ELEVEN Behind Japan’s Success – Peter F. Drucker on Nonprofits and the Public Sector

CHAPTER ELEVEN

Behind Japan’s Success

“I AM MORE AFRAID OF THE JAPANESE than I am of the Russians,” a young lawyer, partner in a leading law firm, said recently to me. “To be sure, the Russians are out to conquer the world. But their unity is imposed from the top and is unlikely to survive a challenge. The Japanese too are out to conquer us, and their unity comes from within. They act as one superconglomerate.” But this is myth rather than reality. The Japanese indeed have learned how to act in the world economy effectively and with national consensus behind their policies. But their unity is not the result of a “Japan Inc.,” of a monolith of thought and action. It is the result of something far more interesting and perhaps far more important: of policies aimed at using conflict, diversity, dissent to produce effective policy and effective action.

To any Japanese, “Japan Inc.” is a joke, and not a very funny one. He sees only cracks and not, as the foreigner does, a “monolith.” What he experiences in his daily life and work are tensions, pressures, and conflicts rather than “harmony.” There is, for instance, the intense, if not cutthroat competition between the major banks and between the major industrial groups. And almost every Japanese is himself involved personally every day in the bitter factional infighting which—rather than unity and cooperation—characterizes Japanese institutions: the unremitting guerilla warfare which each ministry wages against all other ministries; the factional sniping and bickering within the political parties and within the Cabinet, but also within each business and each university. Where the foreigner sees close cooperation between government and business, the Japanese businessman sees government attempts to meddle and to dictate, and a constant tug-of-war. “To be sure,” the chief executive officer of a big company remarks, “we pull at the same rope, but we pull in opposite directions.” Nor is government always successful in making industry work together and subordinate itself to what government sees as the national interest. Despite twenty years of continuous pressure, the supposedly all-powerful Ministry of International Trade and Industry (MITI) has, for instance, not gotten the major Japanese computer manufacturers to pool their efforts—something that Germany, France, and Britain have all accomplished.

One foreigner after another extols Japan’s uniquely harmonious industrial relations. But the Japanese public curses at the all-too-common wildcat strikes on the government-owned National Railways. It is only where the labor unions are exceedingly weak, that is, in the private sector, that labor relations are harmonious. There is no sign of “harmony” in the public sector, where (a legacy of the U.S. occupation) unions are strong. Indeed, Japanese labor leaders are inclined to point out, somewhat acidly, that Western firms without unions—IBM, for instance—tend to have exactly the same labor policies and the same “harmony” as “Japan Inc.,” so that the Japanese situation signifies management’s hostility to unions rather than the fabled “harmony.”

And yet—while “Japan Inc.” may be more myth than reality, Japan has developed habits of political behavior which make it singularly effective as a nation in economic policy and in international economic competition. One of these habits is thorough consideration of a proposed policy’s impact on the productivity of Japanese industry, on Japan’s competitive strength in the world markets, and on Japan’s balances of payment and of trade. This has become almost second nature with Japanese policy makers, whether in the ministries, in the Diet, or in business, and equally with analysts and critics in the popular newspapers or the university economics departments. The Japanese are far too conscious of their dependence on imports for the bulk of their energy and of their raw materials and for two fifths of their food to shrug off the external world or to push it out of their field of vision altogether, as American lawmakers, American government departments, and so many American economists are wont to do.

The Japanese do not go in for formal “productivity impact statements.” And its impact on competitive position and productivity is by no means the sole criterion in adopting or rejecting a proposed policy. Even if the most powerful government agency opposes a policy because of its deleterious impacts on Japan’s position in the world economy, the Japanese public or Japanese industry may yet embrace it—as they did in respect to the expansion of the Japanese automobile industry.

