Is Japanese Manufacturing Style (so-called Monozulami) really robust?
- Causal Loop Diagram and Modeling A nalysis -
Shiro Fukushima, Ph.D. Candidate
Graduate School of Policy and Management
Doshisha University
Kyoto 602-8580, Japan
Email: Shiro_ Fukushima@ omron.co.jp
Kaoru Yamaguchi, Ph.D.
Graduate School of Business
Doshisha University
Kyoto 602-8580, Japan
Email: Kaoyamag@ mail.doshisha.ac.jp
Abstract: This paper tries to analyze the structure of Japanese manufacturing style (herein after called
Monozukuri), by applying causal loop diagram method of systems thinking. Three layers of positive
feedback loops that strengthen Monozukuri are identified: (1) professional spirits on Monozukuri at an
individual level, (2) trust-based style of management at a corporate level and (3) trust-based
transactions on R&D and parts-supplier-network (Keiretsu) at an inter-corporate level. However, these
strong features are shown to be easily tured into weak ones. This paper identifies five exogenous
factors that turn the strength into weakness: (1) monetary incentives, (2) pressure from another
management policy, (3) pressure from another transaction policy, (4) technological standardizations,
and (5) foreign competitive efforts. Effects of factors (1) (2) (3) are analyzed as a whole represented by
management mode and (4) are analyzed in detail. Then, social feedback loop is brought to the model to
re-reverse these weakening trends. It is posed that the trust-based management based on Monozukuri
together with social feedback is superior to the contract-based management in the long run.
Keywords: causal loop, manufacturing, capability, quality, Monozukuri, Kaizen, Keiretsu
1. Introduction
Monozukuri! (Japanese Manufacturing Style) is said to be one of the specialties of Japan as Ezra F.
Vogel pointed out in his "Japan as Number One. (Vogel, E [1979]) In his study of Japan, Ezra F. Vogel
concluded that the Japanese strong point lies in pursuing knowledge as a group. Steven K. Vogel,
Ezra's son, proposed the Japan model as an interacting one between a micro system at a corporate level
and a macro system at a national level. (Vogel,S[2006]). Taiichi Ono proposed Just in Time (JIT)
system as a production system.(Ono[1978] ). Many researchers have been studying the strong points of
Toyota Motors. One of these is Mutoh's research which points out that the company's strengths lies in
the product design system among the car manufacturer, the parts suppliers and the mold manufacturers
based on IT infrastructure, and persevering improvement.(Mutoh[{2005]). MIT Industry Productivity
Committee concluded that the source of the strong point of Japanese industry consists in Japanese
style management on HRM (Human Resource Management) such as in-house training, and
inter-enterprise collaborative system and dynamic network such as the relationship between assembly
manufacturers and parts suppliers.(Dertouzous [1989]). Takahiro Fujimoto proposes a concept of
three-layer organizational capability; that is, integration, improvement and evolution, and concludes
that the strong point of Monozukuri is derived from a tight relationship between the organizational
capability’ and product architecture.(Fujimoto[2004]) Kakuro Amasaka and his team propose a new
concept "New Monozukuri Theory - Beyond JIT-" (Amasaka[2008]). J.N.Baron et al identify a feature
of "High commitment HRM" as a Japanese style of HRM that can be applied to the quality-sensitive
jobs which needs continuous improvement in spite of its feature of high cost.(Baron [1999]). Nobuo
Takahashi explained a Japanese style of HR development as "By rewording with the next job". In other
words, an intrinsic motivation is mainly used in Japan as the HR development (Takahashi[2007]).
Edward L.Deci identified two elements which improve intrinsic motivation, that is, autonomy and
competence (Deci[1995]). In conclusion, several studies on Monozukuri have been done in the fields
of social systems, enterprise systems, production systems, and psychology, but only S. Vogel discussed
the interacting effects of these areas.
1 Monozukuri: Fujimoto defines “Monozukuri” as the duplication of design data into a material (Fujimoto [2004)).
2 Capability: Warren defines the capability as strategic resources to perform the business. Warren (Warren [2002]).
Fujimoto defines three levels of capability as static capability, improvement capability and evolutionary capability
(Fujimoto [2004]). In this paper, "capability" is used as being defined by Warren from a viewpoint of system
dynamics. Yet, it also covers the above three levels of classification by Fujimoto.
2
2. Reexamination of Monozukuri Studies
With the application of causal loop diagram analysis in systems thinking, this paper tries to analyze a
system structure that gives strength and weakness of Monozukuri. Before presenting our model, we
have reexamined two previous studies to make our model more comprehensive.
2.1 The Report by JACE
Let us first examine the Monozukuri study presented in the report published by JACE (Japan
Association Corporate Executives) (JACE [2008]). It analyzed the strength of Monozukuri from a
viewpoint of Japanese top-management. Nine features are listed in the report as strong points of
Monozukuri, out of which we have picked up several keywords and refined them to reconstruct their
analysis with causal loop diagram (CLD).The results are shown in Table 1 and Figure 1.
Table 1 Features that create strong points of Monozukuri mentioned in JACE [2008]
Factors mentioned in the Report
Keywords for CLD
(1) Corporate culture that unites itself with partners:
The sense of values that industry is a virtue has been rooted. It is going to
unite with a customer demand thoroughly.
Capability for Adaptation
to customer needs
(2) Management of long-term vision: Based on the confidential relation
for steady employment.
Long-term management
view
(3) No. 1 on-site power and group power of the world: teamwork by
talented people who are comparatively homogeneous with higher
education and finish things with particular efforts.
Organizational Capability
(4) Inter-organizational network: The existence of powerful Small and
Medium Enterprises (SMEs): The Monozukuri network accumulation into
Japan. It has superior technology and can respond flexibly.
