Has the Management Quality in Korean Firms Caught Up with That in Japanese Firms? An Empirical Study Using Interview Surveys

Abstract

Bloom and Van Reenen (Quarterly Journal of Economics 122:1351–1408, 2007) show that differences in management practices are related to productivity differences at the firm level. In this paper we conducted a similar interview surveys on management practices in Japanese and Korean firms in 2008 and 2012. We find that overall management scores as an average of organizational and human resource management scores in Japan are higher than those in Korea. However, the second survey shows that the gap in management scores between two countries has shrunken over time. In addition, average management quality in Korean large firms has surpassed that in Japanese large firms, which are consistent with the literature comparing big businesses in Korea and Japan. This study also compares additional aspects of the management style, such as speed in decision-making and the role of various communication channels, which are not done in the previous literatures.

This paper is a revised version of RIETI Discussion Paper 10-e-013. We thank Professors Mitsuhiro Fukao (Japan Center for Economic Research and Keio University) and Haruo Horaguchi (Hosei University) for their insightful comments. Professors Masahisa Fujita (President of RIETI), Kyoji Fukao (Hitotsubashi University), Kozo Kiyota (Yokohama National University), Jeong-Dong Lee (Seoul National University), Hideaki Miyajima (Waseda University), Elias Sanidas (Seoul National University), Dr. Masayuki Morikawa (Vice President , RIETI), other members of the project entitled ‘Research on Intangible Assets in Japan’ at RIETI, and participants at the seminar in RIETI, CAED Tokyo Conference held in October, 2009, Waseda University, Seoul National University, and Workshop on ‘Intangibles, Innovation Policy, and Economic Growth’ at Gakushuin University also gave us helpful comments to improve our paper. We also thank Professor Takizawa of Toyo University, and Professor. Kawakami of Teikyo University for their excellent research assistance. The interview survey in Korea was supported by Japan Center for Economic Research, Nikkei Inc., and Samsung Research Institute. The views expressed in this paper are solely for those of authors and an neither represent those of organizations to which authors belong.

Appendices

Appendix 1: Questionnaire (The First Interview Survey)

• 1. Dissemination of management principles (vision)

• Does your company have management principles that it has upheld for many years?

• What efforts are in place to have those management principles shared by all employees? (For example, announcing them at morning assemblies, or making them portable by writing them on business cards etc.)

• Are management principles also supported by parties such as external partners (customers, suppliers) or the shareholders?

• 2. Implementation of organizational goals

• Are there specific quantifiable goals on multiple levels that go beyond being just a vision or a slogan, regardless of the level of the goals (such as company-wide, divisional or sectional goals)?

• Do you ensure that the goals amongst divisions are consistent?

• Is consistency maintained between these goals and the goals of management principles or long-term company-wide goals?

• 2-1. Implementation of organizational goals (setting target levels)

• For example, are the parameters for divisional or sectional target levels simply given to you in a top-down fashion? Or is the input of your division or section considered in the setting of these goals?

• Are the target levels appropriately set as non-binding challenges?

• Are target levels checked to ensure they are equitable between divisions or sections? Please provide an example of how they are checked. (    )

• 2-2. Implementation of organizational goals (penetration of goals)

• Are all employees aware of these goals?

• If goals exist on various levels (such as company-wide, divisional and sectional goals), do all employees understand the level of priority of the goals?

• Do all employees accept these target levels? Please provide an example if possible. (    )

• 2-3. Implementation of organizational goals (degree to which goals are met, checks on performance)

• Are checks conducted to see how far goals have been achieved? Please give an example of how such checks are conducted. (    )

• Are such checks conducted on a periodic rather than on an as-needed basis? And how frequently are such checks conducted? (    )

• Are additional checks conducted that are decided by the section or department involved itself, rather than just being mandated checks?

• 2-3-1. Implementation of organizational goals (permeation of degree to which goals are met, and results of performance checks)

• Are the results of such checks made openly available within your division?

• Are the results of such checks made openly available within not only your division but also between relevant divisions?

• Are adjustments made to ensure that the comparison of the attainment of goals between divisions is fair? (for example, by utilizing common measures such as overtime hours?)