MITI, the powerful Ministry of International Trade and Industry has, since 1960 or 1961, steadily opposed expansion of the automobile industry—in large part because it views the private automobile as “self-indulgence” and as the opening wedge of the “consumer society” which a puritanical MITI abhors. There was also, at least in the early years, considerable skepticism about the ability of untried Japanese automobile manufacturers to compete against the likes of GM, Ford, Fiat, and Volkswagen. And there was, and is, great fear that a large automobile market in Japan will provoke irresistible demands to open Japan to foreign imports—the one thing MITI is determined to prevent. But MITI also held—and quite sincerely—that expansion of the automobile industry would have an adverse, indeed a deleterious, effect on Japan’s balance of trade, on its ability to earn its way in the world economy, and on its productivity altogether. The more successful the Japanese automobile industry, MITI economists argued, the worse the impacts on Japan. The automobile, they pointed out, requires the two raw materials that are in shortest supply in Japan: petroleum and iron ore. It also requires diversion of scarce resources, both of food-growing land and of capital, to highways and highway construction. What MITI wanted was massive investment to upgrade the railroads’ freight-handling capacity.

There are plenty of diehards around—and not only at MITI—who still maintain that to let the Japanese automobile industry expand was a serious mistake. The industry’s export earnings, the diehards will argue, are only a fraction of what the automobile costs Japan in foreign exchange for petroleum and iron ore imports, even with record automobile sales to North America and western Europe. A small part of the sums spent on highways would have given the Japanese railroads the freight-carrying capacity which the country needs and still lacks. Yet, though enormous amounts have been spent on roads, it has not been nearly enough to build an adequate highway system—thus resulting in trucks clogging the inadequate roads, in high transportation costs for Japanese industry, in unhealthy concentration of people and factories around a few already overcrowded port cities such as Tokyo, Yokohama, Nagoya, Osaka, and Fukuoka, and in growing air pollution.

MITI lost its fight against the automobile, despite its reputation as a kind of economic superman. It was defeated in part by the automobile industry, which forged ahead despite MITI’s disapproval. In large part MITI was defeated by the infatuation of “Nabesan,” the Japanese “man in the street” (and of his wife) with the motor car, despite its high costs, despite the lack of places to park, despite the traffic jams which make commuting a nightmare in every Japanese city, and despite air pollution, about which no one complains louder than “Nabe-san,” sitting in the driver’s seat.

But at least—and this is the point—the automobile’s impact on Japan’s productivity, competitive position, and balance of trade was seriously considered. And even the automobile company executives who fought MITI the hardest admit that it was the ministry’s duty to make sure that these impacts were taken seriously, no matter how popular “wheels” are with the Japanese consumer and voter.

The impact on Japan’s competitive position in the world economy is only one of the considerations Japanese leaders are expected to think through and weigh carefully before espousing a policy or taking a course of action. They are expected altogether to start out with the question: “What is good for the country?” rather than the question: “What is good for us, our institution, our members and constituents?”

In no other country are interest groups so well organized as in Japan, with its endless array of economic federations, industry associations, professional societies, trade groups, special interest “clubs,” guilds, and what-have-you. Each of these groups lobbies brazenly and openly uses its voting power and its money to advance its own selfish ends in ways that would have made a Tammany boss blush. Yet if it wants to be listened to and to have influence on the policy-making process, every group must start out in its thinking and in its deliberations with the national interest rather than with its own concerns. It is not expected to be “unselfish” and to advocate policies that might cost it money, power, or votes—Japan’s Confucian tradition rather distrusts self-sacrifice as unnatural. But the group is expected to fit what serves self-interest into a framework of national needs, national goals, national aspirations and values. Sometimes this is blatant hypocrisy, as when the Japanese physicians claim that the only thought behind their successful demand for near-total exemption from taxes is concern for the nation’s health. Still, the physicians pay lip service to the rule which demands that the question, “What is the national interest?” be asked first. That it fails to do even that and instead is forced by the very logic of trade unionism to assert that “What is good for labor is ipso facto good for the country,” is probably largely responsible for the Japanese union’s lack of political influence and public acceptance, despite the unions’ impressive numbers. And that, conversely, business management in Japan—or at least a substantial minority among business leaders—has for a hundred years subscribed to the rule that the national interest comes first, that indeed the rule was first formulated by one of the earliest of modern Japanese business leaders, the nineteenth-century entrepreneur, banker, and business philosopher Eiichi Shibuzawa (1840–1931), may also explain why business management is respectfully listened to whenever it discusses economic and social policies, even by the two fifths of the Japanese population who faithfully vote every time for avowedly Marxist and stridently anti-business parties and candidates.

