[KOBAYASHI ] Today's theme is the business model for the 21st century, so I'd like to talk about the competitiveness of Japanese companies or what we can do to improve the competitiveness of Japanese corporations.

The overall topic for us is to root out the optimum management style for the 21st century. First, however, it might be beneficial to give a brief overview of management style in the 20th century. The global management standard in the 20^th century has been the maximization of monopoly profits of mega-corporations. In Japan, for instance, after the war, the Keizai Doyukai, Japan Association of Corporate Executives, of which I now head, felt there was a need for a change, because the focus was on capitalism where the concentration of everything was in the hands of the large zaibatsu. Therefore, we felt a different version, or a variation of capitalism had to be pursued. In this instance, we felt that it was necessary to make a distinction between capital and management as well as introduce elements of democracy. In the first half of the 20th century, therefore, there was a concentration of capital. The business model was to pursue such mega-concentration.

Fifty years later, however, what is the current global standard? Please don't correct me, saying that there is no proper English expression for global standard, because global standard is a common word we hear in Japan. Here, the business model is to optimize the capital of mega-companies. For a very short period of time, toward the end of the 1960s and in the 70s and by the 80s, this phenomenon was already disappearing and the Japanese business model was expected to become the benchmark for the world.

What was the typical Japanese business model like? Simply put, it was the idea of putting people at the top as well as the sense of unity and the pursuit of efficiency. Please don't argue whether Japanese business management was really efficient, but those who extolled the Japanese model, unity and efficiency and cherished human resources, were able to make a lot of money. That was for a short-lived period of time.

But what about the 21st century? I'm not going to argue that we should go back to the Japanese business model, but efficiency of capital should give way to, again, a focus on human value. I think a time will come when, once again, we will attach importance to human resources. This is not going to be in the year 2005 or may still not be the case in the 2010, but if we think about our organizers, we have to take a long-term perspective, or else they would not have given us the topic of the 21st century. Instead, they would have given us the task of talking about the business model for the next ten years. The title here says the next century. So I am trying to inject a long-term perspective into my discussion.

Now, let me state what you may have already taken for granted. It is very important for a nation or a corporation to increase and improve competitiveness. What should we do in order not to lose out in competition, and to be a constant winner in competition. Mr. Wallace of Cable and Wireless talked about this in detail -- to be number one. But there are many competitors who are all aspiring to be number one. Who ends up being number one depends on all the players. All are trying out various ways and means of achieving the goal of becoming number one. Some may not aspire to be number one but to be number two, a significant number two. At one time, there was a rental car company which aired a commercial on this topic of becoming the significant number two.

What is important is to look at the potential held by an organization and maximize the organizational potential. This may sound very simple, but human beings have intellectual strength, mental strength and physical strength. To maximize that potential, you have to train and exercise to maintain your physical strength; you have to study to maintain your intellectual strength; in terms of spiritual and mental strength you have to be exposed to various different challenges and experiences. If you just go to bed and sleep and have a pleasant dream, you are not going to be stronger. And this applies to both nations and corporations.

How to maintain the maximum level of a corporation's potential? You cannot win in competition just by having good potential. Potential has to be translated into results ---- how to maximize the conversion effect of turning potential into reality?

Back to the 21st century model, I said people will be at the core of our activity. I think there is room for improvement to maximize the potential as far as Japanese companies are concerned. But is the potential of Japanese companies low? No, I think Japanese companies now have a very high potential.

Now, I'm trying to talk about two potentials of the assets owned by the company. The first one is market opportunities. Mr. Wallace gave us a very good testimony that his company came to Japan because of the market potential in Japan. The Japanese market is the second largest after the American market, and consumers in Japan are very sophisticated. So if you win in Japanese competition, you can be sure to win in the United States or in Europe. There is a high likelihood that you can win once you are successful in Japan.

Mr. Morita, together with Mr. Ibuka, created Sony, which is an international, global brand. Those successful Sony products were created by Japanese consumers who appreciated Sony products, then, consumers throughout the world formed long lines to get a hold of Sony products. Of course, this may not have been the case with the very early Sony products, but this is a testimony to the strength of Japanese customers and Japanese markets, and these are attributes that still exist in Japan.