Inter-organizational
Keiretsu Collaboration
(5) Highly concentrated power for technical development: Highly
integrated type of technical development
Technical Development
Power
(6) No. 1 quality of the world: Quality supported by QC circle and TQM
etal.
Monozukuri Quality
(7) Highly demanding Japanese market : The highest level of demand by
end users and customers for quality, price and services et. al.
Requirement Level
Japanese market
by
(8) Enough Monozukuri human resources: Talented people suitable for
Monozukuri with tenacity and cooperativeness.
Monozukuri Human
Resources
(9) The personnel training system in a company
In-house training
. Technical
Inter-organizational + Dévelopneit
Keiretsu Collaboration
7 t+) Power
Technological
Develop
Trans-Organizational
Cooperation
Organizational a 7
Capability MONOZUKURT
Human Resources
; tt)
Organizational
Capability Empowered by
Jpanese Management Style rs
+ MONOZUKURT
Quality
In-house
gee Training Ph
Long-term
Management View A
MONOZUKURI Human
Resources
Development
Requirement Level
lby Japanese Market
Capability for
(Earning Adaptaion to
Capacity) yi Customer Needs
Figure 1 Causal Loop Diagram of Robustness in Monozukuri
This study captures the structure of Monozukuri from a viewpoint of Japanese executives with an
emphasis on technological-innovations by the inter-organizational partnership. Yet, it seems to be
missing a feedback loop by open-technological-innovations, which is by nature universal.
2.2 A Questionnaire by Toyota Group's Executives
Secondly let us examine the study derived from the questionnaire by Toyota Group's Executives.
It is published by Amasaka (A masaka [2008]). The questionnaire identified the following keywords as
technologically essential issues for its Monozukuri management:
(1) intensive resource, (2) focusing issue, (3) technology for global ecology, (4) innovating
organizational system, (5) proposal style of new products, (6) utilization of information, (7)
establishing vision, (8) customer's voice, (9) development of marketing methodology, (10) next
generational production system, (11) SCM/optimized procurement, (12) transferring technology and
skill, (13) speed/efficiency, (14) collaborative development, (15) training, (16) apply for change, and
(17) viewpoint of customer-first. We have drawn a causal loop diagram based on these keywords in
4
Figure 2, in which four reinforcing loops are identified, that is, (1) strengthening Monozukuri people
power, (2) development of organizational capability, (3) strengthening technological development
power and (4) strengthening technological production power.
Proposal style of ——————_,
la products Next generational
production system
r
Utilization of " gj. Ounce ~N
information ) Monozukuri
Technolegies SCM/Optimized
Procurement
Technology
+) for global
ecology
Innoveling. == “pe
Product Giguhivational Collaborative
Development Syston Development
Technologies
Focusing Issue Speed/Efficiency
Development of
marketing + Development of
methodeology AE Organizational
ae Establishing Capability
Apply for change
‘Training Transferring
as MONOZUKURI _ technogy and skill
Human Resources
Veiw point
of customer
first
Customer’s
voice
Figure 2 Causal Loop Diagram of J apanese strength in Monozukuri
This study well analyzes the structure of Monozukuri which has a tight relationship between
technologies and operational capability. Yet, it seems to be missing a feedback loop by the
inter-organizational cooperation, because the loop may he too self-evident for Toyota group to
recognize as an essential subject.
3. Development of the Causal Loop Diagram of Monozukimi System
Having reexamined the above two studies, we have expanded our investigation further to identify
essential keywords for developing our own model of the Monozukuri system. Specifically, using the
reference sources such as the white papers published by METI (Ministry of Economy, Trade and
Industry). (METI [2006], METI [2007], METI [2008]), and the literature mentioned in the
introduction, we have identified keywords for the Monozukuri model as listed in Table 2. Let us
explain them by illustrating reinforcing feedback loops one by one below.
Table 2 Keywords in the Monozukuri System
Keywords Description
Monozukuri Quality Individual skills, organizational capability and
inter-organizational capability that produce good characteristics
and features for the production of goods and services, and lead to
customer satisfaction.
Care for Quality Mental state of feeling and desire for pursuing high quality in a
development design and manufacturing.
Profitability Earning capability of manufacturing industries relative to those in
foreign countries.
Management Mode An index variable of management policy which ranges between
contract-based value of 0 in Europe and America, and trust-based
value of 1 in Japan.
Lifetime Employment Human resource management of high commitment to
employment
Motivation Mental attitude in Monozukuri spirits that is cultivated through
in-house training and corporate culture.
Kaizen-based Activities
An execution-level of continuous improvement activities for
increasing capabilities as a team.
Inter- Personal Feedback
Level
Team capability for performing development, design and
production of products toward high level Monozukuri quality.
Commercial Transaction
Mode
An index variable of transaction policy which ranges between
market-based value of 0, and trust-based value of 1
Keiretsu-based Feedback
Level
Inter-organizational capability to pursue Monozukuri quality
in designing and manufacturing products
R&D
Investment for technology related to Monozukuri
Cost
Cost incurred from development, design and production.
3.1.A Strengthening Loop at an Individual Level
Figure 3 illustrates a reinforcing loop, built
by using the keywords in Table 2, that
strengthens Monozukuri at an individual level.
"Care for Quality" is an important stock for
understanding this CLD. It is a mental state of Oo
feeling for pursuing high quality in a process
ent
of product development, design and : iy /
manufacturing. Its level determines a total eA Lifetine eplojaent
eabiahaliey
capability of “Monozukuri quality", together
with other levels that are related to ’ 4) \
organizations and networks of organizations.