The demand that they take responsibility for thinking through the policies which the national interest requires forces the leadership groups—and especially the business leaders—to lead. It demands that they take the initiative and formulate, propound, and advocate national policies before they become issues. Indeed, it forces the leadership groups to define what the proper issues are and should be.

In the West, and especially in the United States, the “interests”—such as the conventional “interests” in the economic sphere: business, labor, and the farmer—are expected to start out with their own concerns and their own needs and wants. This then means as a rule that they can rarely act at all in any matter that is general rather than sectional. They can only react. They cannot lead; they can only oppose what someone else proposes. For whenever a matter of general concern comes up, someone within the group is bound to fear being harmed, someone else will be opposed to doing anything at all, and a third will drag his feet. In Japan too, of course, any proposal is likely to run into opposition within any group. But the special interests and concerns of the members of the group which form the starting point for policy deliberations in the West are pushed aside in Japan until the national interest has been thought through. In the West, the individual, sectional, specific interests and concerns are the focus; in Japan, they are the qualifiers. The Western approach tends to lead to inaction—or to “another study”—until someone from the outside proposes a law or a regulation that can then be fought as “unacceptable.” But this is only rearguard action to prevent defeat or to contain damage and, even worse, the other side then determines what the issues are or should be. Yet, as the Japanese see clearly, to define the issue is the first duty of a leader.

But the Japanese approach also means that business—and the other leadership groups in society—are rarely “surprised.” It is their job, after all, to anticipate and to define the issues. This does not always work, of course. Both the bureaucracy and the business leaders of Japan were totally unprepared for the explosive emergence of the environmental issue ten years ago—even though by that time it had already erupted in the United States, so that there was plenty of warning. Today the leadership groups in Japan—the bureaucracy, business, labor, and academia—prefer to ignore the challenge of women moving into professional and managerial jobs; yet the movement is gathering momentum and is grounded in irreversible demographics. But whereas in the United States business, labor, government, and academia talked of lowering the mandatory retirement age at the very time when the growing power of the older people made first California and then the U.S. Congress enact laws postponing retirement or prohibiting mandatory retirement altogether, big business in Japan anticipated the issue. And although the costs are very high, Japan’s largest companies on their own and without any pressure from government, from labor, or from public opinion have raised the mandatory retirement age. “It’s what the country needs,” was the explanation.

The Western approach worked as long as national policy could effectively be formed through adversary proceedings and by balancing the conflicting reactions of large, well-established “blocs” or “interests”—the traditional economic policy triad of business, labor, and farmer. But with the fragmentation of politics in all Western countries where now small, single-cause zealots hold the swing vote and the balance of power, the traditional approach is clearly not adequate any longer. Thus the Japanese rule under which leadership groups, and especially those of the “interests,” derive their legitimacy and authority from their taking responsibility for the national interest, and from anticipation, definition, resolution of issues ahead of time, might better serve in a pluralist society.

The third of the Japanese habits of effective behavior also originated with the banker-entrepreneur-business philosopher Eiichi Shibuzawa, in the closing years of the nineteenth century: Leaders of major groups, including business, have a duty, so Shibuzawa taught, to understand the views, behavior, assumptions, expectations, and values of all other major groups, and an equal duty to make their own views, behavior, assumptions, expectations, and values in turn known and understood. This is not “public relations” in the Western sense. It is, rather, very “private” relations—relations between individuals; relations made not by speeches, pronouncements, press releases, but by the continuous interaction of responsible men in policy-making positions.

Irving Shapiro, the chairman and CEO of DuPont de Nemours, the world’s largest chemical company, was recently quoted in the American press for pointing out in a public speech that he was now being forced to devote four fifths of his time to “relations,” especially with individual policy makers in the Congress and in the Washington bureaucracy, and could only spend one fifth of his time on managing his company. The only thing that would have surprised a Japanese CEO in a business of comparable importance was the one fifth Mr. Shapiro has available to run the company which he heads; very few CEOs of large Japanese companies have any time available for managing their companies. All their time is spent on “relations.” And what time they have for the company is spent on “relations” too, rather than on “managing.” They keep control through thorough and careful attention to personnel decisions in the upper ranks and through meticulous financial and planning reports. But they do not “manage”—that is left to lower levels. The top people spend their time sitting, sipping a cup of green tea, listening, asking a few questions, then sitting, sipping a cup of green tea, listening, asking a few more questions. They sit with the people from their own industry. They sit with suppliers, with the trading company people, with the managements of subsidiaries. They sit with top people from other companies in their group—as, for instance, in the famous four-hour “luncheons” in which the presidents of all companies in the Mitsubishi group come together once a week. They sit with the people from the banks. They sit with the senior bureaucrats of the various ministries, and on half a dozen committees in each of half a dozen economic and industry federations. They sit with the people of their own company in an after-hours party in a Ginza bar. They sit and sit and sit.

