Viewpoints : Japan’s Achilles Heel : Its corporate global strategies are hindered by a history of highly centralized operational control.

The Japanese Juggernaut is in high gear. In the United States alone, Sony recently spent $3.4 billion to add Columbia Pictures to its communications empire, which also includes CBS Records. Similarly, Firestone belongs to Japanese giant Bridgestone, and guests at Inter-Continental Hotels are now enjoying hospitality courtesy of the Tokyo-based conglomerate Seibu Saison.

Japanese foreign direct investment last year alone jumped 40% to $47 billion--10 times the level of eight years ago--and Japan is now the No. 2 foreign owner of U.S. companies, behind longtime leader the United Kingdom.

The reaction to this investment invasion has been dramatic. Politicians, executives and public opinion pollsters have all registered concern about the implied “threat from within” that such investments could represent.

However, findings of a study that a colleague and I recently completed indicate that such fears are probably unfounded. The massive shift of assets and resources offshore is likely to become the Japanese companies’ Achilles heel rather than their Trojan horse.

While some Japanese acquisitions have been opportunistic, most are driven by new strategic imperatives. New and increasingly sophisticated demands by foreign governments are forcing many companies to replace exports with locally manufactured products. These pressures are reinforced by growing consumer demands for more customized products and by the development of flexible manufacturing technologies that allow plants to be closer and more responsive to local market needs.

So, while European and U.S. managers have been treating their Japanese competitors’ centralized operations as the ideal model for global competitive strategy, Japanese companies have been looking enviously at the politically connected, market-sensitive and locally staffed national units built by their Western counterparts over many decades. From Tokyo to Osaka, the new watchword is rokaru (localization).

While Japanese companies have initiated heroic attempts to localize their operations, the question remains as to how effectively they will be able to manage their more internationally dispersed operations. Their two major challenges will be to develop the means to integrate output from new offshore plants and research and development labs into an effective global network, and to give their non-Japanese managers access to and legitimacy in their management system.

Historically, most Japanese companies have treated their overseas operations as delivery pipelines for products and strategies developed at the center. Coordination has been created simply by extending abroad such traditional elements of Japanese management as nemawashi (consensus building) and ringi (shared decision making). Although such processes work well when all managers share the same cultural background and are in the same proximity, they can be transferred abroad only through the extensive use of expatriate Japanese managers (typically 10 to 20 times the number in comparable U.S. or European companies) linked by intensive communications and constant travel between headquarters and subsidiaries.

In the emerging, more globally dispersed Japanese corporation, however, the overseas units’ dependence on the parent company is being dramatically reduced, and cracks are beginning to appear in time-honored ways of management. At the most fundamental level, Japanese managers are finding that they can no longer keep the grueling travel demands required to build consensus and gain commitment from their colleagues scattered around the globe--a process that one manager termed “jet-age nemawashi.”

Tokyo-based NEC became concerned that this process was reaching its limits five years ago when an internal survey revealed that its corporate managers logged more than 10,000 trips abroad in 1983. Although the electronics company is working hard to develop alternative means of coordinating and integrating worldwide operations, it takes a long time to develop a completely new set of management systems and practices.

For Nomura and other leading Japanese securities firms, the slow, risk-averse decision-making process controlled from Tokyo has been one of the main impediments to establishing successful U.S.-based operations. Five years ago, their arrival on Wall Street triggered a minor shock wave; today their internal management processes are seen as constraining their ability to get close to the American customer, create innovative products or take the risks necessary to be profitable in the highly competitive U.S. market.

Even more difficult for Japanese firms has been the assimilation of foreign managers into their culture-bound decision-making process. Although most Japanese companies have made great strides in replacing Japanese with locals in many of their foreign subsidiaries’ top management positions, they have not found ways to integrate these individuals into their corporate decision making.

As a result, they continue to sprinkle their overseas operations with managers from headquarters. Through nightly calls to Japan and after-hours meetings together, this expatriate group develops such enormous power and influence that the local management often feels cut out of the communications loop and manipulated in the decision-making process. As a result, many Japanese companies have found difficulty in attracting and retaining top-quality local nationals in key management roles.

When Matsushita acquired Motorola’s television business in the United States, for instance, the operation had a strong and innovative R&D; capability. Indeed, within a year of the acquisition, they developed a synthesizer tuner that was adopted by the parent company for worldwide models. However, the U.S. group became frustrated when a contingent of managers and engineers arrived from Japan to provide “direction and coordination” with the central development lab, and within a short time more than half had left, including the most talented engineers.

And on Wall Street, the biggest challenge facing the Japanese firms is how to recruit top-level investment banking talent. The best American managers are simply unwilling to work in an environment where they feel that they are not in the mainstream of decision making.

For American- and European-based companies, this situation presents both a lesson and an opportunity. First, it should be clear that their networks of overseas subsidiaries represent important strategic assets to be protected and developed, not undermined by mindless calls for “standardization and centralization on the Japanese model.” The Japanese themselves are abandoning this strategy.

Second, by building on the strongest of their overseas units, rather than reducing their role to deliverers of products or implementers of strategies developed at headquarters, Western companies may be able to take advantage of a window of opportunity created by the current organizational challenges facing their Japanese competitors.

Proctor & Gamble has done so. While its highly innovative and efficient Japanese competitor Kao Corp. has been able to take on and beat the American giant in Japan, P&G; has used what it learned from those competitive battles to reinforce its own strong worldwide network. In mid-1980, this meant copying revolutionary innovations that Kao developed for disposable diapers; currently P&G; is diffusing worldwide the concentrated laundry detergent concept first developed by its Japanese adversary. Kao’s inability to exploit its own innovations outside Japan stems from the difficulty the company has had in establishing the kind of market-sensitive subsidiaries that P&G; has built.

For the new Japanese acquirers, a period of severe indigestion is likely to follow their current offshore investment bite. Along with P&G;, companies like International Business Machines and Ford Motor are discovering that the organizational capability to link their well-established overseas operations into an integrated worldwide organization represents their most important source of strategic advantage as they enter the 1990s. Other U.S. firms would do well to follow their lead while the Japanese are still in the process of painful readjustment.