It is an integrated capability level that creates
_——Cost+—
Individual Level i
Motivat ic
Monozukuri lotivation
good characteristics and features for Quality,
producing goods and services, and leads to ‘Care for Quality :
customer satisfaction. The higher the level is,
the more the profitability will increase. Such Figure 3 CLD of the Individual Level
a relation depends on the architecture of
products. That is, if a product has an integral architecture, the relation of profitability with Monozukuri
quality becomes high, because an integral architecture needs more delicate activities for product
development, design and production than a modular architecture. Profitability thus attained enables an
operation of trust-based management which is as an value of management mode, even though it is
more costly than that of contract-based management. By “trust-based management” we mean trust
comes first and contract becomes secondary. Human resource management (HRM) under the
trust-based management tends to use high-commitment HRM; lifetime employment is one of its
typical practices of trust-based management in the mental model of employees. The organization
operating under the high-commitment HRM or lifetime employment tries to cultivate mental attitude
and spirits of Monozukuri among employees thorough the in-house training and corporate culture. The
motivation becomes a cause of care for quality in the mental models of employees. This reinforcing
loop is accompanied by a balancing loop, originating from the lifetime employment, due to its
high-cost operation compared with the HRM under contract-based management.
3.2. A Strengthening Loop at an Organizational Level
Figure 4 illustrates an reinforcing loop, built by
using the keywords in Table 2, that strengthens
Monozukuri at an organizational
"Inter-personal feedback level" is an important stock
for understanding this CLD. It is a team capability
to perform product development, design and
production of products with a high level of
Monozukuri quality. Its level determines the total
capability of "Monozukuri quality", together with
other levels related to individuals and networks of
organizations.
The Monozukuri quality and profitability have a
positive relationship in CLD, as well as profitability
and trust-based management. Organizations that
level.
_—— Cost
jf \
{ 5 Baar \
| "|
4 Kaizen-based
Profitability ~\ Activities
4)
:
ww,
Organizational Level
MONOZUKURT y
Quality Inter-Personal
Feedback Level
Figure 4 CLD of the Organizational Level
adopt trust-based management tend to invest resources to the process improvement activities, because
managers think the Kaizen-based activities effectively achieve their business goal from bottom-up than
the reform from top-down. The Kaizen-based activities in turn trend to build up the inter-personal
feedback level. This loop also produces a balancing loop, originating from the Kaizen-based activities,
due to its high cost operation. The Kaizen activity is a costly investment for productivity, because it
does not contribute to the increase in outputs immediately. With time lag, it works for increasing the
productivity in the long run.
3.3 A Strengthening Loop at an Inter-Organizational Level
Figure 5 displays a reinforcing loop,
constructed by using the keywords in
Table 2, that strengthens Monozukuri at
an inter- organizational
"Keiretsu-based feedback level" is an
important stock for understanding this
CLD. It is an inter-organizational
capability for performing product
development, design and production of
products with a high level of
Monozukuri quality. Its capability is the
same as the organizational one
mentioned above, but the capability
level.
Profitability
Monozukuri —
Quality Es
Management
alue of
Mode) \
7 Transaction
~\ fas a value of Commercial
\+) Transaction Mode)
Inter-Organizational Level
etsu-based
pack Level
~~
Figure 5 CLD of the Inter-Organizational Level
mentioned above is basically based on the business process within an organization. The capability here
is based on a process through business transaction such as a subcontract in R&D and procurement in
production. Its level determines the total capability of "Monozukuri quality", together with other levels
related to individual and organization. The Monozukuri quality and profitability have a positive
relationship in CLD, as well as profitability and trust-based management. Organizations that have
adopted trust-based management tend to consider long-term business connections more important than
market-based competitions such as prices. The trust-based transaction is a value of an index variable of
transaction policy, which is named commercial transaction mode. The variable ranges between
market-based value of 0, and trust-based value of 1. The trust-based transaction is more costly in short
run than market-based transaction. But the accumulations of knowledge with their partners enable
higher performance in relation with Quality, Cost and the time of Delivery (QCD)? of products and
services in the long run. That is to say, the trust-based management increases the trust-based
transactions and promotes to build up Keiretsu-based feedback level. A balancing loop also originates
from the trust-based transaction, because its operation becomes more costly in the shot run than the
one under the market-based transaction.
3.4A Strengthening Loop of Technological Innovation
Figure 6 illustrates a reinforcing loop, using the
keywords in Table 2, that strengthens Monozukuri
through technological innovation. “Profitability” is (—
an important stock for understanding this CLD. It is
an earning capability relative to the one in foreign
countries. When profitability improves, the | “— %*%; \-
investment for R&D will also increase, and Ra - Profitability
»Cost —
consequently technological innovation prospers, +
which in tum improves the Monozukuri quality. +
Technological innovation discontinuously brings Technological Innovation
bigger improvement to Monozukuri quality rather ,
than the improvement by "care for quality", Technological Monozukuri
“inter-personal feedback level" and "Keiretsu-based — "Y02t107) Quality
feedback level". In this sense, it is a destructive Figure 6 CLD of the Technological Innovation
innovation. (Christensen [2000]). Usually, it is quite
3 In Japan the concept of QCD is quite often used among manufactures as an indicator for measuring performance in
continuous improvement activity to meet their customer satisfaction.
“Profitability: MIT Industry Productivity Committee defined product performance for comparison of strength of an
industry or a company among countries: productive performance. Productive performance is defined as a total index
which not only shows the productivity traditionally used as labor productivity, but also quality, timely service,
organizational flexibility, speed of technological innovations and strength of strategic technology. In this paper
"Profitability" is defined in the sense of productive performance as a result of competition.
9
difficult for an organization to prepare as evolutional capability that adopts to the destructive
innovation. It seems that the technological innovation depends on "Capabilities not linked to resource
building". (Warren [2002]). Further arguments may be required about this CLD. However, it is not the
central issue in this paper, because the loop is not specific to Monozukuri but very universal.