In these sittings they do not necessarily discuss business—and surely not their own business. Indeed, to a Westerner the conversation at times appears quite pointless. It ranges far afield—or so it seems—from issues of economic policy to personal concerns, to the other fellow’s questions and his problems, to the topics of the day, to expectations for the future, and to reappraisal of lessons of the past. The aim is not to “solve” anything, but to establish mutual understanding. Then one knows where to go when there is a “problem”—and there is, of course, always one, sooner or later. Then one knows what the other person and his institution expect, can do and will do—but also what they cannot or will not do. And then, when either crisis or opportunity arrives, these immobile “sitters” suddenly act with amazing speed and decisiveness, and indeed ruthlessly. But also when the crisis comes, the others are ready to support, or equally, if they see the need, to oppose. For the purpose of all this sitting is not to like one another; not to agree with one another; not even primarily to trust one another: it is to know and understand one another and, above all, to know and understand where—and why—one does not like the other, does not agree, does not trust.

And finally, the effectiveness of the Japanese is based on their having learned that living together cannot be based on adversary relations, but must have a foundation in common interest and mutual trust.

Adversary relations in Japan have historically been fiercer, fought more violently and with less forgiveness or compassion than in the West. The popular movie Shogun does not exaggerate the violence of Japanese history, however much it may romanticize other aspects. Neither “Love thine enemy” nor “Turn the other cheek” is to be found in any of Japan’s creeds. Even nature is violent in Japan, a country of typhoons, volcanoes, and earthquakes. Indeed, Japanese convention dictates that relations be adversary—or at least be made to appear so—where the Westerner sees no need for feuding and recrimination when, for instance, a painter or another artist of old parted company with his teacher and established his own style or school. This tradition extends today to divorce, which has reached epidemic proportions in Japan and is approaching the California rate, especially among young, educated couples. An “amicable” divorce is apparently not considered proper; it must be made to look “adversary,” even if the couple parts by mutual consent and on reasonably good terms.

But all these are situations in which the relationship is dissolved for good. Where people or parties live together, let alone where they have to work together, the Japanese make sure that the relationship has at its core a mutuality of interest and a common concern. Then there can be conflict, disagreement, even combat; for then conflict, disagreement, and combat can still be confined and subsumed in a positive bond.

One of the main—though rarely voiced—reasons why the Japanese automobile companies are reluctant to build plants in the United States is their bafflement at management-union relations in the American automobile industry. They simply cannot understand them. “Our unions,” said a young Toyota engineer, an avowed “leftist” and “socialist” with strong pro-union leanings, “fight management. But yours fight the company. How can they not know that for anything to be good for the company’s employees it has to be good for the company? Where this is not taken for granted—and it’s completely obvious to every one of us—no Japanese could be a manager, but no Japanese could be an employee and subordinate either.”

One does not have to live and work with a competitor; hence competition tends to be ruthless between different companies in the same field and between different groups, e.g., between Sony and Panasonic or between Mitsui Bank and Fuji Bank. But whenever there has to be a continuing relationship with the opponent, common ground must be found. Then the question that always comes up first—the question indeed to which all these endless sittings and meetings between the leaders of different groups are largely devoted is: “What interests do we share?” or: “On what issues are we in agreement?” or: “What can we do together that will help both of us attain our respective goals?” And great care is then taken to avoid destruction or damage to the unity and common purpose.

