The Adoption and Diffusion of High Performance Management

Colloque : Changement Organisationnelles, Gestion de Ressources Humaines et Communautés de Pratiques

Université de Technologie de Compiègne

21-23 Janvier 2003

The Adoption and Diffusion of High Performance Management:

Lessons From Japanese Multinationals in the West

Peter B. Doeringer

Boston University

Edward Lorenz

Centre d’Etudes de l’Emploi, France

David G. Terkla

University of MassachusettsBoston

Forthcoming in the Cambridge Journal of Economis, March 2003. Research for the UK and French studies has been financed by the DG 12 of the European Commission under its Targeted Socio-Economic Research (TSER) Programme (Contract No. SOEI – CT1078). The research on the United States was supported by the W. E. Upjohn Institute for Employment Research and the Alfred P. Sloan Foundation. We would like to thank Nathalie Lazaric for allowing us to freely draw on her case study work of three French-based affiliates and we gratefully acknowledge the database and case study materials on the United States provided by Christine Evans-Klock. Research assistance provided by Robbie Judes and Christophe LeGuhennec is greatly appreciated.

Introduction

There is an on-going international debate over how to improve the competitive performance of the manufacturing sector in western countries. One focus of this debate is on managerial transformation and the importance of replacing traditional management practices with new “high performance” management practices, such as flexible work organisation, intensive training, the use of self-managed production teams, and the involvement of production workers in solving production and quality control problems.

Many of these practices resemble those pioneered by large Japanese enterprises (Koike, 1988; Whittaker, 1990).[1] Although questions have been raised in Japan about the long-term efficiency of some of these practices (Japan Commission on Industrial Performance, 1997), other analysts are persuaded that the Japanese high performance management system offers substantial efficiency benefits (Aoki, 1990; Porter, Takeuchi, and Sakakibara, 2000). Japanese multinationals have been at the forefront in introducing such practices into western economies (Kenney and Florida, 1993; Doeringer, Evans-Klock, and Terkla, 1998; Crowther and Graham, 1988; Munday, 1990; Elger and Smith, 1998; Sako, 1994; White and Trevor, 1983; Bourguignon, 1993) and there is growing evidence from western firms that such practices are IN FACT(Ned, I think this is unnecessary extra word, you make the call – DT) more efficient than the traditional practices that they replace (Abegglen and Stock, 1985; MacDuffie and Krafcik, 1992; Ichniowski, Shaw, and Prennushi, 1997; MacDuffie and Pil, 1998; Doeringer, Evans-Klock, and Terkla, forthcoming).

Nevertheless, the international diffusion of these practices has been relatively slow. National surveys show that it has taken over two decades for a majority of U.S. firms to use at least some of these practices (Osterman, 1994; 2000; Black and Lynch, 1999) and adoption rates are even lower in Europe (Coutrot, 1999; Dreher, et.al. 1995; EPOC, 1997; Waterson, 1997; Greenan, 1996; Lay, et.al. 1999). For example, the 1998 French Ministry of Employment survey of workplace employment relations, REPONSE, indicates that only 14% of establishments in France involve more than half of their employees in autonomous team organisation and the adoption rate s(RATE) of quality circles is only 11% (DARES, 2000, p. 5). [2] According to Osterman’s 1998 survey, the comparable rates for the United States are 38% and 58% (Osterman, 2000). While the 1998 UK Workplace Employee Relations Survey (WERS) indicates a comparable use of team organisation in the UK and the United States, it shows that a substantially smaller percentage in the UK (16%) make use of quality circles (Guest, et. al. 2000, p. 16).[3] Even Japanese transplants in western countries rarely adopt the complete system of management practices found in large enterprises in Japan. These data raise questions about the compatibility of such practices with more traditional western industrial relations arrangements.

