Comparing How Japan Measures Performance

MostU.S.companies still use some form of return on investment as a primary measure of financial performance. This method is intended, obviously, to bring together both profit and investment management in order to yield a satisfactory return on capital and, ultimately, a return to shareholders. A number of scholars and some business people have argued, however, that obsessive adherence to the ROI objective results in a bias toward short-term results at the expense of the long-term future of the business. Prices are raised to increase profits, products are cheapened to reduce costs, and strategic expenditures are avoided. On the investment side, investments in capital with long payback periods are avoided.

As mentioned earlier, Japanese companies use return on sales as a primary measure of financial performance, but it should be understood that they do so in the context of a competitive market viewpoint that effectively assumes no price increases. The goal of no price increases, then, necessitates both cost savings and volume increases. Obviously, price reductions should drive volume increases, all other things considered, but it appears as though Japanese managers also understand that in a competitive environment a steady stream of new product introductions of higher quality and more features, especially if offered at lower prices, will increase volume. Those new products with additional features obviously cannot be provided without appropriate levels of strategic expenditures for new product development. Thus, the Japanese view declining prices, increased product capabilities, lower costs, product development, and increasing return on sales as fundamental components of long-term profitability.

Even though Japanese companies are not utilizing ROI specifically as a primary measure of financial performance, they do manage their investments. For example, the levels of inventory being carried by leading Japanese companies are far less than the levels of their American counterparts. We have seen Japanese companies turn their inventories more than 100 times a year. ComparableU.S.companies do not achieve 10 inventory turns annually. Similarly, Japanese companies use space and equipment very prudently because they recognize the high cost of space in their country. As a result, when one walks through a Japanese plant, one is impressed with the tightness and absence of excess. Many Japanese executives do not have elaborate offices; rather, managers frequently are located in “bull pen” arrangements close to the action on the manufacturing floor. The absence of high inventories eliminates the need for large warehouses and manufacturing space committed to work-in-process inventories.