Why Japanese companies do so many different things
Japanese firms like Toto (toilets) and Yamaha (pianos and motorcycles) aren't just diversified—they're a fundamentally different organizational species optimized for incremental refinement over shareholder returns, explaining both their dominance in precision manufacturing and their absence in software.
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"Consider, for example, the famous “Toyota Production System,” the philosophy that determines how Toyota makes its cars. In a Toyota factory, there’s a rope called the andon cord that runs along the assembly line, within the reach of every worker. Anyone who spots a defect—like, say, a misaligned door seal, or a bolt torqued to the wrong specification—can pull the cord and halt production at any time; once they’ve pulled the cord, the workers and team leaders closest to the problem will converge and try to solve it on the spot. In an H-firm factory, by contrast—you can think of a classic Ford plant here—defects are reported to a line manager, who will make a report and send it up the chain of command, and the higher-ups will solve the problem.
The andon method is really the J-mode in miniature. Information flows laterally, authority to act is widely distributed, and the people closest to the problems are the ones who fix it. And one result of the Toyota-style approach is that Japanese automakers have produced fewer defective cars than their American competitors for a very long time."
Supermodularity
Source
- Comes from a paper by Paul Milgrom and John Roberts, called “The Economics of Modern Manufacturing"
- Core idea in this paper:
- the practices defining "modern manufacturing" (flexible equipment, short production runs, low inventories, tight quality control, cross-trained workers, closer supplier relationships, faster product development) are complements, not independent choices.
- Adopting any one of them in isolation often doesn't pay; adopting them as a cluster can transform a firm's economics.
- For this, they posited that "Supermodularity" is one of the mathematical backbones for this.
What's Supermodularity (intuition-wise)
- the math of "the whole is more than the sum of its parts"
- the feeling that doing one thing makes every other thing you're doing more worth doing.
- Marrying someone whose ambitions fit yours makes your work better and their work better.
- Health, sleep, and focus compound. fixing one raises the return on the others.
- Writing publicly compounds with reading deeply compounds with having interesting conversations compounds with writing publicly
Summary used for search
TLDR
• Toto's toilet business is now overshadowed by its semiconductor component division (electrostatic chucks for memory chips), illustrating how Japanese firms excel across wildly unrelated domains
• The "J-firm bundle": lifetime employment, horizontal coordination (Toyota's andon cord), seniority pay, and hostility to outside capital form complementary practices that only work together
• This organizational form emerged from WWII's "1940 system" of total mobilization and proved exceptional at catch-up growth through patient capital and shop-floor refinement
• J-firms dominate precision manufacturing (optics, industrial ceramics, machine tools) but fail at paradigm invention (Sony had all smartphone components but Apple built the iPhone)
• Piecemeal reforms fail spectacularly (Fujitsu's performance pay disaster) because you can't change one practice without changing the entire bundle
In Detail
The piece uses Toto—a toilet manufacturer now making most of its profit from semiconductor components—to explore why Japanese corporations are so diversified and how they manage to excel across unrelated domains. The answer lies in understanding Japanese firms as a fundamentally different organizational species with a coherent "bundle" of complementary practices.
Drawing on Milgrom and Roberts' economics of industrial organization, the author explains that organizational practices work as bundles: each practice only makes sense alongside others. The "J-firm" bundle includes lifetime employment, horizontal coordination (like Toyota's andon cord where any worker can halt production), seniority-based pay, firm-level unions, and hostility to outside capital. These practices emerged from WWII's "1940 system" of total mobilization, where Japan reorganized its entire economy to maximize production. Unlike other countries, Japan never dismantled this system after the war. This bundle proved exceptionally good at catch-up growth—throwing patient capital and broadly-trained workers at incremental refinement until achieving world-class quality. Japanese firms excel in moderate volatility environments requiring constant small adjustments (precision manufacturing, industrial ceramics, optics) but fail at sharp discontinuities requiring top-down vision (Sony had all smartphone components but couldn't invent the iPhone; Japan dominates automotive but missed electric vehicles and software).
The bundle's self-reinforcing nature explains why reforms fail: Fujitsu's attempt to introduce performance-based pay collapsed because it contradicted the horizontal coordination and team cooperation the rest of the system required. You can't change one practice without changing everything. This organizational form prioritizes survival over profitability, making diversification logical—if you've committed to lifetime employment, you need to create jobs even when markets shift. The piece concludes that while the J-firm bundle may seem antiquated, it produces irreplaceable deep process knowledge. American entrepreneurial innovation only works completely when paired with Japanese manufacturing precision—they're complementary systems, not competing ones.