• 2-3-2. Implementation of organizational goals (results of checks - response when goals have not been achieved)

• Is a meeting of managerial staff and employees held as soon as it is determined that the goals were not achieved?

• After investigations, are action items to improve shared throughout the division, and are measures for handling the failure to achieve the goals promptly implemented?

• Are problematic issues and countermeasures made thoroughly known throughout the relevant division, and if necessary, other divisions? Please provide an example if possible. (    )

• 2-3-3. Implementation of organizational goals (results of checks - response when goals have been achieved)

• When goals are achieved, are investigations conducted so that those goals are renewed on a continuous basis or so that higher goals are set?

• How long does it take for the operation/implementation of those goals after the higher goals have been set?

• Are these measures institutionalized at a company-wide level?

• 3. Informal communication within the organization

• Are measures and activities other than formal meetings used to enhance informal communication? (for example, informal meetings consisting only of key personnel)? Please provide an example. (    )

• Are informal meetings held between divisions?

• Are informal meetings held between persons of various ranks?

• 4. Implementation of organizational reform

• Has your company undergone any organizational reforms in the last ten years? When did these occur? (    )

• Did your company use a consulting company at that time? What was the cost? (    )

• Did you determine the results of the reform in a quantifiable manner? By what percentage did profits increase or by what percentage were costs reduced? (    )

• 4-1. Period of organizational reform or strategic change

• Did the implementation of the organizational reform take more than one year? How many years were spent including the preparation period? (    )

• Why was organizational reform necessary? Did this have to do with the leadership of senior management?

• During the organizational reform, did mid-level management also strive to achieve the reform, thereby giving the sense of unity in the company?

• 4-2. Scope of the effects of organizational reform

• Were the effects of the reform evident in the divisions or sections? If they were, please provide an example of the effects. (    )

• Were the effects of the reform evident between divisions, and not just within one division? If they were seen between divisions, please provide an example of the effects. (    )

• Were the effects of the reform evident between the company and the business partners, and not just within the company? If they were, please provide an example of the effects. (    )

• 4-3. Details of the organizational reform (delegation of authority)

• Was decision-making authority delegated to those in a lower position as a result of the organizational reform?

• Were posts simplified in conjunction with decision-making authority being delegated to those in a lower position?

• As a result, was there a change in the description of the job or the way of doing the job? Please provide an example. (    )

• 4-4. Details of the organizational reform (IT activities)

• Did the IT system make your company more streamlined, for example by reducing the amount of paper-based documentation?

• In the last decade, did your company launch organizational reform, rather than raise business efficiency, by utilizing the IT system?

• Did an opportunity to earn new profits arise as a result of the organizational reform based on the IT system? Please provide an example. (    )

• 5. Promotion system

• Does your company have a mainly performance-based promotion system?

• If the promotion system is mainly performance-based, does your company have a management-by-objectives system? If so, when did that system begin?

• Did the performance of the employees improve as a result of using the management-by-objectives system and introducing a performance-based promotion system?

• 6. Programs to improve motivation

• Are there any programs other than promotion or pay-related schemes to increase the motivation of the employees? Please provide an example. (    )

• Is that scheme used on an institutional basis throughout the company?

• Do you monitor when the employees’ motivation, retention rate or job performance increases as a result of such a program?

• 7. Handling employees that perform poorly

• Are poor performers handled in some formalized way other than by verbal warnings?

• Does the response to poor performers include their movements to another positions?

• Are the measures implemented as soon as a problem is confirmed (before a routine rotation)?

• 8. Handling employees that perform well

• Is it an employee’s good performance shared within the division, for example by management praising employees at meetings?

• Do you have a system that ensures that good performance is linked to financial rewards or promotions?

• Was the motivation of the employees raised through introducing such a system?

• 9. Retaining talent

• How do you identify the high performance and core employees, mentioned in question 9, in your company? Please provide an example. (       )

• Are excellent employees treated well compared with ordinary employees? If so, how they are treated? (       )

• Do you have measures to prevent the loss of your excellent employees ?

• 10. Evaluating the interpersonal skills of managers

• Do the managers give clear criteria such as the degree to which persons of a lower position could be developed?

• Is there an incentive system, such as a pay-related or promotion-related system, to reward managers that have developed excellent staff of a lower position?