This study draws upon the experience of Japanese transplants in the United States, the UK, and France to understand better how Japanese-style management practices are transferred to western economies and what constraints impede the transfer process. Japanese transplants represent an ideal test case for examining these issues. Their managers are well-versed in the strengths and weaknesses of high performance management, their parent companies typically invest in “greenfield” plants that are free of established management practices that might interfere with the introduction new practices, and there is typically a willingness to adapt Japanese management practices to western conditions if necessary.

We have conducted comparableSIMILARcomparable surveys and on-site case studies of management practices in Japanese transplants in the three countries. The comparative aspect of this study allows us to examine whether there is a single management regime that represents Japanese-style “best practice” for western countries, or if a series of national management regimes are emerging among Japanese transplants in different countries.

Our surveys reach similar conclusions to other studies; that Japanese-style high performance management practices are being transferred to the West, although often selectively and with various adaptations (Liker, Fruin and Adler, 1999; da Costa and Garanto, 1993; Pil and MacDuffie, 1995; Boyer, 1998; Jenkins and Florida, 1999, Doeringer, Evans-Klock, and Terkla, 1998; Abo, 1994). However, our major finding is that patterns of transfer and accommodation differs systematically from country to country in ways that suggest that new management practices are blended with traditional practices to create distinctive national “hybrid” management regimes. We also show that performance incentives for workers, particularly those involving “commitment” to the firm, are an important adjunct to the transfer of Japanese-style high performance management practices.

Further, Tthis paper ALSOalso provides a partial explanation for why Japanese-style high performance management practices do not diffuse more rapidly in the West. In addition, it is also It showsIT SHOWS shown that national differences in public policy and in the exercise of labour power through trade unions and informal workplace customs help to explain the existence of different hybrid combinations of Japanese and traditional practices in different countries.

The Global Transferability of Management Practices: Theory and Evidence

Two different theoretical frameworks have been used to analyse cross-national differences in management regimes. Theories of economic organisation see management practices as instruments for improving micro-economic efficiency and they implypredict IMPLY a convergence in management practices among countries with similar technologies and factor endowments (Williamson, 1975, 1985) . In contrast, theories of industrial relations systems (Dunlop, 1958) see management practices as embodying considerations of economic power, as well as efficiency. National differences among management regimes are, therefore, likely to persist as long as the balance of power between labour and management varies among countries.

Economic Theories of Organisation

Management practices are the subject of economic theories of organisation, where they are interpreted as instruments for correcting market imperfections and failures – transaction costs, imperfect information, and the potential loss of firm-specific assets -- that would otherwise undermine the efficiency of production (Williamson, 1985; Aoki, 1990; Frazis, Gittleman, Horrigan and Joyce, 1998;Delery and Doty, 1996; Lazear, 1998; Gibbons and Waldman, 1999; Dickens, Katz, and Lang, 1986; Katz and Summers, 1989). Some of these theories focus on the importance of human capital investment by firms, particularly when skills are firm specific. Others emphasise the need to resolve agency, information, and co-ordination inefficiencies within the firm. Still others regard compensation incentives and “efficiency wages” as the best approach to improving productivity and operation efficiency. The common element, however, is that these management practices can generate efficiency gains for employers.

It is typically assumed that differences in technology play a major role in determining the extent to which particular workplace management practices are adopted. The prominence accorded to technology implies that similar practices, or their functional equivalents, will arise in countries with comparable technologies and factor costs. This hypothesis about convergence predicts that Japanese-style high performance management practices will be transferred to the West because they have efficiency advantages over western practices in the areas of human capital investment, agency and information, co-ordination, and worker motivation.

Human Capital Investment

One source of labour efficiency in Japanese manufacturing is substantial investment in both firm-specific and general human capital (Koike, 1994; Aoki, 1990). Because lifetime employment and seniority-based pay in large Japanese factories reduce the risks of lost training investments, substantial amounts of formal training, informal training through rotating job assignments, and teamwork training, are common in Japanese manufacturing. In western countries, workers tend to quit more frequently, employment contracts are less permanent, and job tenure is likely to be of shorter duration, so that such intensive training investments are less common than in Japan.

