Tuesday, March 15, 2011

Management Implications of the Japanese Catastrophe

My undergraduate students were not yet born when the American media played up the supposedly inexorable Japanese economic power.  When, in the 1970s, Toyota began to out-shine GM, and American television manufacturers failed to keep pace with Sony and Sanyo, many in the United States attributed Japan's success to culture.  A foundational work on Japanese culture is Ruth Benedict's The Chrysanthemum and the Sword, which she wrote during World War II at the behest of the United States government.  The Japanese are more collectivist and team-oriented than Americans are.  They tend to put greater weight on loyalty and, like other Asian cultures, on saving face.  Benedict identified indebtedness to others, on and giri, as fundamental to the Japanese ethical make up.  While Americans base their ethics on guilt, Benedict claimed, the Japanese base theirs on shame.  Shame leads to collectivism.

Because of the numerous cultural differences between the Japanese and Americans, many argued that the Japanese firms were successful because of Japanese culture. According to this argument, management skills are rooted in culture. Toyota is successful because the Confucian philosophy underlying much of Japanese culture supports participation in family-like units such as corporations. The strong cultures of Japanese firms result from on and the Japanese's collectivist orientation.  Their firms are better managed because of cultural characteristics that cannot be duplicated elsewhere.

But many Japanese firms are badly managed.
Firms are well managed if rationality prevails over politics.  Cultural differences do not guarantee success or failure. Rather, the brokerage of interests within firms and within societies frequently inhibits optimal courses of action.  Experimentation and imagination are the sources of progress, and these threaten the status quo.  The Japanese excel with respect to management systems, but the Americans have been the most innovative nation.  Both approaches, as well as many others, can be successful if and only if trial and error can prevail over custom and political power.

Today we see a tragic catastrophe in Japan.  The Wall Street Journal reports that Tokyo Electric Power Company has mismanaged not only the nuclear reactors that have caused the potential radiation disaster but also the staged blackouts that it is implementing to manage the loss of power.  Radiation fallout has reached Tokyo, although reports are that the levels, though earlier more than twice as high as normal, are not dangerous and are falling.  Nevertheless, the management of the nuclear plants improperly ignored safety standards, resulting in the release of radiation.  Is culture to blame for the power outages and radiation threat as well as lean management and total quality management?  I think not.

The world has adopted the Progressive approach to economic progress. Progressivism advocates large firms that enjoy  economies of scale. Such firms are inherently inefficient and unstable. We have seen this recently in the financial system and the BP oil catastrophe.  Large scale enterprise has significant long term costs that increasingly offset economies of scale over time. Therefore, Progressivism works only with government support, and the support needs to increase over time, leading to socialist stagnation. But there are additional costs to the large scale approach besides the end of economic progress.  Large organizations create a sense of dependency and detract from one's sense of responsibility for one's actions.  A single error, such as Coca Cola's rejection of its traditional formula in the 1980s, can result in catastrophic losses to the economy.  Enron is another example. Progressivism leads to the slowdown in innovation, alienation, and risks of large scale economic crisis and environmental catastrophe.

The involvement of government in the economy becomes increasingly necessary to sustain scale because management inefficiencies get worse in large firms.  They get worse because the lack of competition (due to government protection) permits the accumulation of power centers that do things for their own benefit.  This results in economic decline for several reasons. State support depends on political power. Political power aims to suppress innovation.  Hence, Progressivism forces a decline in the economic progress that generated its possibility in the early twentieth century.

Japan's nuclear meltdown is a function not only of its mismanagement of its nuclear industry but of the entire mercantilist approach that state activist liberals since Theodore Roosevelt and the Progressive era have advocated. Japanese government-supported business caused today's crash in the Nikkei stock market.  The quality glitches and indifference to safety were due to Japanese social planning and its state-supported government.

This is not to say that all Progressive institutions lead to quality reduction. For instance, until the 1980s AT&T provided good quality service.  But over time Progressive institutions decline in quality because the government-created monopolies that they enjoy (through a variety of mechanisms, including access to credit) lead to reductions in competition and ever lazier management.

1 comment:

Intrinsic Value said...

Hi Mitchell,

BOJ has expanded the QE program to 10T Yen to aid the recovery. However it needs to be signficantly bigger to have a meaningful impact.