• Did the managers’ motivation increase as a result of introducing such a system?

• 11. Training for development of human resources

• Is there training on an occupational ability basis or an assignment basis, aiming to improve the work skills of the employees? Over the course of one year, on average how long is spent on training? (    )

(Training on an occupational ability basis refers to training in specialist capabilities that are required in each field, such as management, business, research and development, and manufacturing.

Assignment-based training refers to training in areas such as languages, OA, computing, and acquisition of official certifications.)

• Do business results improve as a result of these training activities? Please provide an example. (    )

• Are the effects of those training activities adaptable to other companies?

• 12. Developing human resources through OJT

• Is OJT performed on a daily basis?

  What percentage of the supervisor’s working time is spent on providing instructions to those in a lower position? (    )

• Does OJT contribute to business results? Please provide an example. (    )

• Are the effects of OJT monitored? Please provide an example of the methods used. (    )

• 13. Employees’ expertise

• Are employees rotated to different positions under a fixed schedule, such as once every two or three years?

• To improve the expertise of the employees, are they assigned to a position for a significant amount of time?

• Is there a systematic program in place to ensure the employees acquire some expertise?

Appendix 2: Questionnaire (Second Interview Survey)

• 1. Business environment and responses to changes

• a. With regard to the market your company is operating in, what are the percentages of revenue from your domestic and overseas markets?

• Domestic market accounts for 75 % or higher.

• Domestic market accounts for 50–75 %.

• Domestic market accounts for 25–50 %.

• Overseas market accounts for 75 % or higher.

• b. How do you see the competitive environment surrounding the market for your company’s major product or service (i.e., the product or the service that has the largest share in your company’s revenue)?

• Mild

• Medium

• Intense

• Highly intense

• c. What is your market share of the major product or service which relates previous question?

• About 0–5 %

• About 5–10 %

• About 10–25 %

• 25 % or higher

• d. How many rival firms are competing for a larger market share?

• None or one firm

• Two to five firms

• Six to ten firms

• Eleven or more firms

• e. What actions are typically taken when the market for your main product is favorable and prevailing prices are rising? (Please choose one or two that best describe the situation.)

• Expand investment

• Increase operating time to expand production capacity

• No changes

• Increase employees (transfer, or newly recruit employees)

• Reduce advertising and marketing expenses

• f. What actions are typically taken when the market for your main product remains stagnant?

• Cut down operations (reduction in sales and production including restructuring)

• Reduce prices

• Develop production methods to save production costs

• Explore new marketing methods

• Improve product quality and design as well as develop new products

• g. We would like to offer our deepest condolences to your employees who greatly suffered from the East Japan Earthquake that hit Japan on March 11, 2011. Please provide any examples of significant changes in corporate strategy caused by this unprecedented disaster, such as the relocation of production bases, or changes in product line-up.

Thank you for sharing your business environment with us so far.

We would appreciate it if we could obtain a brochure that explains your major product or service when we leave your office after completing today’s interview. We would like to study it to have a better understanding of your company. (Yes/No)

Then, let us move on to topics concerning corporate visions, followed by goals/targets on a more operational level. Questions can be answered ‘Yes’ or ‘No’.

• 2. Production management system

• 2-1 Production system

• Please describe your company’s production system? Has your company introduced a system aimed at minimizing inventory on the production line?

• Please let us know if your plant has a unique system of inventory management.

• How does your company manage inventory? How do you maintain the proper balance between inventory management and smooth operation of the production line?

• 2-2 Reason that your company introduced the production system

• What factors led to the introduction of your production system?

• Is your inventory management system mainly designed to reduce costs?

• Or do you believe that your system is more than just a cost-reduction method and that the system has far-reaching positive impacts on logistics, innovation and other systems?

• 2-3 Improvement of production process

• How has your company improved the production process in the last five years?

• How are problems regarding production processes typically identified and fixed? Please provide an example in which your workers recently identified and fixed a problem with regard to the production line.

• Do factory workers take the initiative to suggest ideas for improving production process?

• 3. Organizational goals/targets

• 3-1 Questions about goal or target setting

• Is each operating division responsible for setting its own goals/targets, rather than their being set at higher departmental levels?

