Japan Poised For Digital Transformation?

Japan, a country known for its technological innovations in robotics and manufacturing, has surprisingly lagged behind when it comes to digital transformation. According to the 2022 IMD World Digital Competitiveness Ranking, Japan ranked 29th out of 64 countries examined in terms of know-how, development of digital technologies and their preparedness to exploit digital transformation. Other Asian countries finishing ahead of Japan include South Korea in 8th, Taiwan in 11th, and China in 17th.

The country is well-aware that it has fallen behind many of its G7 counterparts. Japan’s public sector is notoriously stuck in the analog age, with its endless paper-shuffling reliant on manual stamping. Since declaring its initiative to digitise in September 2020, the country established a Digital Agency to coordinate the digital transformation effort across government departments and the private sector. Yet standing in the way of digital transformation are some self-imposed constraints, including a risk-averse mindset, limited exposure of some companies to global competitors and a deficit of software engineering talent to build the necessary software applications.

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To better understand how Japanese corporate executives perceive digital disruption, IMD’s Global Center for Digital Business Transformation (which this author is part of) and NTT Data Consulting surveyed 609 Japanese executives with decision-making responsibilities related to digital. We compared the Japanese executive survey results against responses received from executives based in the US and Europe.

Over the next five years, approximately 80% of respondents from both Japan, United States and Europe predicted that there would be significant changes in their industries due to digital disruption. In response to the question, “When do you expect the impact of digital disruption to occur?”, the United States and Europe had a high percentage of respondents answering that it “is already happening.” In contrast, a high percentage of respondents in Japan answered that digital disruption will occur “within the next one to three years, indicating a significant difference in perception between these regions.

While the majority of surveyed respondents worldwide reported that they had a formal digital strategy, more than half of the respondents based in the US and Europe acknowledged that it was a fragmented one. A fragmented digital strategy indicates that most digital initiatives are incremental in scope, linked to process improvements in specific departments and functions.

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On the other hand, a higher percentage of Japanese respondents answered that they have a unified digital strategy consisting of a portfolio approach linked to clear business outcomes. In addition, a higher percentage of Japanese respondents answered that they are ready for digital disruption, when it will occur. This suggests that there is a growing momentum in Japan amongst firms to prepare for digital disruption.

However, for Japanese companies to be successful in their digital transformation, it will be necessary to improve their business agility in three ways. According to. Professor Michael Wade, IMD Business School, Japanese companies should focus on the following three aspects:

1) Develop hyper-awareness of both internal and external changes that are occurring around the business, and to identify future disruptive threats

2) Actively leverage data for informed and rapid decision-making

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3) Endeavor to promptly translate decisions into execution

The third aspect-translating decisions into execution-may be the most difficult challenge for many of Japan’s businesses. Its traditional corporate culture, valuing hierarchy and consensus-based decision, generates a reluctance to embrace change and a resistance to adopting new technologies.

Japan’s delayed progress in digital transformation is a cause for concern given its status as a global leader in technological innovation. While our survey indicates that many firms are prepared for digital disruption, the country needs to address its cultural and demographic challenges and take proactive steps to promote digital transformation across all sectors of the economy.