What about money? Last year when stock markets were low, the capitalization on Japanese stock markets was very high. Since then, the markets have improved, so our stock market is indeed very large. Maybe smaller than the United States, but in Japan we do have a large capitalization of money. And we do have a large market in Asia. Even though there is a difference between industries, generally speaking, there is a strong market potential here in Japan.

Of course, close analysis will find a web of regulations preventing potential to be realized. Many people have talked about this in this forum already. They have to be removed to make the market more open, so that latent potential can be translated into reality. Even excluding this element of regulation, there is strong potential.

Now, to convert this into reality, do we have the strength to make this conversion? My answer, no doubt, is yes. We are capable of making this transition. Of course, again, the power differs from one industry to another. Generally speaking, people talk about the declining competitiveness of Japan, and that may be the case. But a certain organization in Switzerland has made a study in terms of technical development where Japan is number two constantly, after the United States. The competitiveness council of the United States talks about the capability for innovation, where they say that American strength is winning, but Japan, which has been following the U.S., is going to overtake the United States, maybe next year. One could argue that the American council is saying this to encourage American companies. But still, the fact that Japan is given high ranking in their evaluation is a tribute to the potentially high level of competitiveness that Japan has.

So are we safe, are we okay? Well, in three respects we are not that okay. Of course, we have to turn the non-okay factors into okay factors. That will allow us to make the transition from potential to reality; in other words, the conversion factor will become very strong if we take care of these three weaknesses.

One is that Japan lacks strategy, or Japanese companies do not work on the basis of a strategy. Professor Michael Porter said in his recent book that among Japanese companies there are only three or four companies that can be considered strategic companies. It is not relevant which three those are. Whether you have a strategy or whether you are a strategic company in the end is different. In other words, if you have to convert a strategy into reality, just owning a strategy is not enough. I think Japanese companies all have strategies ad nauseam. Many companies spend a lot of money asking outside consultants to work out a strategy. But after a short while of testing or tinkering with the strategy, they put the strategy back into the depths of their library, to perhaps be opened up again in 20 or 30 years.

The problem is how and why the strategy is not really utilized. In the process of creating a strategy, it doesn't matter whether it is a bottom-up or a top-down process. It is not relevant who makes it or how the strategy is made. But in terms of execution, the execution must be delivered by the top executive. If the head of the company says, "Please follow the leadership of the man in charge," that is not sufficient. Once a decision is made on a strategy, even though the strategy might be a borrowed idea, the top leadership has to own the strategy to bolster its development, as if the leader made it, to implement and execute it. And, their communication is very important so that everyone in the company shares this strategy.

I was not able to listen to Mr. Welch's discussion yesterday, but I know that he talked about four important points; four E's. Energize, he said, as I understand, was an important word. From the very beginning of strategic development, the top leadership has to be energized. And the entire membership of an organization must be involved in this process, they must echo the same feeling and must be sympathetic to the idea.

Unfortunately, I am speaking for myself when I say this, generally, Japanese are not very good at communicating. We are improving. Younger people are good at communicating, but top executives are really poor at the art of communicating. Of course Japanese top executives are becoming younger, but still the Japanese sentiment is that people who are very good at speeches cannot be trusted. We tend to say it is much more effective if someone sleeps through a meeting without uttering even a word, but then make an important statement at the end. What is being expected is to communicate to make people understand why the state of affairs is as it is, and what is expected of the individual member of an organization. This has to be understood through good communication, which should come from the top, and this is where a conscious change is needed in Japan.

I think in America that deliberate efforts were made to improve communication skills; you go through speech training because you know the importance of communication. Mr. Welch is a very good example. He uses not only aural communication but also handwritten fax, so that passion, or enthusiasm is filled by the receiving end of the communication. That is, the strategy has to be conveyed and communicated so that the sense of mission is shared by many people.

The second point is relevant to IMD and Stanford University. Although educational institutions are becoming increasingly important in Japan, we lack experts and professionals. Or even if there are experts, we are not utilizing them enough.

