As Japanese executives search for new sources of growth outside core domestic markets, they are looking to innovation as a source of differentiation and competitive advantage. Innovation means more than scientific invention: it is about providing new solutions to customers’ needs, either by using new technologies or by combining existing ones in new ways.
Japan is no longer the leading innovator it once was: it ranked 13th among the 130 economies featured in the Global Innovation Index 2021.1 While Japanese products are considered to be of high quality, they are sometimes overspecified. What’s more, the country’s manufacturers have been slower than the global competition to adapt to the changing needs of customers. That’s hampering Japanese companies in their export markets and allowing innovative overseas competitors to make inroads in Japan’s home markets too. Japanese executives are asking how their companies can make innovative products that address unmet customer needs, differentiate themselves from competitors, increase the value of their products without increasing costs or compromising on quality, and help their people become more innovative.
Barriers to Japanese innovation
Japanese businesses are known for their strength in process innovation, where outcomes are clear KPIs. Historically, they have been less effective in business model innovation, where outcomes depend on external factors, such as customer preferences. Japanese companies are world famous for high-quality products made possible by continuous Japanese innovation in process control: for example, the cell production system (CPS), developed by Toyota and usually referred to as the Toyota Production System, is now the global standard in industries such as consumer electronics and auto manufacturing. Japanese companies often see innovation as an extension of this traditional manufacturing mindset. As one Japanese academic put it in a survey of innovation in Japan, its companies see innovation as “the process and results of all efforts made to pursue perfection in the details of product or service.”2
Paradoxically, this commitment to continuous improvement may have created barriers to breakthrough innovation. These innovation inhibitors are related not to the inventiveness or technological capabilities of Japanese companies but rather to how they respond to their customers’ needs.
Innovation is not possible without connecting with customers. Design can serve as the bridge that connects companies to them. That makes design a key lever to help Japanese companies innovate by shifting value creation from a technology orientation to a customer orientation.
Design as an enabler of Japanese innovation
We all recognize good design when we experience it. But what do we mean by design? It is no longer solely about aesthetics but rather a business discipline that employs well-documented scientific methods to channel customer needs into new products and services. Japan has a long history of effective design. Sony’s Walkman, for instance, made our music personal and portable. The Shinkansen bullet train can take you anywhere in Japan at speeds up to 320 kilometers (almost 200 miles) an hour. The humble QR code has transformed how we keep track of virtually anything.
But what does design have to do with business performance?
In 2018, McKinsey research into the business value of design showed that the performance of companies correlates with specific design actions and behavior. This work—the first of its kind—was based on a detailed analysis of the financial and operational records of 300 publicly listed companies over a five-year period. It revealed that companies with top-quartile design behaviors outperformed industry benchmark growth by a ratio of two to one and had higher revenues and returns to shareholders as well. These correlations held true across sectors.
Specifically, the research found that design leaders tend to score well in four key themes: encouraging analytical leadership, delivering a seamless customer experience, following a cross-functional approach, and emphasizing continuous iteration (Exhibit 1). When we conducted a series of interviews with senior executives at Japanese companies, we found that cultural and organizational factors held back their performance in each of these themes.
Conversely, we also identified several examples of Japanese companies that have systematically worked to introduce good design practices across the organization. In this article, we look at the four themes, highlighting both the common barriers to success in Japanese industry and how they can be overcome.
Analytical leadership
Japanese companies tend to manage risk by ensuring consensus before making changes: leaders listen to the collective voice from below to make decisions. This has been a hugely effective way to achieve high quality in Japanese products; it picks up all the little details where things can go wrong. The unintended consequence of consensus decision making, however, is that high risk–reward ideas tend to get killed before they get to the leadership. Knowing this, engineers and designers are less likely to promote novel ideas.
Japanese C-suites are becoming aware that consensus decision making can inhibit innovation. Bold CEOs who believe in a customer-first approach are requiring teams to step out of their comfort zones to deliver more than incremental innovation. One such leader is the CEO of a Japanese equipment company, who believes that products should respond to the needs of customers—not engineers. Here, the CEO delivered a strong mandate to involve industrial designers, alongside engineers and marketers, in listening to those needs. Then, instead of using the engineering-led consensus-building approach, the company based new-product specifications on customer needs. As this CEO told us in an interview, “Design counteracts high-spec engineering with insights from the customer to get the right spec.” In addition to issuing the mandate, this leader took three important steps: ensuring that sufficient resources were committed to innovation programs, managing risk with small-scale pilot programs, and using market data to set performance KPIs.
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A Japanese medtech company is breaking away from the conservative, consensus-driven approach by using data to manage product portfolios. In the past, sales teams would lobby the company to keep all SKUs or risk losing customers. The inevitable result was a very large, complex product portfolio that was extremely costly to maintain. Now, some companies, including this one, are using customer KPIs (rather than just revenues and costs) to refine their product portfolios and product development plans. Executives are taking a more critical view of the performance of SKUs, combining sales data with customer insights to force the retirement of low-performing ones. For new-product development, business unit leaders expect reverse profit-and-loss estimates to justify investments.
Another company in the same sector is using data to inform product development decisions, seeking a quantitative answer to determine how hard it will be to develop a product. The company estimates such efforts by using data from previous projects, including engineering time, computer-aided-design (CAD) version history, and the level of communication among team members.