Agency and Information

A second set of efficiencies in Japanese manufacturing stems from practices that reduce principal-agent problems, particularly where work effort and productivity are hard to monitor (Williamson, 1975; Lazear, 1998; Milgrom and Roberts, 1990; Katz and. Summers, 1989). The wage premiums paid by large Japanese firms, combined with deferred compensation through seniority-based pay and reciprocal employer-employee obligations based upon lifetime employment, are thought to provide “commitment» incentives that discourage shirking by employees. High wages, seniority-based increases in wages, and job security are also used to provide similar incentives in western countries, but jobs are less secure and the deferred compensation profiles are often less steep in the West so that shirking inefficiencies are likely to be more severe.

Co-ordination

Japanese management practices can contribute to the co-ordination of tightly scheduled and fast-paced “lean” production and are particularly important for just-in-time supply relationships. For example, systematically assigning workers to different jobs can give them a broad sense of the production process, problem-solving through quality circles can address scheduling and co-ordination issues, and flexible production teams facilitate the reduction of production bottlenecks (Aoki, 1990). The more common practice in western manufacturing is to develop bureaucratic rules of thumb for governing routine co-ordination and to make overall co-ordination largely a managerial responsibility (Williamson, 1975).

Compensation Incentives and Commitment Incentives

Japanese high performance management practices are reinforced by various types of incentives that reward human capital investment and productivity, reduce agency problems, and facilitate co-ordination and problem solving. For example, substantial annual bonuses are paid to workers that are contingent upon the performance of the firm (Koike, 1988). These bonuses provide a collective reward for improved productivity through learning, higher work effort, and employee participation in solving production and quality problems. They also tend to reduce principal-agent conflicts by sharing efficiency gains with employees. In addition, the Japanese nenko wage system also has a merit element that becomes important after several years of service as workers become more skilled and knowledgeable, and the deferred compensation aspect of nenko seniority pay can further motivate labour efficiency.

While piece-rate incentives and performance bonuses are sometimes used to spur productivity in western manufacturing, and seniority plays a strong element in promotions along job ladders, pay that is contingent upon performance is used less frequently than in Japan. The tradition in the West, until recently, has been to base pay on job content and to use seniority to determine job assignments.

Similarly, the loyalty and commitment of Japanese workers are secured through practices such as lifetime employment guarantees and the sharing of managerial authority with employees. The efficiency of employment guarantees is at the heart of recent debates in Japan over how to reform Japanese organisational regimes (Japan Commission on Industrial Performance, 1997; Porter, Takeuchi, and Sakakibara, 2000), but they remain a part of the organisational regimes of most large enterprises in Japan. Such commitment incentives, however, are much less prevalent in the West (Foulkes, 1980; Capelli, 1999).

Industrial Relations Systems and Management Practices

An alternative perspective on the transferability of high performance management practices across national boundaries focuses on issues of labour power and public policy and the exercise of power by labour and management, , as well as efficiency, within national “industrial relations systems” (Dunlop, 1958). According to this view, there are important national differences in the relative power of labour and management, and in the public policies used to regulate the workplace, which can lead to persistent national differences in the types of management practices that are adopted by employers even where technologies and markets are similar.

Comparative studies of national industrial relations systems provide considerable support for efficient eefficient management practices being contingent upon the local institutional context. Even where technologies are similar, Japan, the United States, the UK, and France have developed substantially different sets of workplace management practices that are closely linked to the formal and informal exercise of power(Cole, 1971; Dore, 1973; Maurice, Silvestre and Sellier,1982; Maurice, Sorge, and Warner, 1980; Braverman, 1974).

From this perspective, national differences in industrial relations systems may constrain the transfer of high performance management practices from one country to another where there are differences inunionlabour power and public policy. These constraints may block the transfer of particular management practices, or they may force modifications in practices to make them compatible with other parts of the national industrial relations system. In short, what is efficient under one set of national industrial relations arrangements may not be efficient under another.