For instance, take globalization, we have to understand what this is all about and what is different from what we used to experience. In terms of information, in terms of finance, or in terms of the legal system, we have to rely on the resources of experts. Because competition is so severe, to always be at a high level of competition, we do need to use the resources of professionals and experts at a very high level, and their wisdom has to be reflected into corporate management.

Owning such professionalism will help heighten the level of the company itself. How to reflect such human expertise in terms of balance sheet numbers has been difficult. To measure the level of expertise, we use proxy numbers in terms of patent numbers or intellectual properties or the amount of salaries that are paid to these professionals. But in many cases, Japan has not made full use of this important resource, --- the strength of experts and professionals. Although we don't attach enough importance to what they can potentially provide, I think that they are golden eggs toward the future.

In Japan, there's lack of awareness that there is a professional expertise that can be consistently utilized in all industries, or within a certain industry. For instance, the question of outside directors. We have to change our state of mind, or else the potential that I talked about earlier will only end up being a potential, that is not fully realized.

Japanese companies also have produced many MBAs. I'm one old example, because I graduated in 1958. There are a lot of young MBAs. I wonder whether those who have obtained their MBA in the last decade or so can be utilized to their full potential. This is a potential that is highly utilizable. They can become full professionals. So you have to give them opportunities as soon as possible. I am not saying to make them a managing director of divisional sections soon. We should make the most of what they can offer by assigning them to important positions or posts.

So we need to create professionals, although it takes time. We should also utilize the untapped potential of MBAs as well as those who have returned from professional schools.

So by doing these two things, I think Japanese companies can attain a very high level of competitiveness. Now, business leaders in Southeast Asia may say that Japanese businessmen are spoiled because Japan seemingly has so many resources. The only thing is that Japan is not utilizing such a wealth of resources. I think the eyes overseas are looking at Japan as containing a lot of potential, while business management has to take the initiative so that potential can be turned into reality.

You cannot generalize what strategy would work best in this context. You need focus; you need speed. People will say different things. But in some industries, or in some companies, you can generalize instead of focusing on core competence. That can be a viable strategy. So I am not going to generalize about this. Having a strategy is different from your company actually being strategic. To become a strategic company in the true sense of the word, the top executives should make efforts to energize the organization through communications, and utilize and nurture professionals to act on the strategies. This is what is required of Japanese companies for now. If they work on this, I think the results are all but ensured.

Now, let me come back to the original subject of the 21st century management style. As Mr. Wallace said, we have witnessed the establishment of the network society. So many things are happening and so many things are changing at this moment. We talk about the introduction of IT, which has resulted in a change in the organization. IT makes an organization flat. That is not the first time we have tried that. In the past, we tried to make the organization flat; we tried to expedite communication. However, I believe there are two things that are extremely crucial. Compared to the past, I think IT will change the ways decisions are made in companies and the pattern of thinking based on decisions. I think we're going to see some differences, that is, basic differences. Globalization and networking demand the pattern of action and thinking that are different from what we had in the past. This is related to people, to some extent.

We have seen some short-term values that networking brings about have spread to not only large companies but small companies. In some cases, it has gone over the barriers of companies to individuals so that you need no organization. Infrastructure that was not available to the organization is now accessible by the individual. All of you could be day traders, and we don't need Merrill Lynch; we don't need Nomura Securities. In some industries, we are seeing the individual taking such an initiative. For the time being, I think we're going to see more and more of this.

Nevertheless, when we look into the 21st century, if we have individuals working independently, then what is the merit of an organization? What is the merit of a collective group sharing the values? Are they going to be useless? Those are the important questions that are going to be posed for the next century. We have an organization in the name of a company. It could happen that not only middle management but even companies themselves would be unnecessary in the future.

I think that some companies are going to disappear. At the same time, I wonder, when individuals have access to resources that were not available to them before and operate independently, is it going to be sufficient? No. The keyword here is trust.

