Global preconceptions about Japanese organizations have often resulted in their potential being overlooked. Yet, as discussed by Naoyuki Iwatani and Michele Raviscioni, McKinsey senior partners and co-authors of the Japanese-language book, Unlocking the Full Potential of Japanese Corporates, the strengths of Japanese corporations are numerous, ranging from focused customer orientation, employee loyalty, management resilience, and soft power. By changing mindsets that hinder growth, taking full advantage of their strengths, and defining their aspirations, Japanese corporates could flourish and enhance their global value.

An edited version of Naoyuki and Michele’s conversation follows.

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Gautam Kumra: I am Gautam Kumra, chairman of McKinsey Asia, and you’re listening to The Future of Asia Podcast series. The Asian century has begun. The region is now the world’s largest economy. As Asia’s economies evolve further, the region has the potential to fuel and shape the “next normal.” In each episode, we are going to feature conversations with leaders from across the region to discuss what Asia’s rise means for businesses across the globe. Join us.

Angela Buensuceso: Welcome to a new episode of the Future of Asia Podcast. My name is Angela Buensuceso and I’ll be your host today. In this episode, we’ll be looking at the potentially critical role Japanese corporations could play to advance Japan and its society. I’m joined by Naoyuki Iwatani, managing partner of McKinsey’s offices in Japan and senior partner in the Tokyo office, and Michele Raviscioni, also a senior partner in the Tokyo office. They are co-authors of a newly released book, Unlocking the Full Potential of Japanese Corporates, the topic for today’s discussion. Welcome to you both.

To kick us off, please share a bit about the book. What was the inspiration behind it and what does it address?

Naoyuki Iwatani: First and foremost, we believe in the huge potential of Japanese corporates. We see multiple underlying factors that we think companies could better leverage and, if they do, there could be very good opportunities for them going forward. But, at the same time, we recognize the challenges that need to be overcome. In our book, we want to show our commitment to and excitement for Japanese corporates, especially global ones, and to share our thoughts with as many companies as possible.

Michele Raviscioni: We decided to write the book because while working for many years with Japanese organizations with global aspirations, we have learned to appreciate the strengths and hidden treasures in these organizations. There are many preconceptions of—and sometimes prejudices toward—Japanese organizations, which result in their potentially being neglected. In addition, we see almost an imperative for Japanese organizations to improve their performance. The inflow of capital and the geopolitical environment are favorable factors that Japanese companies could take advantage of. Yet, many investors and business leaders wonder whether it is possible to transform and accelerate the performance of these organizations. We believe we have learned something about Japanese corporates over the past decade while working with them, and so we thought we would share these learnings with interested readers.

Angela Buensuceso: Michele, you spoke about the strengths of Japanese corporations and the immense potential that they have. Can you share more about those strengths and what gives you the confidence these organizations can become major players in the global market?

Michele Raviscioni: There are strengths that I think are well known, even to foreign observers. For example, craftsmanship or monozukuri—the ability to create products of a very high-quality using manufacturing skills that are more complex than just assembly and, as such, are very difficult to replicate and outcompete. I also think the customer orientation of Japanese organizations, particularly in the services industry, is well known and appreciated—the concept of omotenashi, an almost obsessive customer focus. This customer-centric approach is something that many companies around the world are trying to achieve.

The power of the Japanese brand is also well known and associated with quality, especially in the fashion industry. In fact, in January this year, Somerset House in London opened an interesting exposition on the culture of cute (kawaii), revealing the contribution that Japan has made to fashion and the arts. Japanese organizations can leverage such aspects.

Then there are other strengths that perhaps are not well understood and are untapped opportunities. For example, Japanese organizations are often criticized for lifetime employment and employee loyalty, which is described as a hurdle to performance. We would argue that this is an incredible opportunity to invest in the long-term upskilling and reskilling of employees. And employees who stay in organizations will be rewarded with the return on investment for their loyalty to those organizations through the opportunities to reskill and upskill themselves. This is very different from, for example, the Anglo-Saxon model where job hopping is much more common.

The generalist management model in Japan has leaders rotate across an organization in different roles—this can be a drag on performance. However, if we think about future operating models such as agile organizations, which are based on the dynamic and frequent reallocation of resources, this generalist management model is a strength—Japanese employees are used to being told to move and change into different roles within the same company at short notice.