The effect of this loop is thus quite neutral for the discussion of the competitiveness in Japan. A
balancing loop here appears from the investment for R&D, because it is costly in short run.
3.5A CLD of Monozukumi System
Figure7 illustrates our integrated causal loop diagram of Monozukuri system, consisting of four
reinforcing loops discussed so far.
Managemen i Ng
: based
Activities
:
Lifetime
/ { } fi
=, = ] gyment “
[xe Profitability ta wat
/ Red Cost ay
| i 7
a / Inter-Organizational
RDy -
Motivation
/ t+)
/ od
[ va Organizational
| ( 4
Care fo)
MS, dai
Technological Innovation ul i
Keiretsu-hased
Feedback Level
Figure 7 The Causal Loop Diagram of Monozukuri System (whole)
That is to say, (1) a strengthening loop at an individual level, (2) a strengthening loop at an
organizational level, (3) a strengthening loop at an inter-organizational level, and (4) a strengthening
loop through technological innovation. The diagram can be roughly separated by the arrow between
"Monozukuri Quality" and "Profitability" into right-hand and left-hand portions. Right-hand portion
describes problem-solving activities such as continuous improvement for pursuing Monozukuri quality
by individuals, company and country. Left-hand portion indicates an activity that raises quality
through destructive innovation.
10
3.6 Comprehensiveness of the Monozukuni Diagram
Let us compare our causal loop diagram developed here with the two previous studies discussed in
section 2. The results of comparison are shown in table 3. The report by JACE lacks an analysis of the
open-innovation. On the other hand the analysis of inter-organizational level is missing in the study of
Toyota. In this sense, our analysis based on causal loop not only integrate them successfully, but also
attains more comprehensive structure as an analysis of Japanese manufacturing system. This was made
possible by the application of systems thinking.
Table 3 the Comparison of three CLD
Elements derived from the report by
JACE
Elements derived from Amasaka(2008)
Elements identified as the
Monozulami system
(1) Monozukuri Human Resources
Development
(1) Strengthening Monozukuri Human
Resources
(1) Strengthening in Individual level
(2) Organizational Capability
Empowered by Japanese Management
Style
(2) Development of Organizational
Capability
(2) Strengthening in Organizational
level
(3) Technological Development by
Inter-Organizational Cooperation
(3) Strengthening in
Inter-Organizational level
(3) Strengthening Product Development
Technologies
(4) Strengthening Monozukuri Technologies
(4) Strengthening by Open-Innovation
11
3.7 The Monozulani System
The left-hand portion of Figure 7 illustrates three loops that are related with technological
innovations. Yet, they do not specifically characterize the Japanese manufacturing style, and can be
observed universally. Accordingly, we pose that the right-hand portion of the Figure 7 can only
characterize the Japanese manufacturing style, or Monozukuri. Figure 8 illustrates the Monozukuri
system, consisting of three-layer structure of the reinforcing loops; that is, (1) a loop of Individual
Care for Quality, (2) a loop of Organizational Inter-Personal Feedback Level and (3) a loop of
Inter- Organizational Keiretsu-based Feedback Level.
Se 4 Lifetime
~ Viduel —_-Enploynent
Profitability Tadivisnel
t+)
(+)
Inter-Organizational
tion
vtiva ~
4
A+)
Orgenizationel
Monk eee :
Qual ity ;
ee
Figure 8 the Monozukuri System
12
3.8 Exogenous Variables of Reversing Behaviors
It is well known in system dynamics that a reinforcing loop is generally bi-directional, that is, it may
drive a system into a positive (or increasing) direction, or into a negative (or decreasing) direction.
How can it be reversed when it is driving the system into a growing direction? We have identified five
factors that make the Monozukuri system reverse its growing direction into weakening direction.
They are indicated as five hexagon-shaped exogenous variables in Figure 9; that is, monetary
incentive, pressure from other management policy, market pressure, technological standardization, and
foreign country's competitive effort. Let us briefly discuss these exogenous factors one by one.
Incentive
\
Organizational
Care foi
Quality
Monovukuri gj
Qual
Figure 9 Exogenous Variables of Reversing Behaviors
3.8.1 Monetary Incentive
Japanese style of HR development is occasionally called "rewording by the next job”. It is based on
“high-commitment HRM". (Baron [1999]). In other words, the intrinsic motivation is a driving force
for Japanese HR development. It enforces "Care for Quality". Under the circumstances, a monetary
incentive, when introduced, tends to weaken the intrinsic motivation, because monetary incentive is
too strong to maintain the linkage between job performance and job satisfaction. (Takahashi [2007]).
13
3.8.2 Pressure from another Management Policy
Corporate management usually reflects opinions of various stakeholders. When a company, managing
under trust-based management, is forced to change its management policy into contract-based
management policy by stakeholders, its competitive power becomes weakened because coherence of
its management is forced to be split into fragmented policies.
3.8.3 Pressure from Market-based Transaction
Japanese inter-organizational or highly integrated transaction known as Keiretsu transactions has
been criticized by foreign countries that support market-based transaction®. Market-based transaction
has a merit of reducing costs in the short run. When introduced, however, it may weaken a competitive
power of Monozukuri system in the long run due to a rise in transaction cost, an increase in the product
development lead time, and spoilage of products quality caused by a shortage of sharing knowledge
among business partners.
3.8.4 Technological Standardization
By technological standardization we mean a common interface of industry-wide specification on a
basis of modular architecture. Technological standardization is in a sense a "black box" in Monozukuri,
out of which anyone can obtain production parts and assemble them to attain almost the same product
quality. For example, a technological standardization named "AUTOSAR"® is now progressing in the
automotive industry. It provides modular architecture for automobile production. When applied, it may
weaken a competitive power of a Japanese automotive industry, because everyone can make products
by assembling "black box" parts irrespective of Monozukuri quality. If the technological
standardization advances to its high level, Monozukuri quality system may no longer be needed.