As I said, Japanese companies have to be more strategic. They need to resort to the professionals more so than in the past. Furthermore, needless to say, they need to pursue higher levels of productivity. Mr. Ushio stressed in the panel discussion that there are things that need to be changed and those which need to remain. He tried to delineate what we need to pass on to the future generation in his presentation. In the past, we were in the same boat; we rode in the same boat as a company; we all shared the same destiny. I don't know whether this is the most appropriate expression, but recently, we talk about tacit knowledge, or explicit knowledge. If we look at Japanese companies, they had tacit trust, and that was very strong within the organization.

I believe that most Japanese people started off their career working in a certain organization and they have shared the same experiences over many years. Thus, there is a tacit trust among the members of the organization. However, with globalization, you are going to have different kinds of people coming to your organization, and you have to accept them. At that time, tacit trust is not going to be sufficient, but trust is important when you accept people from different backgrounds. We do cherish trust. So far, we are used to the tacit trust, but from now on, it has to be explicit trust, which is going to be more formalized. Furthermore, this trust should be transferable from one organization to the next, adding new values in the process. That is the kind of trust we need. Different from air, trust is created by the people. Thus, I think the organization and relationship among people that create trust will become very important as benchmarks of the business model for the 21st century.

When I assumed the role of chairman of Keizei Doyukai, I might have been presumptuous in giving my messages called “Beyond the "Manifesto for a Market-Oriented Economy.” As we look into the 21st century, we need to think whether the model that pursues maximizing capital is sufficient or not. We may need something extra, or we may need to subtract from that. It is just not efficient trying to maximize capital.

I hate to repeat myself, but we need to further enhance the merits of the market economy till 2005. I am not talking about the next five or ten years. I am talking about the next century. Even in the 20th century, or even if you look at the second half of the 20th century, we have seen a change of the business model. At one time, we placed importance on the Japanese style of business model emphasizing loyalty. If we look ahead for the next three to five decades, I would hardly say that the Anglo-American model would be the de facto model.

We need to look at human values. What is important is to maximize human values. I am not saying that the American employment custom is bad. I don't think we are giving due attention to maximizing human values even in Japan. Of course, we talk about placing importance on people, however, it is not just to assure employment. That is not sufficient. We need to maximize the capability of each employee, and we have to create an environment so that potential can be fully used. We need to have a business model that is more forward-looking, rather than assuring the employment of staff. If it is difficult to accomplished solely by corporations, then we need to develop a societal system in which not only corporations but NPOs participate. Unless we do so, we will not be successful in the next century. If we try to simply repeat what we have done, I think it is going to be a very dull society.

Maybe some would say, “I would like to make more money.” That is a value, too. However, if we really place importance on human values and if we really think about it, then we need to create a society and a management style in which humanity and people are at its core. I think we need to further pursue this in theory and practice. Although we didn't have exactly the same model in Japan in the past, it is true that we had some experiences and know-how that are similar. So let's go back into history, while we have the time. Let's try to learn from those experiences so that we can accumulate and compile a business model that is appropriate for the 21st century.

I would like to conclude my presentation here. Thank you very much.

[NISHIOKA] Thank you very much, Mr. Kobayashi. If I may be allowed to cite my personal impression, I think he was successful in filling the gap of the time horizon. Mr. Kobayashi even raised the question whether organizations in the name of companies would survive. And he focused on the people, and raised some other fundamental questions. And I do appreciate the presentation by Mr. Kobayashi.

I shy away from very pragmatic questions, but before I give the audience an opportunity to raise questions, allow me to be first.

You say that strategy has to be converted into results. There is one issue that did not come up today, to which we are giving much attention. How do we nurture the start-up companies? We are beginning to see some strategies to nurture start-up companies. How do you view the existing situation? And which direction do we need to go so that we can really convert the strategies into results?

[KOBAYASHI ] Thank you. As you said, when we talk about start-up companies or venture businesses, it is often said that we are not good at nurturing them. That is why the angel taxation system was introdcued. It is often said that we need some professional schools so as to nurture and train the entrepreneurs and professionals.