• In terms of the difficulty of achieving the goals/targets, does the company consider ways to maintain appropriate levels of the division’s goals/targets (i.e., ensure they are not too difficult, not too easy)?

• Does the company ensure that all the divisions are treated fairly in terms of difficulty of division’s goals/targets? If any, can you provide an example of specific ways to manage these goals/targets? (    )

• 3-2 Questions about how goals/targets are shared by employees

• Do all employees understand the goals/targets of their divisions?

• If different goals/targets are established on various levels such as section, department, company etc., do employees understand how they relate to each other and what these priorities are?

• Have most employees fully bought into the goals/targets and are motivated into action by them, rather than just “being aware of” the goals/targets?

• 3-3 Questions about monitoring the degree of achievement

• Does your company monitor the achievement of the goals/targets? If so, can you provide an example of the monitoring method used? (  )

• Is such monitoring conducted periodically? If so, what is the frequency that it is conducted? (  )

• In addition to a system of institutional monitoring, do employees take the initiative to monitor their own achievements?

• 3-3-2 Questions about how monitored results are utilized

• Do employees share the monitored results of achievement, regardless of whether the results are good or bad?

• Do employees have easy access to the monitored results of achievement of the other departments with whom they work closely?

• Are there specific ways to make a fair evaluation of achievement across divisions such as the measurement of overtime etc.? If so, can you provide an example of such evaluation method? (  )

• 3-3-3 Questions about cases in which goals/targets are not achieved

• In case set goals/targets are not achieved, do managers and staff have a meeting in a timely manner?

• When the mangers and staff come up with ideas for improving performance in such meetings, are these ideas shared by staff in the division and put into action in a timely manner?

• Does the company ensure that such ideas for improvement are also shared by the other divisions? Please provide an example of specific ideas for improvement that are shared by the other division (    )

• 3-3-4 Questions about cases in which goals/targets are achieved

• When the goals/targets are met, does your company consider revising them to higher goals/targets?

• Is the time frame required to revise the goals/targets and to implement actions toward such new goals/targets within three months? How long is the time frame? (    )

• When revising the goals to higher level after earlier goals are achieved, are such actions institutionalized as part of a formal corporate process?

• 4. Human resource management

• 4-1 We understand that various measures are taken to improve employee motivation.

• Do managers evaluate employees mainly on the basis of performance (performance-based system)?

When was such performance-based evaluation system introduced? (Year  )

• Do you use incentives other than promotion and compensation to help improve the motivation of employees? If so, can you provide an example? (  )

• Do you monitor how these incentives lead to better outcome, such as greater motivation, higher retention rate or better financial results?

• 4-2 When we discussed organizational issues previously, we touched on the management and achievement of goals. Here, we would like to ask similar questions in terms of human resource management.

• Do managers take any specific measures other than verbal advice to employees when their achievements do not reach targets?

• Do such measures include transferring the employee to another position even if he or she has been in their current position for less than the average rotation period?

• Do such internal transfers take place promptly, and no later than the timing of regular rotation?

• 4-3 Questions regarding high-achieving employees

• When an employee achieves a high performance, do managers announce this within the division by praising the employee at meetings, for example?

• Does your company adopt a compensation and promotion system that is aligned with performance targets and achievements?

• Have you seen improvements in motivation by adopting such performance-based systems of compensation and promotion?

• 4-4 Questions about managers

• Does the company provide managers with clear guideline as to how they should cultivate the talent of their subordinates?

• Does your company adopt a promotion or compensation system in which managers are incentivized to foster high-achieving employees?

• Have you seen an improvement in the motivation of managers by adopting such an incentive scheme?

• 5. Human resource development

• 5-1 Questions about human resource development

• Does your company conduct employee training on a regular basis to develop their business skills?

• a. How many days a year, on average, does an employee spend on training? ( days)

• b. There are two types of corporate training programs: 1) functional training designed to obtain technical knowledge and 2) theme-based training designed primarily to obtain a certificate. Which do you focus on?

• Focus on functional training

• Focus on theme-based training

• Both training are conducted roughly equally.

• Do these training programs contribute to improving financial results? If so, please provide an example. (  )

• Do employees obtain a high level of transferable skills that could be utilized soon after she or he moves to another company?