3.8.5 Foreign C ompetitive Efforts
Profitability is used in this paper as an earning capability in manufacturing industries relative to the
one in foreign countries. By definition, foreign country's competitive efforts weaken the profitability
of Japan.
5 An Example is the criticism of non-tariff barriers by Reagan Administration in 1984.
® AUTOSAR, which stands forA UTomotive Open System Architecture, is an consortium, which aims to make a
software platform for automotive e industry. It is jointly developed by automotive manufactures and suppliers. See
http://www.autosar.org/ for details.
14
4 __A System Dynamics Model of Monozukiuni
We are now in a position to present our model of Monozukuri system as presented in Figure 10. The
model is surely not aimed to perform numerical predictions of its system behavior. Its purpose is to
understand how exogenous factors discussed above affect system behaviors of Monozukuri,
specifically its profitability at a highly abstract level of analysis. The initial values of the parameters
and stocks in the model are indicated in Table 4 and 5, respectively.
For simplicity in our model the first three exogenous variables: (1) monetary incentives, (2) pressure
from another management policy and (3) pressure from market-based transactions, are assumed to be
represented by another exogenous variable: management mode. Hereafter, it is explained why
management mode represents these three exogenous variables. One of our main purposes is to make it
obvious how the behavior of the system is changed when the system, which is operating under
trust-based management, is affected by the external pressure of the contract-based management. We
can assume that these three exogenous variables as a whole change "management mode" from
trust-based management to contract-based management. So we can analyze how the behavior of the
system is changed by the management mode. Accordingly, the management mode is assumed to play
an important role.
Figure 11 (a) (b) (c) illustrates its functional relations with three different outputs such as (a) HRM of
lifetime employment, (b) Kaizen-based activities and (c) commercial transaction mode. Figure 11 (d)
(e) illustrates the functional relations of Monozukuri quality with two different outputs such as (d)
sales’ and (e) failure cost®. These functional relations can be freely modified during the simulations to
observe changes in the behavior of the system.
In the following sections we run two simulations for the newly defined exogenous factors such as (1)
management mode and (2) technological standardization. Factor (1) is more specifically presented by
trust-based management vs. contract-based management’. Next, the effect of an exogenous factor
"technological standardization" is examined under the trust-based and contract-based management.
Exogenous factor of foreign competitive efforts is left unanalyzed in this paper due to a limited space.
7 Sales mean the excess sales yielded by the quality of products.
8 Failure cost means the excess expense caused by the failure of products.
Of course contract and trust are too essential features for business activities. By contract-based management we
mean contract comes first and trust become secondary. By trust-based management we mean trust comes first and
contract becomes secondary.
15
<M of
Lifetime
Employment
ven-based Activities?
<Transactjon Wode>
Labour Cyst for LTE
Labour Cost for KAIZEN
Material Cost by
KEIRETSU Trangaet ion
toat
Excess Cost Initial value
of Productivity Table of WM to
Lifetine Paros.
Cae
Tine to adjust
Profitability on
Table of . FC test
= of Lifetine
Employgent
ak Cost Chane by
Profitabi Lityp™t
Prot tabi ina charge by
soe
Saleg
Ky
Tims to adjust
Profitability on
Table of HQ-9Sales Sales
| 7 es
Individual
Tine to adjust
Care Tor a
+
Pa ae of
Monodukuei hai Quality
ual ity
= IM->Kaizen
2
t+) |
Organization |
pase terest g@_—__ a 2
Feedback Level ?¢-$=$§$$——=+ >)
Figure 10 the SD (System Dynamics) Model
16
Management
Node (1)
Table of WM ->
Transaction Mode
>.
Katzen-h
Aerivit
Inter-Organization
Time to adjust
Inter-Personal
eee igedback Level
wange of ae
Time to adjust
d
Ikeiretsu-basea| .
[Feedback Level———>Chanae oF KF
Table 4 Initial value of parameters DML: Dimensionless
Parameter Value Parameter Value
Time to adjust Profitability on Cost 1Year { Time to adjust Keiretsibased Feedback] 10Years
Level
Time to adjust Profitability on Sales 3Years {f Technical Standardization(STD) 0.5(DIML)
Time to adjust Care of Quality 1 Year anagement Mode (MM) 0.7(DIML)
Time to adjust Inter-Personal Feedback] 5 Years
Level
Table 5 Initial Level
Level Initial Value Level Initial Value
Profitability 0.60 Inter-Personal Feedback Level 0.5
(Care for Quality 0.5 [Keiretsu-based Feedback Level 0.5
1 HRM of Lifetime Employment 1 Kaizen-based Activities | Trust-based Transaction
" H . q! Market based Transaction |
Hf | i Lo
/ ¥; | 7
A ae
0.5 05 = (1) a a
0 ol 0 0
L=—“TManagementMode!___1 | ‘Management Mode 1 Management Mode
Contract-based € Trust based Contract-based «+ Trustbased Contract-based ¢ Trust-based
Figure 11(a) HRM_ of Figure 11(b) Level of Figure 11(c)
Lifetime Employment Kaizen-based Activities Transaction Mode
1 Sales 1 Failure Cost
ae 1 us
1 NS
0.5 0.5
%
0 va 1 0 NS 1
Monozukuri Quality = Monozukuri Quality >
Figure 11(d) — Monozukuri Figure 11(e)
Quality - Sales Monozukuri Quality - Failure
Cost
Figure 11 Initial Values of Table Functions
17
4.1 Trust-Based Management vs. C ontract-Based Management
Figure 12 shows the result of two simulations by blue lines and by red lines.