A seamless experience
Although Japanese companies put much effort into understanding their customers, many struggle to learn what those customers actually need. These companies tend to rely on sales teams and surveys to collect customer insights. This market information is often skewed toward the specific needs of the most enthusiastic customers or the most important accounts; it may not be representative of the needs of average customers. The result is a tendency to solve for every situation and a reluctance to eliminate low-value features that add unnecessary costs or, in some cases, even diminish the customer experience. This problem is amplified in export markets, where geographical and language barriers make the voice of the customer even fainter. In the words of the leader of a Japanese government agency, “Many organizations understand why they should incorporate customer needs more effectively into product development, but they do not understand how.”
Now, some leading Japanese companies are attempting to break away from the traditional model by using ethnographic research techniques to give product development teams first-hand insights into the customer’s needs and preferences. Several medical-device players, for example, have used a government-sponsored program to pursue a clinical-immersion approach. To observe the delivery of care in real-world settings, product development engineers are sent to the field. In addition to building their understanding of the market and identifying pain points and improvement opportunities, they are developing a deep empathy for patients and healthcare providers. In this way, engineers are improving their awareness of customer needs, not just the technical requirements of products.
Other companies are changing the way they draw up product specifications, which now include formal links to specific customer requirements. At the equipment company described above, a project intended to break into a new product category did so with a traceable design-thinking approach: every feature of the product was explicitly linked to an identified customer need. That helped engineering teams, and their managers, ensure that the voice of the customer was never forgotten. The CEO remarked that this approach is powerful because it “breaks down complex problems into manageable pieces.”
Cross-functional talent
In Japan, people with specialized technical skills are often praised as takumi, or artisans, but this mindset unintentionally leads to the formation of functional siloes. Successful design relies on fresh ideas and a wide range of viewpoints across functions. The free-flow sharing of ideas is harder in Japan, where industry is dominated by large companies with loyal employees and rigid organizational boundaries that restrict the sharing of information between functions.
Design-led companies work hard to ensure that customer-centric design is the responsibility of the entire organization, not of a single function. The most effective way to achieve that goal is to empower small and well-supported cross-functional teams with a mandate to move quickly and autonomously. Success stories emerging from these teams radiate out and inspire initiatives for other products. “Shifting to a cross-functional, team-based way of working is one critical way we have become better product designers,” the leader of a Japanese medtech company told us. “Cross-functional teams allow information to be shared and discussed simultaneously, driving common understanding and more innovative discussions.”
In volatile markets, embedded product costs can be a hidden treasure
This runs counter to Japan’s hierarchical, consensus-based approach, but some Japanese companies are now adopting it with considerable success. A medical-device player, for example, established a value-engineering department to refresh existing product lines by taking out costs and adding value. The team empowered to meet these goals used revenues and value at stake to select a product category. It then tore down samples of competitors’ products, developed clean-sheet cost models, and gathered customer insights from internal experts and physicians. Workshops generated hundreds of ideas, both value-up and cost-down. Ideas were evaluated by impact—the benefit to customers—and feasibility of implementation. Ideas were checked in a cross-functional group setting and selected for further development. The potential margins of the ideas chosen were estimated. A total potential-margin-value estimate gave business unit leaders the value at stake to assess which ideas were worth implementing. For one product, the team achieved a 50 percent increase in margin potential.
Continuous iteration
The final key enabler in good design practice is closely related to the previous two. Design leaders take a highly iterative approach to product development. Cross-functional teams create multiple prototypes during the design cycle, gradually adding and refining features. Critically, they test these prototypes with real customers in real-world scenarios wherever possible and use the feedback to improve future iterations.
This approach is derived from agile methodologies, which have transformed the speed, quality, and productivity of software development in recent years. It stands in stark contrast to Japanese engineering’s traditional waterfall methodology, in which product development proceeds sequentially through multiple stage gates and hand-offs between functions, and customers don’t see new products until the work is almost complete.
Extending continuous improvement
It can be a challenge to fit rapid, sometimes unpredictable, agile practices into the long-term planning frameworks that Japanese companies use. But the new approach does have important antecedents in Japanese industry. Gemba kaizen, the philosophy of continuous incremental improvement to shopfloor processes, is a fundamental element of the lean methodologies that have transformed manufacturing productivity, first in Japan and later in the rest of the world. Now, some Japanese companies are applying the gemba kaizen approach to product development.
For example, as an extension of the ethnographic research described above, some medtech companies have taken early-stage prototypes back to the field for user tests. The results have been transformative. In one case, early testing with concept mock-ups revealed that the initial product specification was not suited exactly to local needs. The company tweaked its concept and returned to the field with a higher-fidelity prototype. The final result was a better product—and a higher confidence of success at launch.
Other parts of the agile toolbox are also making their way into Japanese companies. At the design-focused equipment manufacturer described above, for example, engineers use advanced project-tracking software to manage a backlog of issues and requests for features during new-product development. The engineering and marketing teams gather each day for a stand-up meeting to report progress on tasks. Development work proceeds in three-week sprints, followed by a week of testing, review, and planning for the next sprint.
Exhibit 2 shows common inhibitors of good design in Japanese companies, and examples of good-design enablers reflecting the four themes of high performers in design.
In later articles, we’ll take an in-depth look at how leading Japanese companies are addressing each of these four themes and using them to boost their innovation capabilities. But in the next article in this series, we’ll examine a key challenge for many of the country’s industrial players: how to equip an existing workforce with the skills, capabilities, and attitudes needed to make great design happen.
