Three Essential Elements for Rebooting Digital Transformation in Japan

Around the world, the wave of digitalization accompanying the covid pandemic has spurred digital transformation (DX*)-driven corporate business reforms, such as further synthesis of e-commerce and physical stores in the retail sector. Japan too has made some progress in putting remote technologies to use rethinking work done traditionally in the office. However, some companies in the country’s manufacturing, distribution, and service industries are falling behind in DX.¹

These companies are also struggling to find and train personnel with a grounding in DX. In its DX Hakusho 2021, a white paper on the current state of DX in Japan, the Information-Technology Promotion Agency estimated that 54% of companies in Japan lack any measures to improve employees’ information technology (IT) literacy through either in-house or external training. This is in contrast with the 87% of companies in the U.S. that are proactively boosting skills through such initiatives.

The gulf is widening between Japan and digitally-advanced nations. And by doing nothing to close it, Japan risks falling into decline just as humankind faces drastic social changes brought on by the appearance of new covid variants, the outbreak of war in Ukraine, and the challenges of decarbonization.

Our survey* on digital transformation has demonstrated that most initiatives have been either internal reforms of operations and organization, or system upgrades (Figure 1). Companies have been slow to implement fundamental structural reforms of how they do business—such as stepping up use of digital technologies in dealing with customers and suppliers—and leveraging digital tech in the supply chain.

We warned readers about this problem in the August 2021 MRI Monthly Review article “How Should Companies Tackle DX?”, offering readers with three keys to success: examining touchpoints, collaborating with companies across the supply chain, and training select personnel. The article also highlights four main reasons why Japan lags behind in DX, based on interviews with management teams responsible DX and our experience helping clients implement DX projects.

Whereas large corporations are making progress with digitalization, many SMEs with limited funds and IT talent still place and receive orders by phone or fax. As a result, they are still having difficulties with order timing and size. A lack of collaboration between companies has hindered their supply chains from growing stronger.

Identifying the best timing, considering the situation carefully, and securing the necessary personnel are all important to rectify the above problems and recover from a slow start in DX. This resonates with the three key factors for success in classical Chinese philosophy, “Heaven, Earth, and People”^†. Successful DX requires ascertaining the best timing to act (Heaven), making the most of the advantages of one’s situation (Earth), and gathering a team of like-minded members (People). Below we explore the best way to undertake DX based on the “Heaven, Earth, and People” principle.

Now is the time to tackle DX and harness digitalization to reform business models. But it needs to be understood as an approach that differs from traditional, defensive IT investment. It requires the ambitious goal of creating new value added by forging new, socially meaningful services.

A forward-thinking example from Japan is Fast Retailing Co., Ltd.’s series of reforms to create new services. Aiming to overhaul its business into a new format that commercializes information, the company is working to evolve its e-commerce business, creating products that fulfill customer needs ascertained through communication with customers and deliveries via its own logistics network.

DX must be premised on a full-scale review of IT measures while keeping a close eye on trends in digital technology and the company’s own position—all moving in unison to achieve established goals. Given the importance of launching new services quickly to survive intense competition, agile development*, with its adaptability to sudden specification changes, may be required for developing customer contact apps. However, potential progress in DX could be thwarted by a fall into the “digitalization as a catch-all” trap. Allocation of resources must be carefully calibrated.

The same applies to DX personnel. In another example, Ryohin Keikaku Co., Ltd. aims to establish “a new digital organization” saying it will, “Hire 100 professional personnel and transform into an organization that develops and operates digital services that go beyond E-commerce.”² It is crucial for companies to allocate sufficient resources, both time and people, to DX.

In practice, moving DX forward is a long-term undertaking. Working out an image of a company’s future—something that cannot readily be envisioned from the front lines—is similar to a long expedition. A compass is needed to navigate a long and perilous journey. Companies must move forward with DX while regularly monitoring their progress from multiple perspectives.

In cases where companies struggle to launch DX initiatives, setting interim and final goals to be achieved through DX can serve as the first big step forward. Important here is to chart the path to achieve the company’s goals and to reform the process for driving DX forward itself (see “The DX Journey®—Scripting the Story of DX”).

Ambidextrous management is an organization’s ability to be efficient in the operation of its current core business as well as preparing a future mainstay business. Advancing DX presents an opportunity for taking this approach. Some forward-thinking manufacturers like Siemens are putting this into practice. The company uses software to create black-box packages of its manufacturing know-how, which it sells to smaller companies in a form that protects its value added. The initiative has enabled the visualization of production data and trends for these companies.

Defining key performance indicators (KPIs) is essential for ambidextrous leadership to move business reforms forward. Management teams must make nimble decisions and communicate the results of DX initiatives to employees. The former helps to keep current core business divisions onboard, thus making it easier to build new future core businesses.

Gathering and utilizing data used to define KPIs is also important. Yet many companies have difficulty in utilizing KPI-related and other data. Advanced companies are focused on utilizing internal and external data to strengthen their competitive edge. See “Key to Successful DX is Utilization of Internal and External Data” in this issue of MRI Monthly Review for more details.

Mencius (Mengzi) asserts that unity among People is even more important than Heaven and Earth. A shared awareness is irreplaceable when people are working together toward a common goal. That said, there is no need to seek consensus at all costs. DX will require a solid understanding of the awareness of those at all job levels in the company.

In reality, what management envisions and what those on the front line envision are often polar opposites in DX endeavors. The opinions of team leaders, section and subsection chiefs, and deputy managers are especially unforgiving when it comes to DX. In the aforementioned survey, respondents were asked their level of agreement or disagreement with the statement, “Management’s awareness of problems and vision for DX strategies and their implementation were shared within the company.” Only 58% of section and subsection chiefs answered that they “agree” or “somewhat agree”, versus 82% of directors.

Companies must foster the awareness that all employees are in the same boat. Management should be responsible for ensuring that DX awareness takes root throughout the organization. And though management teams make change happen, they can’t do it all on their own. Companies with an organization dedicated to DX or a cross-organizational DX task force are far advanced in implementing specific DX initiatives. They are also more likely to have employees driving DX who have been trained on the job, rather than relying on outside help.

Companies must combine knowledge of how the company is run, the business, and IT measures; crucial too is close communication between management, the organization responsible for advancing DX, and employees tasked with implementation.

It may be possible to discover potential DX personnel outside the DX organization or task force who can serve as an intermediary between the organization for advancing DX and employees tasked with its implementation. In our survey, we asked how well employees not directly involved in promoting DX understand the significance of DX. About 27% replied that they had a good understanding of the significance of DX and actively adopt IT tools; this increased to roughly 70% when employees who were reluctant to adopt IT tools but had some understanding of DX were included (Figure 2). Fostering hybrid DX personnel—people with business experience who are highly motivated to digitalize—is also a crucial element of successful DX.