Care for Quality
0 6 2 i 2 30 36 42 48
Time (¥ ear)
Care for Quality: MM=0, 7 —-—3—33- 3 3 3
Care for Quality: MM=0, 3 —2—2—2 22 2 2
Figure 12(a) Care for Quality
Keiretsu-based Feedback Level
1
0.85
07
055 [pe
04
o 6 2 1 224 30 36 42 48
Time (Year)
"Keiretsu-based Feedback Level" : MM=O. 7]. —?—3—+}—+—3—3
*Keiretsu-based Feedback Level” : MM=0. 3 ——2—2—2—2—2—
Figure 12(c)
Keiretsu-based Feedback Level
Inter- Personal Feedback Level Profitability
1 1
Seal
0.85 0.85 auld
07 07
08 et “ESR
04
Me 0 6 2 1 2m 30 36 42 48
o 6 2 & 2& 30 36 42 48 Time (Year)
Time (¥ ear)
Profitability: MM=0, 7 —-—3—33 3 3 3
"Inter Personal Feedback Level”: MV=O. 7). —t—+—+ 2 .
"Inter-Personal Feedback Level’ : MVM=O, 3 2——2—2—_ 22 2-—_ Profitability : MM=0. 3. —2—2—2—2—3 323 —
Figure 12(b)
Inter-P ersonal F eedback Level
Figure 12(d) Profitability
The blue lines indicate the result of the behavior of the system performed under the condition of
“trust-based management”, which is controlled by a parameter named "management mode" valued at
0.7. The red lines indicate the result of the behavior of the system performed under the condition of
“contract-based management", which is controlled by the same parameter valued at 0.3. In the model,
the management policy is defined by the parameter values between 0 and 1. The procurement policy is
also a variable with a range between market-based transactions and trust-based transactions. In Figure
12, the blue lines describe the behaviors controlled by "trust-based management", and red lines show
the behaviors by "contract-based management". In the case of trust-based management, three levels,
that is, the individual care for quality (see Figure 12(a)), the organizational inter-personal feedback
level (see Figure 12(b)) and the inter-organizational Keiretsu-based feedback level (see Figure 12(c))
are accumulated at a high level. Therefore, Monozukuri quality has reached to a high level. Moreover,
high profitability is attained by Monozukuri quality. (See Figure 12(d)). In the case of contract-based
management, the values of three stocks become low gradually. And the additional cost of Monozukuri
quality, that is, the additional expense for lifetime employment HRM, the expense for continuous
improvement and additional expense of Keiretsu-based transactions all become lower than the case of
trust-based management. The situation of the so-called "better-before-worse" dynamics is observed in
18
the early time zone near time 0. The profitability, then, gets lower and lower, because three reinforcing
loops are going to work predominantly into a bad direction. Figure 13 simultaneously shows the result
of two simulations by blue lines and by red lines.
Care for Quality Keiretsu-based Feedback Level
1 1
0.75 0.85
05 7
ee 0.55 Lett
pete te ot et tl
0
0 6 i 1 om 30 3 42 48 be
Time (Year) 0 6 122 18 «#4024 «©6300 (386 ss
Time (Year)
"Keiretsu-based Feedback Level : MM=0. 7, —3—3——4__2 4
"Keiretsu-based Feedback Level’ : MM=0. 0 ——2—2—2—_2—_2—
Figure 13(a) Care for Quality Figure 13(c)
Keiretsu-based Feedback Level
Care for Quality : MM=0, 7. —+—s—3—+—s 2 —
Care for Quality : MM=0. 0 —2—2—2—2 2 2 2
Inter-Personal Feedback Level Profitability
1 1
0.85 0.85
oss oss ALL
04
04
o 6 2 8 24 30 3 42 48
o 6 i i 2 30 36 42 48 Time (Year)
Time (Year)
Profitability : MM=0. 7. —+~—+—-3—3 3+ +33.
“Inter-Personal Feedback Level" : MV=0. 7. ——t—12_3._3_4 e Fe
“Inter Pesonal Feedback Level; MEQ. Q 3333 >> — Profitability : MM=0. 0 —2—2—2 223-32.
Figure 13(b) Figure 13(d) Profitability
Inter-P ersonal F eedback Level
The blue lines indicate the behavior under the conditions of trust-based management which is the
same as the blue lines of Figure 12. Red lines indicate the typical contract-based management
controlled by a parameter "management mode" valued at 0.0. In this case, care for quality falls quickly,
because the HRM for lifetime employment keeps low under the contract-based management. And
inter-personal feedback level and keiretsu-based feedback level keep flat because kaizen activities and
transaction mode keep neutral. As a result the Monozukuri quality falls gradually, but the profitability
keeps high, because expenses for operating organization under the contract-based management is
lower than the case of trust-based management. So a typical contract-based management mode (valued
0.0) attains higher profit than a trust-based management mode (valued 0.7). But profit in the
trust-based management mode passes that of contract-based management mode, due to the
accumulation of capability in organization.