Angela Buensuceso: Nao, is there anything that you would like to add?

Naoyuki Iwatani: I think that Japan as a country and Japanese corporations produce very innovative products, such as anime, and they also use soft power as a form of influence. Moreover, Japan is known as a country that has created many advanced technologies. In a recent survey, I think from 2023, of the top 100 global innovators, 38 companies were from Japan, with 35 in the previous year. Whenever it comes to perfection, creating something new, and sharpening the value proposition to an excellent level, Japanese corporates and culture excel.

Another point I’d like to highlight is mindset and culture. I think that an underlying strength of many Japanese corporations is resilience. Whenever disasters hit, whenever certain events have happened in the history of Japan, there has always been recovery in successful, resilient, harmonious, and collaborative ways. These cultural perspectives and mindsets are elements of soft power—things that in the current context can be deployed and played on in terms of strengths.

Angela Buensuceso: Both of you mentioned traits in Japanese corporations that could be described as unique to Japan. Based on these unique endowments, what makes you think that Japanese firms could potentially be better suited to contribute to sustainable and inclusive growth, not only in Japan but also on a global level?

Naoyuki Iwatani: As already mentioned, we believe that Japanese corporations have great potential. However, in many cases, I think Japanese organizations are not aspirational enough. McKinsey did a survey of high-growth companies to ascertain what makes a difference in terms of leadership and organizational attributes. Five attributes were identified, alongside growth: First, a company needs to grow in ways that benefit customers and stakeholders; second, it needs to be agile and willing to try out new things; third, learning from failure is important; fourth, companies need to understand B2B or B2C customers at a very granular level; and last, they need to have both short-term and long-term perspectives.

Japanese corporates scored lower in these aspects across countries and companies. On the other hand, the survey showed that if a company had at least three out of five of these attributes, its growth could double or almost triple. These results are a clear indication of how a company can aim for the next level of growth in a consistent manner with a growth-oriented mindset—and this is something that Japanese organizations can concentrate on more.

Michele Raviscioni: If I think about social inclusion and the contribution of Japanese companies, there are a couple of traits that come to mind. One is that Japanese companies tend to be long-term oriented and fairly patient with performance management and return on investments. This is a favorable substrate that allows the workforce—particularly a diverse workforce such as women employees—more flexibility in roles and working arrangements. Japanese companies also tend to take social responsibility seriously, sustain employment and an ecosystem of suppliers, and support customers. These are deeply embedded, sometimes to a fault, in these organizations. This presents a solid starting point from which to create a socially engaged, responsible organization that is able to face the challenges of the future.

Finally, the technological capabilities of Japanese organizations are incredibly powerful in tackling some of the planetary challenges—energy transition, for example, or environmental sustainability—because Japan has a unique industrial ecosystem that is able to make large capital investments and deploy some of the largest winning projects. So, when I think about societal inclusion, diversity of the workforce, and environmental challenges, I think Japanese companies can, and should, play a very important role.

Angela Buensuceso: Both of you have mentioned the soft power that Japanese corporations wield culturally all over the globe. For our listeners who aren’t too familiar with kawaii culture or anime, could you elaborate more on what you mean by soft power being one of the strengths of Japanese corporations?

Naoyuki Iwatani: I think that soft power, first of all, can be defined as multidimensional. We could say it’s a brand or values; we could say it’s a style or a culture. I think where Michele and I stand in terms of Japan’s soft power is that many interesting, creative things are studied in Japan—anime being one of them—and different types of innovations are devised, including in food and entertainment.

Another soft power is the mindset around the passion and commitment to social responsibilities, and how people consistently act for the good of corporations and society. People in Japan, in general, are collaborative and open to big changes. These types of mindsets need to be deployed and sometimes reinforced more.

For example, at a global level, a company’s diversity and inclusion are instrumental to the next generation of growth and innovation, to adding more value to society, and also to stimulating growth and motivation for employees. I think Japanese corporations lag in diversity and inclusion because usually, employees in these companies have only worked in Japan, which can create a common, implicit understanding and nuance among them. Yet, this is not an issue when corporations operate globally. So, there is a sense that the soft power Japan has in terms of values and mindsets can be deployed. Yet, on the other hand, there needs to be progress in terms of embracing real diversity and inclusion at a global scale.

