How East Meets West at Canon

CEO Fujio Mitarai explains the melding of Japanese and U.S. management styles that has turned his company into a powerhouse

Fujio Mitarai, president and CEO of Canon, is a rarity in Japan. He picked up his management skills during a 23-year stint building up Canon's U.S. operations, making him one of the most Westernized managers of a leading Japanese corporation. Yet he's also a strong believer in adhering to certain Japanese management principles, such as lifetime employment and a company board composed of Canon executives only.

His fusion of Eastern and Western corporate principles has helped him in the ambitious restructuring of Canon (CAJ ) that started when he took over in 1995. The result: Canon ranks with Toyota Motor (TM ) as one of Japan's most profitable manufacturers (see BW, 9/16/02, "He Put the Flash Back in Canon"). Because of this success, other corporate leaders are looking to Mitarai for pointers on how to prosper despite the economic downturn.

Mitarai spoke recently about his management philosophy and strategies, as well as the problems affecting U.S. corporations, in an interview with BusinessWeek Tokyo Correspondent Irene M. Kunii. Here are edited excerpts of that conversation:

Q: Many people regard you as an ideal manager, a role model for other Japanese managers. What do make of all this attention?


I haven't done anything unusual, just what needed to be done -- that is, I drove home the need for economy and rationalization. Take, for example, our corporate-division system. Initially, these divisions contributed to Canon's success, but later they hindered its development. Some performed very well, while others were unhealthy. The unhealthy divisions were losing money, while the profitable ones had become so independent that they would...hire their own staff when they required additional manpower.

The unprofitable ones had excess labor, but no one thought of moving their staff to the profitable divisions. These [profitable] divisions had become so independent, they didn't think in terms of what would benefit the entire company. It got to the point where divisions were building separate plants in China at the same time. If they had planned it centrally and moved to China together, they could have combined their costs. As it turned out, it cost Canon twice as much because these divisions...functioned like separate companies.

I realized we needed a revolution in the mindset of Canon employees. I got them thinking about what would benefit the entire company, and not just their own division. Plus I appealed to them to make profits a priority. I was able to do by pushing my message through many meetings and the corporate Web site. Once a month, I held meetings with Canon's 700 to 800 middle managers. I talked to them directly, explained what I was doing, and in that way got them to understand what needed to be done.

Q: What were the results?


In 1996, I made Canon's managers adopt consolidated balance sheets, so that they could see instantly which divisions were doing well and which were not. This is how I introduced a profit-orientated policy. At the same time, I introduced cash-flow management. To improve the balance sheet, I knew I had to do something about manufacturing, where most of our costs are concentrated.

After doing some research, I decided to introduce "cell-system" manufacturing [where workers assemble products in small, efficient teams, eliminating the need for more costly assembly lines]. It was tough to implement because it required a 180-degree change in how we did things. But it has been well worth the effort. We saved 540,000 square feet in factory space, which we were then able to use for warehousing. Combined with restructuring, this has helped us improve efficiency, cash flow, and profitability.

Q: What do you think of the big salaries that many American CEOs receive?


It's a market-based system where talented CEOs, who aren't that numerous, can demand and receive high salaries. It doesn't work in Japan, because we don't have a lot of people moving around in the job market. I'm not really interested in how much I earn. It's important, but it's not the most important thing in my life.

My American counterparts do earn a great deal, but then they contribute to universities and charities because of the way the tax system is set up. Japanese taxes are so high that it's no use to receive a large salary. I'm motivated by my ambition of making Canon into a truly excellent company.

Q: U.S. corporate governance has come under attack in the wake of the Enron and WorldCom scandals. What's your reaction?


Because stockholders in America are so strong, companies tend to manage with them in mind. This is nothing new, but recently shareholders have become too powerful. Managers tend to look at things on a short-term basis because shareholders expect short-term profits. That's one reason for the window-dressing of results. This has happened in the past, but it's more prevalent now. And that's why I'm not surprised to hear about what has happened in the U.S.

That said, very few American managers are guilty of such misdeeds. The managers of Enron and WorldCom are the exceptions. They make the news, but they don't represent American business. I'd say 99% of the top executives of corporations would never commit such misdeeds.

Q: Is the same true in Japan, where we've seen recent scandals involving companies such as Nippon Ham and Snow Brand [which lost the trust of the public over charges of mislabeling food or failing to recall poor products]?


They don't represent Japanese business. Most Japanese CEOs are very loyal, thanks to the lifetime-employment system. The basis of corporate governance in Japan lies with the ethical standards of the CEO and a company's board members.

Q: Do you think Japanese companies need outside board members?


I don't think so, but if a company does, then it should appoint them. Canon now has 21 board members, and I'm thinking of adding more because the company has grown. All the board members are corporate officers, and there will be no outsiders.

Q: Won't that make them all yes men?


That's what can happen in some Japanese companies, but not at Canon. Traditionally, our board meetings are open forums where members are free to voice their opinions. Our meetings are very dynamic and are held on an informal basis every working day. Canon opens daily at 8:30 a.m., and all the board members who are in Tokyo are required to be at work at 7:30 and at our meeting at 7:45. This has helped foster great communication and fast decision-making.

As for opposition, there's plenty of that. So much so that I wish the other board members would let up on me sometimes.

Q: How important is the lifetime-employment contract in Japan?


In Japan, where there is little fluidity in the job market, it works well. There are only 5 million to 6 million companies, and the numbers are decreasing, so there are fewer work opportunities here than in the U.S. That's why people [here] invest a lot in their education [in order to gain employment in leading companies]. In exchange for providing job security, companies gain the loyalty of their staff.

The disadvantage of this system is that the corporate environment can become too friendly, leading to a loss of vitality. This is why the seniority system [where staff receive salary hikes based on their years of service] doesn't work. As we've seen at Canon, you can revitalize a company by combining lifetime employment with a competitive salary system [based on merit].

Q: What do you say when analysts criticize your no lay-off policy?


Companies should be judged on the basis of their value. The U.S. system itself is not the only way. Canon has its own system. Our target is to raise corporate value, and we've found our own way of doing it. There are many ways to climb Mt. Fuji. Some start from the east side, others from the west. It depends on their culture, nature, and policy. Analysts should look at corporate policy, but they don't.

When I was a manager in America, I did things differently. The situation there is that if you offered lifetime employment, you could go bankrupt. You'd be left with people who didn't work. So you have to go with what works in the society where you're based.

Q: Yet a lot of Japanese companies are cutting staff these days.


Companies have their own reasons for doing so, but these are not layoffs in the American sense. For the most part, employees [here who are leaving their jobs] are retired early. It's a mistake to compare companies of different countries.

Edited by Patricia O'Connell

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