There are two important things, of which one I really don't know the answer to, that we can do. In short, it is culture. Here in Japan, even not just among the start-up companies, if existing companies are interested in exploring new businesses, they are not given first opportunity. They will be asked, "Do you have a track record?" "No." "Oh, if you don't have any track record, no.” And that is the end of the story. Furthermore, if you make a mistake, society will give you a big X mark, saying you're no good. And, it is going to be some time before you are given another opportunity.

I did say that I don't have the response or the solution. But slowly we are seeing more success stories. Even if there is somewhat of a risk, so long as the results are good, people are beginning to be appreciated more. So the process has started, although it will take time before it is more or less in a complete form.

There are some companies who are successful at the present, but many of them were venture businesses when they started. Mr. Song initiated the introduction of NASDAQ Japan. It was in 1979 when the U.S. started NASDAQ, and, at first, it was questionable as to how effective it was. But some people took the risk to introduce a new system, for example, in the name of NASDAQ. We didn't have similar efforts here in Japan.

It is true that some were trading OTC and others were enjoying some handsome capital gains. But what about the mentality of society at large? They were not interested. Thus, we need to educate the people that there are success stories. Mr. Ushio, and Mr. Iida of SECOM, or Dr. Inamori, they all started up their businesses. How come these businessmen were able to succeed? Did they have special connections? I think that they tried hard and they established the necessary networking to be successful.

On the other hand, there is something we need to reflect. When we were younger, our seniors gave us the opportunity to try something. I said that Japanese culture is a culture that does not provide the first opportunity. In a sense, we are part of the group that is not giving the first opportunity to others. As was said earlier, we have potential, and there are a lot of people who want to start up their businesses, and it is not just few. Thus, inclusive of myself, we need to rethink once again, “Are we giving enough opportunity to start-ups?” I think we need further efforts.

[QUESTION] In Asia, people have been learning from the Japanese experience so far. They felt as long as they follow the Japanese model, they will be successful. But now this belief is faltering. This flying-geese pattern is not going to be successful. So we may have to do something to change. My question is what is Japan's role in Asia and how to create a model that can be useful for Asia?

[KOBAYASHI ] Well, let me respond in both direct and indirect ways. And my indirect response to your comments is that Asian economies, particularly three economies, have experienced hard times since 1997, though they are coming back. Now, I said that there are many MBAs in Japan presently, most of them sent by their companies, but these companies have not made the best of these investments. The situation is totally different in other Asian countries. In fact, Asian companies have made too hasty use of their MBAs, not only in corporate environment but in the government environment as well. But those MBA returnees are occupying important positions. In the 20th century, Asian countries have tried to emulate Japan. There is still a gap in terms of GNP. But in terms of flow of the use of resources, such as the use of MBAs, or the speed with which foreign discoveries are incorporated into one's culture and one's economy, I think Japan and other Asian countries are now on the same level. Japan is not ahead of them.

We cannot generalize this discussion about all the Asian countries, because Asian countries are all different. There are several ways to go to Asia, such as see Asia as selective markets, do production, or put up research and development centers. But more importantly, I think collaboration is the key to this initiative. In the 21st century, there will be many instances where we will be working together with them.

In our case, we are present in Asian countries, though to a limited degree. In Taiwan, Singapore, and South Korea, during the past 10 years, they are beyond the stage where we are able to teach them what to do in management. In fact, the level of excellence of managers is very high. They are far ahead of Japan in terms of utilizing professionalism or expertise.

So, we will be able to create joint ventures in Asia in the future. In terms of developing a new business model for the 21st century, perhaps Asia can pursue their own unique model because they no longer see the Japanese model as viable. They may decide to follow the Western model, but still, the direct copying of the Anglo-American model may not work in Asia. I think there are many minds in Asia who think that their model is different from the Anglo-American model. Of course, I'm not trying to encourage competition between Asia and West, but a new collaborative relationship is called for from now on. We have to focus on this aspect of working together.

In my company, we have an advisory committee whose membership consists of members from Asia, and they do give us input which is very good food for thought and very stimulative. I think this kind of practice is going to expand in Japan.