Michele Raviscioni: To me, there are two elements of soft power in Japan. Anything that is made in the country comes with a positive connotation and brand equity. Japan is interesting; people are curious about it. The country has a reputation for innovation rooted in tradition—reliable innovation. Japan also has a reputation of quality and execution, so there is a perception of quality even before a customer experiences a product. These are incredibly strong starting points.

However, Japanese companies really need to do two things. One is to nurture that favorable brand. Unfortunately, in the past year or two, there have been quality issues with Japanese products, which is starting to make a dent in Japanese companies’ reputation as being excellent in quality execution.

Shifting from an informal, inherited orientation to one that has a specific purpose for the organization is also important. Once this is achieved, the brand must be codified and used purposefully. As I said, the Japanese brand is the result of decades of history and experience—but what does that mean? What are the attributes of Japanese brands and how are they relevant to different products and product categories? To some degree, this is the basic marketing work that organizations need to do. Some companies are already starting to translate Japanese attributes into their organizations and product brands and are amplifying the value of the former to the benefit of the commercial success of Japanese products overseas.

Angela Buensuceso: You have both spoken about Japanese culture being a great starting point for companies to start elevating their presence globally, but are there stereotypes that people may have about Japanese corporations? Is there anything in particular that you want to address about these stereotypes and where people might be thinking incorrectly?

Michele Raviscioni: There’s a significant amount of capital that is coming into Japan for many reasons, and the valuations of many companies are growing as a result. But one mistake that investors, particularly foreign ones, make is to assume that the deployment of capital will naturally create pressure on boards of directors and create the right incentives for CEOs and executive committees to drive performance agendas. That, unfortunately, doesn’t work in the same way in Japan as it does in Europe, the United States, and most other places.

So, one mistake that foreign investors make is to stop at the deployment of capital. Successful investors, however, lean into Japanese companies in a collaborative way to chart a path to performance enhancement, so that executive committees and CEOs can act on that path. Investors can do a better job of declaring what they expect their capital deployment or investment will trigger at the company level to help boards and executive committees translate the deployment of capital into an action plan.

Among the stereotypes—to pick up again on what I mentioned earlier—is that it is true that there is a consensus culture and that it can slow down decision making. However, it also favors and supports cross-functional decision making and risk assessment. In this environment, both are important features that keep companies from making mistakes.

A key shift that Japanese organizations need to make, and which successful ones are already making, is to harness all their strengths and shift from an informal to a formal organization. Japanese organizations are informal in terms of roles and responsibilities for their leaders and employees, as well as in the definition of basic processes and the way organizations work. Adopting a more formal approach would require apprenticeships for employees to learn how the organization works. While this would benefit the transfer of skills, it is a slow and difficult process, particularly when integrating new members into the organization. So, for Japanese companies to harness the benefits of their good qualities—whether cultural, technical, innovative, or customer-focused—it is important that the organization identify and define which of these it does well, codify them, and work out how to scale them.

There are organizations that are successfully exporting, for example, manufacturing skills—monozukuri culture. They are distilling what great manufacturing means and what they do well, and transferring this to overseas operations in Europe and the United States with great success. But this requires the discipline of developing a “common” language and a set of tools that then can be deployed to train employees. That is not typically the way Japanese organizations work. However, when Japanese organizations manage to unlock these aspects, they create a much more enjoyable working environment for employees, who feel they have a better understanding of where they belong in a formal, versus informal, organization.

This reduces the risk of some of the less inclusive behaviors that result from an organization being so informal, hierarchical, and patriarchal at times. A semi-structured working environment also significantly facilitates the integration of new employees, instead of expecting them to learn purely from experience how an organization works.

Angela Buensuceso: What are the key unlocks that could be needed for Japanese corporations to be taken to the next level?

Naoyuki Iwatani: For that to happen—especially for organizations to become more credible and competitive in the global market—there are a number of common areas to be addressed. One is the business portfolio. Japanese corporations are known for the longevity of their organizations; many have been working in the same business domain for many years, even with the same business model. And, sometimes, human attachment makes the decision to make changes in the business portfolio difficult. However, circumstances are changing in this area and new technologies are coming in. I think that, dynamically, many Japanese global corporations should look into this and consider: What are our strengths? What is our future? What is the best way to update our business portfolio?

