“At one of the largest industrial printing companies in Japan, 98% of processes are handled manually and tracked by paper and pen.”
Source: Digital Transformation in Japan, Takeshi Higuchi, ServiceNow.
Digital Transformation (DX) has become a buzzword over the past few years as businesses try to navigate rapidly changing global markets. With the abrupt changes to work-life brought about by the Corona Virus, there is an even greater need to embrace more efficient and smarter ways of working. While technologies and infrastructure that enable the great work-from-home migration have already benefited massively, the emergence of innovative technologies will have profound impact on the future of work and the way we interact with both the digital and physical worlds. Digital Transformation, or DX, is this next leap forward into technology-centered business models.
What is Digital Transformation?
The customer-centric folks at Salesforce describe DX as “a process of using digital technologies to create new business processes, culture and customers experiences to meet changing business and market requirements.”
What’s the difference?
Digitization – converting paper records to digital files. Excel is a good example. Accounting journals were converted to files, but the process remained very analogue and easy to understand for people lacking IT skills. The files and folders were set up to mimic traditional filing systems.
Digitalization – using digital data to simplify how one works. Digitalization doesn’t change the nature of work, but it makes tasks far quicker and easier to manage.
Digital Transformation – changing the way that business gets done. Companies start to reimagine everything that they do, realize game-changing efficiencies, and deliver personalized customer experiences. Netflix is an example.
Challenges for Japan
For Japanese companies that are managed by consensus and weighed down by an ageing workforce, the obstacles to digital transformation can be particularly burdensome. For example, according to a recent survey by HR firm Randstad, just 2% of companies in Japan felt that they were prepared for the Covid situation.
However, the lack of progress towards DX is not a new problem and it is something that METI tried to address in a study group in 2018, which culminated in its report on “Overcoming 2025 Digital Cliff.”
METI clearly had an eye on overseas markets, noting that “New businesses have been appearing in all industries, employing novel business models based on game-changing digital technologies that disrupt established markets.”
A key challenge highlighted difficulty in data utilization across internal departments due to operational department-based construction and excessive customization of existing systems, causing the systems to be overly complex and closed. Old legacy systems are a black box. Engineers that built many of the original IT systems have retired, leaving a shortage of engineers who understand these legacy systems. Most IT budgets are now spent on maintenance of these highly customized firm-specific systems, rather than implementing more modern open source systems.
Government leadership
In one way, the corona virus has been a blessing in disguise for Japan, as it has revealed how far behind the country was in using technology to improve efficiency. There has been a rapid shift in mindset with a survey in the Nikkei highlighting that IT investment was likely to be up 16% in 2020. Meanwhile, online banking usage has risen by 36%, while the number of people signing digital contracts (rather than using the traditional Hanko stamp) was up 10-fold.
Policies initiated by Shinzo Abe under the banner of “three arrows” had some success. Japan’s Ministry of Health, Labour and Welfare has taken initiatives to reform traditional workstyle, due to the decrease of working-age population and the need for a more diverse way of working. This started to propel DX forward since a large part of manual labor can be streamlined or even substituted by technology.
Japan's new PM Yoshihide Suga’s policies are likely to turbocharge Japan’s digital transformation. Suga has appointed Takuya Hirai as Minister in charge of Digital Transformation. He will be tasked with outlining a “Basic policy to promote digitalization of Japanese society” and set up a Digital Agency to speed up the digital transformation of government administration. Where the government leads, the business community will inevitably follow.
DX Stocks
Against this backdrop, the Ministry of Economy, Trade and Industry came up with the Digital Transformation Stock Selection (DX Stocks) in which they select companies from among those listed on the Tokyo Stock Exchange that are aggressively utilizing IT to create new value and bring about management reform and improvement of profit levels and productivity.
Tha panel selected these 35 companies that were employing DX to change their business model and highlighted two - Komatsu and Trusco Nakayama, as “companies exercising leadership in the digital era.” JCV Partners believe that there are many more interesting small cap companies that are geared into providing DX solutions. Contact us for more information.