Great care is also taken to see that there be no “final victory” over some group or interest with whom one has to live and work. For then to win the war means to lose the peace. Thus whenever groups or interests in Japan have to live together, both will be more concerned with making their conflict mutually productive than with winning—even though the same people in the same group will go all out for total victory and for unconditional surrender against an opponent with whom their group does not have to live and who therefore can (indeed, should) be destroyed.

These are rules and, like all rules of this kind, are ideals and normative rather than descriptive of what everybody does all the time. Every Japanese can point to dozens of cases where the rules were broken or disregarded, and with impunity. The rules are also not necessarily accepted by everybody as being right. Some of Japan’s most successful entrepreneurs and business builders—Honda, for instance, or Matsushita at Panasonic, or Sony—have shown scant respect for some of them. These successful leaders do not, for example, give a great deal of time and top management attention to outside relationships, and do not care much whether they are accepted in the “club” or not. They do not necessarily agree that putting the national interest first in one’s thinking and policies is the responsibility of the business leader; and they may even on occasion have been quite willing to inflict crushing defeats on opponents with whom they still have to live and work.

There is also a good deal of criticism within Japan—especially within business—of some of the rules, and grave doubt whether they are still fully appropriate to Japan’s needs. Can top management, for instance, devote practically all its time to outside relations or will it lose touch with the reality of its business at a time of rapid change in economics, markets, and technologies? And there is a good deal of grumbling to the effect that concern for finding common ground with other groups—especially for business finding common ground with government—has led to spineless appeasement and has only encouraged bureaucratic arrogance.

The rules, in other words, are similar to all other such rules in that they have weaknesses, limitations, shortcomings—and in that they do not apply universally and without exception. But they surely also have unique strengths and have been uniquely effective. What then is their essence, what is the “secret” of their success?

The most common answer, in Japan as well as in the West, is that these rules represent uniquely Japanese traditions and values. But it is surely not the whole answer, and is indeed largely the wrong answer. Of course, rules of social and political behavior are part of a culture and have to fit it, or at least be acceptable to it. And how the Japanese handle their policies, their rules, and their relations is very Japanese indeed. But the rules themselves represent a rather than the Japanese tradition. They represent a choice between widely different, but equally traditional, alternatives rather than historical continuity. Some of the rules, moreover, have no foundation whatever in Japanese tradition. The industrial harmony of Japan is usually attributed to history and traditional values. But the only historical tradition of relations between superior and subordinate in Japanese history is violence and open warfare. As late as the 1920s, that is, through the formative stage of modern Japanese industry, Japan had the world’s worst, most disruptive and most violent labor relations of any industrial country. And for the hundred and fifty years before modern Japan was born in the Meiji Restoration of 1867, relations between “bosses” and “workers”—between the lords and their military retainers, the Samurai, who were the “bosses,” and the peasants, who were the “workers”—meant at least one bloody peasant rebellion per year, more than two hundred during the period, which was then suppressed just as bloodily. “Government by assassination” rather than the building of relationships or the finding of common ground was still the rule for relationships between different groups in the 1930s. And it is not entirely coincidence that both student violence and terrorism began in Japan in the 1960s and took their most extreme form there; both are surely as much a “Japanese tradition” as the attempt to find common ground between opponents, and maybe more so.

Also these rules did not just evolve. They were strongly opposed when first propounded and considered quite unrealistic for a long time. The greatest figure in Japanese business history is not Eiichi Shibuzawa, who formulated the most important rules of behavior for today’s Japanese society. It is Yataro Iwasaki (1834–85), the founder and builder of Mitsubishi, who was to nineteenth-century Japan what J. P. Morgan, Andrew Carnegie, and John D. Rockefeller, Sr., combined were to the United States. And Iwasaki rejected out of hand Shibuzawa and his rules—whether the demand that business leadership take responsibility and initiative in respect to the national interest, or the demand that it build and nurture its relationships, or in particular the idea of finding common ground with opponents and of embedding conflict in a bond of common interest and unity. Shibuzawa was greatly respected. But his teachings had little influence with “practical men,” who were far more impressed by Iwasaki’s business success.

Whatever their roots in Japanese traditions, these rules became accepted and the approved behavior only after World War II. Then, when a defeated, humiliated, and almost destroyed Japan began painfully to rebuild, the question was asked: “What are the right rules for a complex modern society, and one that is embedded in a competitive world economy and dependent on it?” Only then did the answers which Shibuzawa had given sixty years earlier come to be seen as right and relevant.