• 5-2 Questions about OJT (on-the-job training), which is also an important training program

• Does on-the-job training (OJT) take place during daily operations? Roughly what percentage of a manager’s time is allocated to such OJT?

If it is difficult to specify the corporate-wide percentage, please base your answers on one of the divisions.

• a. On average (throughout the company) (  %)

• b. Front office/factory (  %)

• c. Back office (  %)

• d. Other specialist divisions (  %)

• Does this OJT contribute to improving financial results? If so, please provide an example. (  )

• Do you monitor the results of OJT? If so, please provide an example of how you monitor them. (  )

• 5-3 We understand that job rotation leads to the development of a company’s human resources.

• Ia your company’s job rotation program flexible? Do you think, for example, that the majority of employees are transferred within the base rotation period of two to three years?

• Do some employees stay in one division for a long period to cultivate a high level of specialized skill and expertise?

• Do you have a human resource development program that integrates various aspects such as training, OJT and job rotation that will help acquire a high level of skill and expertise?

• 6. Acquisition of human resources

• 6-1 Questions about your workforce, human resources itself

• Is your company able to identify core skilled workforce (star performers) in each division? What quality is typically shared by such star performers? (  )

• Are these star performers treated differently from other employees? If so, in what regard are they treated differently? (  )

• Has your company been successful in retaining your top talent?

• 6-2 An increasing number of Japanese companies are interested in utilizing non-Japanese employees or management.

• Does your company have non-Japanese employees or management? What is the percentage of non-Japanese to total number of management and employees? (  %)

• Do overseas subsidiaries have non-Japanese management?

• Do your board members (head office) include any non-Japanese persons?

• 7. Lifetime employment system

Last topic is lifetime employment.

How does your company view the lifetime employment system?

• Important

• Somewhat important

• Somewhat unimportant

• Unimportant

• 8. Relationships between employees (mainly full-time) and management

Which of the followings best describe your company situation regarding how corporate strategy is formulated?

• Top down decision making

• There are regular meetings between management and employees regarding compensation and human resource management, but corporate strategy is determined only by the management.

• In addition to 2, informal communication is common, where management tries to reflect the opinions of employees when it comes to issues related to compensation and human resource management, though corporate strategy is decided only by the management.

• Communication between management and employees plays a key role in reflecting employees’ opinions not only in human resource issues but also in corporate strategy.

• 9. Decision making and information flow

• 9-1 Let us suppose that multiple divisions are involved to discuss a new business project. If we say the total time spent from starting the feasibility study to launch the project is 100 %, what is the percentage of the time spent on nemawashi (i.e., the consensus-building process outside of formal meetings)?

• 60 % or above

• 40–59 %

• 20–39 %

• 19 % or below

• 9-2 Let us assume the case in which you must close or exit an existing business. Let us also say that the total time spent from the formation of the project team for winding down the business to start implementing the plan is 100 %, what is the percentage of the time spent on nemawashi (i.e., consensus-building process outside of formal meetings)?

• 60 % or above

• 40–59 %

• 20–39 %

• 19 % or below

Next, let us cover topics on information flow within the company.

• 9-3 Let us suppose that the total amount of strategic information within the company is 100 %, what percentage of information does the person who is in charge of one business unit have?

• 40 % or below

• 40–60 %

• 60–80 %

• 80 % or above

• 9-4 Let us suppose that the total amount of strategic information that one employee has is 100 %, what percentage of information does the person obtain informally (e.g., unofficial dinner with colleagues or bosses) rather than through formal ways such as conversation with the boss during business hours or corporate meetings?

• 20 % or below

• 20–40 %

• 40–60 %

• 60 % or above

• 10. Organizational reform

• 10-1 Please let us know whether your company underwent organizational reform in the past and how great the reform was.

• Has the company undergone an organizational reform in the last 10 years? If yes, we will continue questions. If no, we will move to question 5.

• Did the organizational reform entail changes to the existing organizational framework (e.g., was there restructuring of existing departments and/or sections)?

• Did the organizational reform go beyond the creation of a new business groups or the consolidation of existing business groups?