19
4.2 Technological Standardization
Figure 14 displays the influence of technological standardization under the condition of trust-based
Management.Keiretsu
Care for Quality Keiretsu-based Feedback Level
0 6 122 18 24 30 36 42 48
‘Time (Y ear)
Care for Quality : MM=0. 7STD=0.0 —+—+—_4—_4_ 4-4-3. areas
Care for Quality : WM=0. 7STD=0. 5 2—2—_2_ 2 2 2 2 ae ee fgg eg ge
Cate for Quality : MV=0, 7STD=1, 0 —3—3—3—3—3 3 —3- Kantsrban Fadia Led’ eo 7e7D=1-0 35g 3 yy
Figure 14(a) Care for quality Figure 14(c)
-based Feedback Level
o 6 2 1 24 30 3% 42 48
Time (¥ ear)
Inter-Personal Feedback Level Profitability
o 6 2 8 24 3 3 42 48
Time (Year)
Profitabilty :MM=0. 7STD=0, 0 +4444 4 33
Profitabilty : MM=0. 7STD=0, § -2—2—2—2 22
Profitability : MM=0. 7STD=1. 0
o 6 12 118 24 30 36 42 48
‘Time (Y ear)
Level’: M¥i=0, 7S70=0.0
Lvl’: MMi=0, 7S7D=0
inte Level’: M=0. 7871.0
Figure 14(b) Figure 14(d) Profitability
Inter-P ersonal Feedback Level
The simulation is performed by changing the value of technological standardization three times; that
is, a low level, a middle level and a high level. The blue lines indicate the behavior of the system under
a condition of a low level. The red lines indicate the behavior under a middle level, and the green lines
indicate the behavior under a high level. These simulations are performed under the condition of
trust-based management. The three stocks supporting Monozukuri quality have the same trends, which
gradually increase. (See Figure 14(a) (b) (c)). The case of low standardization is the most profitable
one among three cases. Next one is the case of the middle standardization. The lowest one is the case
of high standardization. As a result of the same behavior of the three stocks, the Monozukuri quality
and its expense show almost the same behavior among three cases. The difference of the profitability
(See Figure 14(d)) is caused by a relationship between the Monozukuri quality and the architecture of
products. If the technological standardization is at a low level and the product has an "integral
architecture", the Monozukuri quality is effective for increasing profitability. On the contrary, if the
technological standardization is at a high level and the product has a "modular architecture", the
Monozukuri quality is worthless for profitability. Consequently the profitability in the case of high
level technological standardization is lower than that in the case of low level technological
standardization or middle level.
20
Figure 15 shows the influence of technological standardization under the contract-based
management.
Care for Quality Keiretsu-based Feedback Level
06 08
0.45 07
(Care for Quality : MVI=O. SSTD=0. 0 3344 4 3 3
Care for Quality : MV=O. 3STD=O. 5 2—2—2—2 —2 > 2 —
Cate for Quality : MM=0. 3S1D=1. 0 —3—3—3—3—3—3 —3-
Figure 15(a) Care for quality Figure 15(c)
Keiretsu-based Feedback Level
Inter-Personal Feedback Level Profitability
06 08
05 eee rr os
06
04 The
5]
05 ata eg ls tl
a Ra
04
02 o 6 2 & 24 30 3 42 48
o 6 2 1 om 30 36 42 48 Tie eet)
Time (Y ear) Profitability: MM=0. 3STD=0. 0 +3444. 3- 3,
agg yg Profitability: MM=0. 3STD=0. 5 —2—2 2» 2 2 2 —
a. Profitability: MM=0. 3STD=1. 0 —3—3— 33 3 3
Figure 15(b) Figure 15(d) Profitability
Inter-P ersonal Feedback Level
The simulations are performed by changing the value of the contract-based management three times
just like the above simulation. The results are presented in Figure 15. The blue lines indicate the
behavior of system under the condition of low level technological standardization. The red lines
indicate the behavior at a middle level, and the green lines indicate the behavior at a high level. In
contract-based management, the three stocks supporting Monozukuri quality are low or neutral at most
(see Figure 15(a)(b)(c)), and the Monozukuri quality is at a low level, because of insufficient
investment for building these capabilities that support the Monozukuri quality. As a result, Monozukuri
quality is at a low level in these three cases, but the profitability is different one another. The
profitability gradually increases in the case of a high level of technological standardization. (See
Figure 15(d)). It gradually decreases in the case of a low level or a middle level of Technological
Standardization. In the case of a low level of technological standardization, the Monozukuri quality
becomes a critical factor for success in competition, because the product has “integral architecture".
Consequently the profitability is at a low level and the reinforcing feedback loops work toward a
weakening direction. In the case of a high level technological standardization, the profitability
increases, because Monozukuri quality is worthless in the case of a high level of standardization, that is,
products have a "modular architecture".
21
4.3 Sensitivity Analysis
Finally, we have performed sensitivity analysis for profitability against the technological
standardization, which takes random values for the range between 0 and 1.
Management Mode=0. 3 Management Mode=0. 7
MM=0. 3 MM=0. 7
50% 75% 5% 00% 50% 75% O59 00%
Profitability
1
085
055 |S
2 4 36 4§ 0 2 uw 36 8
Tine (Yea Tine (Yeas)
Figure 16(a) Contract-Based Management Figure 16(b) Trust-Based Management
Figure 16 the Sensitivity of P rofitability to the Standardization
Figure 16(a) demonstrates a large distribution of the profitability to the change in technological
standardization. On the contrary, Figure 16(b) demonstrates a relatively small distribution of
profitability. The profitability under a trust-based management has more robustness to the change in
the technological standardization level than a contract-based management. The capabilities which
support Monozukuri quality are to be built when the company adopts a trust-based management, but
they are not in the case of a contract-based management. When technological standardization is kept at
a low level, that is, a product keeps "integral architecture", the company which adopts contract- based
management will fail into a competition because of the lack of Monozukuri quality. A company which
adopts a trust-based management will keep high competitiveness by the Monozukuri quality in the
same scenario. This indicates that a company under trust-based-management has robustness and a
company under contract-based management has vulnerability. In conclusion, the high technological
standardization possibly reverses a direction of the Monozukuri system from a strengthening direction
into a weakening one.
22
5. Social Feedback
So far we have analyzed how the strong features of Monozukuri system get weakened by exogenous
factors such as management mode and technological standardization. (The effects of first three
exogenous variables are analyzed as a whole represented by management mode and the last is being
left unanalyzed in this paper due to a limited space.)