Why and how this happened goes well beyond the scope of this essay, and the author is hardly qualified to answer the question. There was no one single leader, no great figure, to put Japan on a new path. Indeed, the historians will be as busy trying to explain what happened in the 1950s in Japan as they have been to explain what happened at the time of Meiji, eighty years earlier, when an equally humiliated and shocked Japan organized itself to become a modern nation and yet to remain profoundly Japanese in its culture. One might perhaps speculate that the shock of total defeat and the humiliation of being occupied by foreign troops—no foreign soldier ever before had landed on Japanese soil—created a willingness to try things that had never been tried before, even though powerful forces in Japan’s history had urged and advocated them. In respect to industrial relations, for instance, we know that there was no one single leader. Yet the strong need of Japanese workers, many of them homeless, many of them discharged veterans from a defeated army, many of them without employment of any kind, to find a “home” and a “community” was surely an important factor, as was the strong pressure by workers on management to protect them from the pressures of the American occupation and its “liberal” labor experts to join left-wing unions and to become a “revolutionary” force. The conservatism of the Japanese worker in the late forties and early fifties, but also the need of the Japanese worker to have a little security when his emotional, his economic, and in many cases his family ties had been severed, undoubtedly played a large part in the course Japan then took. But why Japanese management found itself able to respond to these needs and in an effective form, no one yet knows.

Indeed, the Japanese “rules” could just as well be explained with purely “Western” teachings and traditions. That business leadership, especially in big business, needs to take active responsibility and initiative for the national interest and must start out with what is good for the nation rather than what is good for business, was for instance preached in the West around 1900 by such totally un-Japanese leaders as Walter Rathenau in Germany, and Mark Hanna in the United States. That an enemy that cannot be destroyed must be made into a friend and must never be “defeated” and humiliated was first taught around 1530 by the first modern political thinker, Niccolò Machiavelli. And Japan’s embedding of conflict in a core of unity is also Machiavelli—the Machiavelli of The Discourses rather than that of The Prince. Four hundred years later, in the 1920s, Mary Parker Follett, most proper of proper Bostonians, concluded again that conflicts must be made constructive by being embedded in a core of common purpose and common vision. All these Westerners—Rathenau and Hanna, Machiavelli and Follett—asked the same questions: How can a complex modern society, a pluralist society of interdependence, a society in rapid change, be effectively governed? How can it make productive its tensions and conflicts? How can it evolve unity of action out of diversity of interests, values, and institutions? And how, as Machiavelli asked, can it derive strength and cohesion from being surrounded by, and dependent on, a multitude of competing powers?

And why then did the West, and especially the United States, reject this tradition while Japan accepted it? Again the scope of this question greatly exceeds this essay and the expertise of its author. But one might speculate that the Great Depression and its trauma had something to do with it. For before it, there was indeed leadership that subscribed to these values. Both Herbert Hoover in the United States and Heinrich Bruening, the last Chancellor of a democratic Germany, represented a tradition that saw in the common interest of all groups the catalyst of national and social unity. It was their defeat by the Great Depression—for instance, in Franklin D. Roosevelt’s New Deal—which ushered, in a belief in “countervailing power,” in adversary relations, as leading to a compromise solution acceptable to all because it does not offend any one group too much, and therefore unites them on the least common denominator. And surely the victory of economics in the West, and especially in the United States, with their apotheosis of national government as omnipotent, omniscient, and able to control the national economy almost irrespective of what happens outside, had something to do with our forgetting the old adage of American politics that “Politics (and economic disputes) stop at the water’s edge.” But this is speculation.

What is fact is that the “secret” behind Japan’s achievement is not a mysterious “Japan Inc.,” which belongs in a Hollywood Grade B movie anyhow. It is perhaps not even the particular values of behavior that Japan has been practicing. It may be that Japan, so far alone among major industrial countries, has asked the right questions: What are the rules for a complex modern society, a society of pluralism and large organizations which have to coexist in competition and antagonism, a society that is embedded in a competitive and rapidly changing world and increasingly dependent on it?


First published in Harvard Business Review, January–February 1981.