven nature makes it less suited for radical innovation or sharp discontinuities, as seen in Sony's failure to invent the smartphone compared to Apple.
- Resistance to Change: The self-reinforcing nature of these bundles makes them highly resistant to piecemeal reform. Attempts to introduce individual performance-based pay at Fujitsu, for instance, failed because it clashed with the overall J-firm structure.
Ultimately, the Japanese corporate model, while seemingly antiquated by Western standards and less effective in periods of radical disruption, remains a robust and uniquely effective system. It fosters deep, irreplaceable process knowledge and specialization in areas critical to the global economy, proving that diverse organizational structures can each offer distinct advantages when operating within their coherent 'bundles'.