During the period of the so-called “Lost Decade” of 1990’s, Japanese economy had suffered from an
unprecedented recession and Japanese executives seem to have lost their confidence in Japanese
management in face of a prospering American economy. Many executives began to abandon a
trust-based management in favor of a contract-based management. This transition has been reinforced
by the revised Worker Dispatch Law in 2004 which enabled to employ contract-based temporary
workers in the production site of many Japanese companies.
As we have examined above, such a transition from trust-based to contract-base management has
worsened the performances of Japanese companies. Accordingly, unemployment has steadily increased.
This worsening trend seems to have climaxed in 2008, following the bankruptcy of the Wall Street
investment bank of Lehman Brothers. The Japanese society began to have been split into two classes;
the rich “haves” of the established workers and the poor “haves-not” of temporary workers.
Gradually social discontent against such discrepancies began to arise through media reports, and even
the powerful leading executives of the Japan Business Federation expressed their concerns in the
public. Management pendulum now seems to be swinging back to a trust-based management little by
little. This social repercussion convinced us of the existence of social feedback loop as an extended
part of Monozukuri system. Figure 17 illustrates an expanded part of the system presented in
Figure 10.
Socal Feedback SW
TBL of UER to SD Ww TE syeo
TBL of SD_to MM Time for POMP
Social Disatisfaction Duration
UnEmployment
—S— Rate +
Change of UER
Social
Management
Mode (MM)
BIAS MULTIPLIER
Table of MM to
Lifetime Employment
HRM of Lifetime
Employment
Figure 17 Adding Social Feedback Loop
To this expanded model, we have brought unemployment data of Japan between 1962 and 2009 as a
reference, and tried a calibration run to estimate parameters such as BIAS and MULTIPLIER in the
23
inflow equation of Change of UER =(HRM of Lifetime Employment+BIAS)*MULTIPLIER.
Table 6 displays its result.
Table 6 Initial value of parameters
Parameter Value | Parameter Value
BIAS 1.142 | MULTIPLIER 0.03455
Figure 18 illustrates our simulation result together with reference data.
Unemployment Rate
6
3
0
0 6 12 18 24 30 36 42 48
Time (Y ear)
UnE mployment Rate : Current -- 4 + 4. + + + sy
UnE mployment Rate : ReferenceMode
Figure 18 Calibration by referencing Unemployment Rate of past 48 years
Based upon this extended structure, we have constructed another table functions such as the one
between Unemployment Rate and Social Dissatisfaction in Figure 19(a), and the one between Social
Dissatisfaction and Management Mode (MM) in Figure 19(b).
? Social Dissatisfaction 7? Management Mode
! Unemployment Rate (%) | ‘Social Dissatisfaction
om) 5 10 * 0 (ow) 0.5 (High) 1
Figure 19(a) Unemployment Rate- Figure 19(b) Social Dissatisfaction-
Social Dissatisfaction Management Mode(MM)
Figure 19 Initial values of Table functions
24
Figure 20 displays our simulation for
profitability when Management Mode
(MM) is set at a value of 0.7, that is, under a
trust-based policy. It is observed to be
increasing as time passes.
Figure 21 shows that Management Mode
decreases by 0.3 toward a contract-based
policy at time=20. This reflect a case briefly
discussed above in which Japanese
economy is forced to adopt contract-based
management under a strong pressure of
economic reforms from the American
government during 1990’s. As a result of
this management policy _—_ change,
profitability seems to have improved
immediately. Unfortunately, however, it
tumed out to be declining again in the long
run.
Finally we are now in a position to
demonstrate how social feedback
re-reverses the situation that was once
reversed under a foreign pressure. In Figure
22 it is shown that, as unemployment rate
increases, social dissatisfaction increases to
a point where social feedback swings back a
pendulum from contract-based management
to a trust-based management little by little.
Accordingly, lifetime employment is
reinforced, and profitability begins to go up.
6.__ Conclusions
Is Japanese Manufacturing Style (so-called
Monozukuri) really robust? - this is a
question we posed in this paper. In the
beginning Monozukuri system was
structured as having three layers of
individuals, organizational and
inter-organizational levels. Accordingly we
intuitively thought that the answer could be
negative, because it seems very vulnerable
to outside shocks or pressures such as five
such factors we identified in this paper. In
fact, we found that these factors can easily
reverse strong features of Monozukuri to
weak ones.
As our research gets deepened, however,
we found that this reversing force could be
re-reversed when a social feedback loop is
introduced to the Monozukuri system. In
other words, if a social feedback loop is
MM-P rofitability
0.75 tee eT |
LL ee]
0 6 12 18 24 30 36 42 48
Time (Y ear)
“Management Mode(MM)" : Non Pressure yy 3g a
Profitability : Non Pressure
Figure 20 Management Mode - Profitability without
pressure from other management policy
MM-P rofitability
ha et PT
0.5
0
0 6 12 18 24 30
Time (Y ear)
“Management Mode(MM)" : Pressure MM—O. 3. —33__4__
Profitability : Pressure MM—O. 3 ———2—_a-_3 aa
36 42 48
Figure 21 Management Mode - Profitability with
pressure (-0.3) from other management policy at
time=20
MM-Profitability
0.5
0)
0 6 12 18 24 30
Time (Y ear)
"Management Mode(MM)" : Pressure MM—O. 3 SFB ——z——3
Profitability : Pressure MM—O. 3 SFB -2——2——_3 2 2
36 42 48
Figure 22 Management Mode - Profitability with
social feedback
25
augmented as a fourth layer of the Monozukuri system, the answer could be surely affirmative. It
depends on how seriously the Japanese society regards a social feedback as essential to the
Monozukuri system. It could be a contribution of this paper to point out the importance of social
feedback for enhancing the Monozukuri system, irrespective of outside shocks against the system, in
the long run.
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