Evidence From Japanese Multinationals

The most extensive evidence on the extent to which efficientJapanese-style management practices can be transferred from country to country comes from studies of Japanese multinationals operating in western economies (Cole, 1989; Kenney and Florida, 1993; Fucini and Fucini, 1990; Doeringer, Evans-Klock, and Terkla, 1998; Abo, 1994; Florida and Jenkins, 1996; Fruin, 1992; Crowther and Graham, 1988; Munday, 1990; Elger and Smith, 1998; Sako, 1994; Trevor, 1988; White and Trevor, 1983; Bourguignon, 1993; da Costa and Garanto, 1993). Corporate policies of Japanese multinationals typically require that their western transplants adopt the identical investment criteria, management information systems and productivity benchmarks that are used in Japan. More generally, the transfer of management practices is facilitated by the practice of staffing transplants with Japanese managers who have long experience with management practices in Japan.

The major exception to this pattern of transferring Japanese management practices intact is found in the organisation of work and the design of personnel and human resources practices. Here, the tendency is to blend Japanese-style management practices with those that are traditionally used in each host country. This process of blending or “hybridizing” Japanese and western work organisation and workforce management practices is the responsibility of western, rather than Japanese, personnel managers who are hired because of their familiarity with the industrial relations practices of the country in which the transplant is located. Although these western personnel managers are often sent to the parent company in Japan for training in Japanese-style human resources management, they are typically expected to design hybrid systems that accommodate established expectations regarding the exercise of authority and the structure of pay and careers. for managing the workforce that blend both Japanese and western practices (Doeringer, Evans-Klock, and Terkla, 1998).

The strongest evidence of this hybrid process comes from a handful of case studies that look at similar branch plants of a single multinational in different national settings (Fruin, 1999; Brannen, Liker, and Fruin, 1999, Sako 1994). These studies control for the practices and strategies of parent corporations, type of product being manufactured, and production technology. While the sample sizes are very small, they tend to confirm that parent companies and their transplanted Japanese managers seek to transfer major elements of the Japanese system, but that local adaptations are widespread.[4]

New Survey Evidence on Hybrid Organisational Regimes

Because there are so few case studies and no common research methodology, it is difficult to reach general conclusions about patterns of adoption and diffusion of Japanese-style practices in western countries. In order to address this gap, we conducted a series of similar interviews and surveys of Japanese transplants in the United States, the UK, and France. In the United States, the universe of Japanese transplants was defined using data collected on Japanese-owned affiliates by the Japan Economic Institute. The French and UK populations were defined from listings of Japanese affiliates compiled by the European Division of the Japanese External Trade Organisation (JETRO), the Anglo-Japanese Economic Institute, and the Office Franco-Japonais d’Etudes Economiques.

The European data were collected through questionnaires sent to the managing directors of all 223 manufacturing plants of Japanese affiliates located in Britain and all 108 affiliates located in France. The U.S. data focused on three industries with high concentrations of Japanese transplants -- rubber and plastic products, non-electrical machinery and electrical equipment – and were obtained through detailed case studies of 28 Japanese transplants randomly selected from directories of Japanese affiliates in three regions. To facilitate comparison, we use a subset of European responses (consisting of 21 plants in France and 44 in the UK) in the same three industries as the U.S. study (see Table 1).

The firms surveyed span a broad range of technologies (batch, assembly line, and continuous process), products, and ages. Specific products include computer diskettes, rubber industrial belts, automobile dashboards, computer printers, and machine tools. Most of the plants are medium-size, employing fewer than 500 employees (74%, 76%, and 79%, respectively, of the UK, French, and U.S. plants). All of the U.S. plants, 89 % of the UK plants, and 90 % of the French plants are newly created greenfield operations.[5]