The other area is that of digital and how to deploy data in the current context. Japanese corporations, in general, are familiarizing themselves with leveraging data for business value creation and proof of concept. Nevertheless—and this is an important unlock—from a top management and talent perspective, reskilling and upskilling throughout the organization is necessary for people to understand and commit to deploying technologies. This should be a continual process with a commitment of more time and money.

Michele Raviscioni: A lot is also written about the reform of corporate governance, boards of directors, capital location policies, and so forth. I would like to focus the lens on some of the behaviors that could make a difference on a day-to-day basis.

For investors: Do more than just deploy capital; also take the time to develop a thesis, then communicate it along with the actions expected of management. As I have said, a typical mistake that foreign investors make is to assume that the deployment of capital can be translated into an action plan by management and create a return.

For boards of directors: Shift from nominating a CEO as a recognition of past achievements and loyalty to nominating a CEO for the future mission of the company.

For CEOs: Change the narrative from being humble and protective to confident and engaging. Also, lead from the front—it’s as simple as the CEO leading the executive committee meeting, as opposed to having the CEO’s office run the executive committee as a bureaucracy. Also, shift the organization from an informal to a formal one—don’t only rely on traditional strengths from the past, but use ones that are well understood, codified, and can be used to train employees at a global scale.

In the next ten to 15 years—in fact, we are already seeing this happen on an annual scale—the skill set required to compete will be very different. This does not only relate to digital and analytical tools or skills; it also relates to the school system that doesn’t always create engineers and technicians with those skills. Japanese companies need to have a vision of what skills will be required in five to ten years and consider where a skill set is available and how to increase the availability of talent. The disparate recruitment of school leavers and an ageing population has been a drag for years in Japan, but will become even more so in future given the pace of innovation.

Japanese organizations have a great opportunity, perhaps even an imperative, to accelerate the generational transition. The new generation of leaders in Japan has grown up in a very different era than current leaders and has a different skill set. Japanese universities are of a very high caliber and they produce talented and skilled individuals. Yet, this younger generation has a different mindset when it comes to expectations and improving their positions in the workplace—and, if organizations do not meet their expectations, younger people may become less motivated and energized. So, what high-performing Japanese organizations need to do is find a way to create roles and opportunities, and empower the next generation to make a difference. They have to remove some of the hierarchical obstacles that exist.

Angela Buensuceso: Nao, did you want to share anything more on the lessons that CEOs and corporate leaders in Japan could take away from your book?

Naoyuki Iwatani: There are three points that could be wonderful for leaders to reflect upon. One, as I mentioned earlier, is setting a high aspiration for the organization, employees, and any other stakeholders in the value chain. This needs to be an aspiration made with confidence but also with a humbleness to be willing to keep changing.

Second is role modeling. The world is constantly changing, with new technologies and innovations occurring rapidly. Leaders can only learn by talking to customers and external stakeholders, as well as internally with employees across all levels of the organization.

And last but not the least, be positive and keep trying. In the past three decades or so, Japanese corporations in general have lost a bit of confidence and optimism about the future. Changing circumstances can be scary but, at the same time, it is a chance for Japanese corporations to capitalize on unlocking their full potential. Now, more than ever, optimism and a positive mindset are very important.

Michele Raviscioni: An overarching message that we’re trying to deliver, and the reason why we decided to write the book, is to inspire confidence. We believe there are enough lessons learned and enough experience gained over the past seven to eight years to be able to have confidence in transforming Japanese organizations. There is a discipline that can be deployed to start the value transformation that has worked in many Japanese companies across industries. We want to encourage investors, boards of directors, and CEOs to have the confidence that a methodology exists, and that lessons can be drawn from companies that have transformed successfully.

The second takeaway is that there is a class of executives in Japan that has gone through this journey and is reaching critical mass. This can really start to make a difference at scale across multiple organizations. The capability to innovate and transform Japanese companies can now be deployed at scale at the system level—enough emerging leaders have experienced the journey, and can now take senior leadership roles to continue to drive transformation.

Gautam Kumra: You have been listening to The Future of Asia Podcast by McKinsey & Company. To learn more about McKinsey, our people, and our latest thinking, visit us at McKinsey.com/FutureofAsia, or find us on LinkedIn, Twitter, and Facebook.