Cross border M&A’s by large Japanese firms have been on the rise over the last 10 years. So too have been overseas expansion efforts by small and medium sized enterprises (SME’s). In fiscal year 2011-2012 474 M&A’s totaling (US$92 billion) was the new record.
This activity is of course being driven by the current poor state and worse future prospects of the local economy, and the attractiveness of lower labor and other costs abroad. A more serious driver in recent years is the fact that many of the SME’s have discovered that the large Japanese companies they used to sell to have already moved their operations overseas and are now looking for local suppliers close to their overseas factories.
However, many of these ventures will fail to produce value if they are managed in the same way that the previous (bubble era) round of overseas activity was managed and if the wrong people are selected to lead them. The main cause was a lack of understanding of how to manage globalization: usually as a result of attempting to export Japanese management style to global operations.
Today, the ability to manage diverse workforces is critical to success: Japanese overseas investment is not just in manufacturing anymore. Now, Japanese companies must globalize R&D, logistics and marketing capabilities as well. To do this requires a clear business strategy and a corporate culture that functions across diverse markets. Companies that fail to do this well will end up risking much and losing huge amounts of money and big opportunities.
Reasons for Failure
The reasons for these failures can be grouped into two broad categories: (1) Poor post M&A integration management and (2) A lack of global leadership skills.
One extreme example is Nippon Sheet Glass. They acquired the huge British glass company, Pilkington, in 2006 in an effort to expand overseas. But due to poor planning, poor leadership and a culture clash, two foreign presidents quit in disgust and ultimately, NSG’s revenue dropped 35% by 2011.
Historically many Japanese overseas acquisitions have performed badly, producing little or no value and occasionally, huge losses.
1. Poor post M&A integration management [i]
The specific reasons for failed integration management efforts generally fall into four categories:
- Lack of alignment between Japanese home office and the overseas office
- Attempting to export Japanese management practices overseas
- Lack of attention to overseas talent retention
- Lack of skilled post acquisition management/leadership
In fact the inability to integrate the acquired company into the parent organization and benefit from business synergies often stems from language barriers, culture differences and a lack of mutual trust. As a result, the two companies fail to share knowledge and best practices and gain little or nothing from their union.
2. Lack of global leadership skills
In a recent survey of HR professionals and leaders in 2600 Japanese companies only 4% said that the leadership at their firms was of very good or excellent quality, compared to 38% globally [ii]. This tells us that Japanese companies are very aware and very concerned about the quality of their global leadership talent. As we can see from the data collected by the Ministry of Economy, Trade and Industry (see graph below) finding and training global leadership talent is one of the biggest challenges faced by Japanese companies when expanding overseas.
Figure 1: Problems experienced when establishing overseas operations [iii]
Another survey, conducted by Jeitosa, shows us a slightly different (global) perspective, but with some agreement in the sense that managing cultural differences and securing global leadership talent are very big issues for any companies seeking to do business globally.
Figure 2: Challenges to Being Global[iv]
Good examples of overseas expansion do exist: Suzuki Motor’s acquisition of Maruti Udyog, and Takeda’s acquisition of Millenium are good cases to examine. In both cases the acquirers had a very well-defined strategy for post acquisition integration, one that was focused on making the most out of the combined strengths of the two companies.
Collaboration is the key to success in mergers and acquisitions, the leadership of both sides must make efforts to understand their new partners and work hard to find the best way of operating in the new, hybrid culture to discover business synergies, share knowledge and leverage the benefits of diversity. To do this, a clear strategy, strong leadership skills and intercultural sensitivity are the foundation.
Update: The Suzuki-Maruti merger has begun to suffer somewhat due a series of complex labor-related issues. This just reinforces the fact that this type of deal is extremely complex and even the best plans will require effective implementation.
Global Leadership Competencies
But what skills are required for a global leader to be successful? More data from the same global survey suggests that the following skillset is ideal for leaders to function successfully overseas.
Figure 3: Global Human Capital Competencies[v]
But the question remains: is leadership competence development sufficient to achieve business success? Unfortunately, the answer is “no”. Without organizational support for global leadership competence, isolated efforts to develop global leaders will ultimately fail.
Global Leadership Development
So what can be done to develop leaders who can then guide these Japanese companies to growth and competitive advantage overseas?
Globalinx has been working with Japanese companies to prepare managers for overseas assignments in leadership roles for over 40 years and we have discovered one fact to be true. Simple training programs (leadership, intercultural awareness, communication skills, etc.) alone have not proved to be effective.
All too often graduates of such programs come back to Japan (after short overseas assignments) totally frustrated because although they may have worked very hard to develop their leadership skills, intercultural awareness, and communication skills, they have been unable to apply their knowledge and skills to produce any meaningful results. This is often because too much “organizational friction” has hampered their ability to get things done. And their overseas colleagues end up being equally frustrated because they see these well-intentioned managers getting tied up in red tape and bureaucratic complexity.
So a more holistic approach is necessary, one that takes into account the knowledge and skills of the individual as well as the organizational environment in which they will operate. Rather than thinking of leadership development as a skill-building activity on an individual level, one has to think of it as developing organizational capability.
[i] McKinsey and Co; Honda,K; Lostaglio,K; Oka,G: A Yen for global growth, 2012
[ii] Development Dimensions International; Global Leadership Forecast; Boatman, J; Wellins, R; 2011
[iii] METI, グローバル人材育成に関するアンケート調査 [Survey on the development of global human capital], 2010, p. 4.
[iv] 2010-2011 Going Global Report Highlights; Jeitosa Group International.
[v] 2010-2011 Going Global Report Highlights; Jeitosa Group International.