• Was the organizational reform conducted on a far greater scale that involved company-wide reform? The examples include transformation from a functional organization to a divisional organization or to a matrix organization, transition to a divisional organization or creation of a pure holding company.

Please allow us to continue asking about organizational reform.

• a. In which year did the organizational reform start? (  )

• b. How many employees were involved in planning and/or implementing the reform as a percentage of total employees? How long did the reform take?

(  %) (  )

• c. What was the major reason that your company decided to implement organizational reform? (  )

(If the answer is not apparent, we ask you to consider the following possibilities).

• It was clear that the existing organizational structure was not effective to save the company from further deteriorating business performance.

• Though business performance was not deteriorating, we felt it necessary to transform the organization as a countermeasure to competitors who had made similar reforms.

• Though business performance was not deteriorating, our external stakeholders such as major customers advised us to do so.

• Though business performance was not deteriorating, we felt it necessary to better meet the changing needs of the future.

• d. What was the major focus of the objective of such organizational reform?

(If the answer is not apparent, we ask you to consider the following possibilities).

• The major objective was to meet customer demand in a more timely manner.

• The major objective was to increase capacity to develop new products, services or new production processes

• Instead of volume or quantity, the major objective was to enhance the ability to offer better quality of new products or services.

• The major objective was to reduce costs, such as labor cost.

We imagine that much internal coordination was required to reform the organization. Such a reform must have resulted in a number of changes. Please answer Yes or No to following questions.

• 10-2 Questions about the organizational reform process.

• Was the time required for the proposed organizational reform to be accepted by a majority of employees less than one year?

• Did a majority of employees work with middle management in line with the proposed reform after the plan was accepted?

• Did employees suggest other constructive alternatives regarding organizational reform?

• 10-3 Questions about changes due to organizational reform

• Was some of the decision-making authority delegated to lower-level managers/employees as a result of organizational reform?

• Did such delegation of decision-making authority help simplify the organizational structure?

• Did the organizational reform lead to changes in terms of what employees do and how they view their jobs? If any, please provide an example. (  )

• 10-4 Questions about the relationship between IT investment and organizational reform, which are generally considered to be correlated.

• Did your company step up investment in IT after the organizational reform compared with the same period prior to the reform?

• Did your company make company-wide efforts to improve the utilization of information technology, rather than each section or division making IT-related plans individually?

• Did your company strengthen IT management to include not only the internal network but also external business partners such as customers and/or suppliers?

Please provide an example where an effective use of IT helped generate a new business opportunity, if any. (  )

• 10-5 We understand that a large budget is generally required for organizational reform. Please let us know about funding the reform, which is usually one of the challenges.

What do you estimate is spent on organizational reform as a percentage to your company’s annual revenue? (  %)

• a. How does your company raise these funds required for reorganization?

• b. Please provide a ballpark figure of the percentage of each source of funds to the budget?

Internally-generated cash flow	(  %)
Borrowings	(  %)
Issuance of bonds	(  %)
Issuance of stocks	(  %)
Other	(  %)
Please specify if you choose “other”.	(  )

Next question is asked only to those who answered “borrowings” in the question b.

• c. How did lenders such as banks evaluate the proposed organizational reform?

Please choose the response closest to lenders’ attitude.

• The reorganization plan was incorporated into their evaluation and reflected in borrowing conditions (loan amount, interest rate, maturity, security etc.).

• The reorganization plan was evaluated but was not reflected in borrowing conditions.

• The reorganization plan was not evaluated.

Next question is asked only to those who did not choose “borrowings” to the above question b.

• c′. Did your company discuss with the banks the possibility of borrowing to fund your reorganization? How did banks evaluate the proposed plan of organizational reform?

Next question is asked only to those who answered yes to the above question c′.

Please choose the response closest to the lenders’ stance.

• The banks analyzed the reorganization plan and tried to reflect it in borrowing conditions (loan amount, interest rate, maturity, security etc.).

• The banks analyzed the reorganization plan but it did not seem to be reflected in borrowing conditions.

• The banks did not analyze the reorganization plan.

• d. If reorganization costs can be recorded as assets, over how many years do you think they should be amortized/depreciated?

Please choose the one closest to your opinion.

• Over 7 years

• 5–6 years

• 3–4 years

• 2 years

• 1 year