Why Did Japan Lose Its 'Earning Power'? The Pathology of Large Corporations and the Culture of 'Outsourcing Everything'

Up until the last installment, I spoke about how 'Japan Inc.' has fallen into a serious deficit-prone structure characterized by sluggish sales and rising expenses, using the analogy of corporate management.

Now, let's get to the heart of the matter. Why has Japan's 'earning power,' which once swept the world, declined to such an extent? The answer is hidden within our very own success stories.

The glorious 'manufacturing line' model became the 'chains' that resisted change

It was undoubtedly the manufacturing industry that supported post-war Japan. Led by the automotive industry, it was a business model of 'mass-producing high-quality goods according to set procedures.' The diligence to faithfully execute a supervisor's instructions and the collectivism where everyone faces the same direction. When these meshed together, Japanese quality was praised as the best in the world, generating enormous wealth.
This success experience permeated every corner of society. Education aimed to cultivate homogeneous human resources capable of acting according to instructions, and companies established multiple checkpoints to enhance quality.

However, this perfect mechanism transformed into the root cause that eroded Japan's competitiveness as the times changed.
The 'checkpoints' for quality improvement eventually became 'responsibility decomposition points' to prevent the shifting of blame, and each one was spun off as a separate company. In this way, a 'multi-layered subcontracting structure' that is huge and complex, unparalleled in the world, was completed.
The rigidity of large corporations and the 'outsourcing everything' mentality of stopped thinking
At the pinnacle of this structure reign large corporations. However, they have forgotten 'aggressive management' that takes risks to challenge new businesses.

Within companies protected by lifetime employment and strict dismissal regulations, the mobility of human resources is lost, and employees are 'kept on the shelf' with low treatment. Instead of investing the profits they earn into future businesses or employees, companies either obsessively accumulate internal reserves just in case, or focus on real estate investments unrelated to their business. They satisfy shareholders with share buybacks and dividends while calling it corporate governance.

And, they stop sweating themselves and start 'outsourcing' every task.
* Administrative work... → Left to temporary employees to cut costs.
* Projects requiring advanced expertise... → Completely outsourced to consulting firms or major SIers (system development companies).
At first glance, it looks efficient. However, this is what drains the company's vitality to the core.

The worst outcome brought by 'outsourcing everything': Know-how disappears, and only consultants profit

What happened as a result of outsourcing specialized tasks? Know-how and insights that should form the core of the business were completely lost from within the company.

They cannot even understand the mechanisms of their own systems, and all repairs and improvements are at the mercy of the outsourcer. As a result, they fall into 'vendor lock-in,' where they cannot escape from the contractor they once relied on, and are forced to continue paying high maintenance costs to use old, difficult-to-use systems.

Business decision-making is delayed, and competitiveness is eroded. And the only ones who profit in this distorted structure are consulting firms that have no real business of their own and only undertake 'project management'.

This reality has also changed the values of the young people who will lead the next generation. What excellent students aim for is not to be entrepreneurs who create new businesses or engineers who support manufacturing. It is to be 'consultants' who can get high salaries without knowing the content of the business.

Engineers have been incorporated into the ends of the multi-layered subcontracting structure (such as SES), becoming mere existences that just trace and code the blueprints drawn by consultants upstream. With this, there is no way innovative ideas or technologies can be born.

The multi-layered subcontracting structure born from past success models, the inward-looking orientation of large corporations that fear change, and the 'outsourcing everything' culture of stopped thinking. These are intricately intertwined, destroying Japan's very 'earning power'.
Unless this structure is fundamentally reformed, Japan will never regain its shine in the international community.