Japanese management is no longer the ‘flavor of the month’. Its heyday in the West coincided with that moment in the early 1980s when US confidence – both political and economic – seemed to be at its lowest ebb; after the debacles of Vietnam, the Iranian hostage saga and the lackluster Carter administration. Smokestack industries were dying, the agricultural heartlands appeared to be in great distress, and everywhere US industry seemed to be under threat. And the number one threat was clearly Japan. In VCRs, cars, cameras, entertainment systems and televisions – to name but a few – US manufacturers were rapidly losing ground to Japanese manufacturers, in some cases, such as VCRs and color televisions, vacating the field entirely. Not surprisingly, students and professors in the business schools wanted to know how it was possible, how Japan had managed to become predominant. That was the 1980s.

Now, fast-forward the overview to the turn of the century. What a difference a decade has made. In the brave new world of e-commerce, the US economy is absolutely and unchangeably number one. The new industries of the digital decade are dominated by US software, with Microsoft as a metaphor for the new economy. And what now of Japan? It struggled through the 1990s suffering the overhang of the late 1980s bubble economy, financial collapses, political incapacity, real estate crises and loss of national industry to foreign firms such as Renault. Who is interested in Japanese management now?

We argue that it would be a great mistake to write off Japanese management. Just because the Japanese economy has experienced slow growth and the average share and real estate prices have fallen, caused mostly by speculative investment by financial institutions, the practices that made companies such as Sony, Toyota and Nintendo household names have not suddenly disappeared. It was not Japanese manufacturing firms that committed these mistakes for they have continued to hold competitive power in the world market, even though their financial performance has been affected by depression in the home market. Most of these firms remain strong and globally competitive. As evidence of their competitive power, the exchange rate of the yen remains strong: it was 300 yen per US dollar in 1976, 250 yen in 1985 and about 100 yen in 1999. The yearly trade balance in the last ten years has been approximately US$100 billion and Japan is still producing many high tech products, such as automatic cameras, DVDs, LCDs, semiconductors, small ball bearings and cars that dominate the world market.

The Japanese management system is changing but its essential strengths are not eroding. Japanese firms have a number of crucial international advantages, in comparative terms. They still have a long time horizon and make large-scale investments for the future. Synergistic, related diversification through internal development and an extreme competition focus are key characteristics. They maintain ‘soft’ and flexible organizational structures that, while bureaucratically administered, are not arteriosclerotic. Moreover they are based on learning capacities grounded in respect for people and for the everyday knowledge that these people possess.

The contemporary trends we report are not forecasts but the new directions being taken by successful companies. Amid these new trends a number of central factors have remained the same. Balancing multiple goals while maintaining respect for employees remains of cardinal importance. Such respect has the highest priority because of the importance of knowledge accumulation in high technology environments. It is important to note that the time span attached to Japanese corporate goals appears not to be shortening under the changed economic conditions. Long-term vision remains essential to the development of high technology products and has not been sacrificed in favor of maximizing short-term profits and enhancing share values.

Some contemporary trends represent a shift from the past. Horizontal strategic alliances are increasingly being developed to expand the scale of production. This is particularly important in terms of maintaining an internal development strategy, typical for Japanese corporations. Such a strategy differs from the frequent use of acquisition and divestment in other countries, such as the US. Specialized career courses have been created so that specialists, rather than generalists as in the past, are encouraged and respected.

However some practices of the recent past have been retained, such as a wage structure based on the status ladder system. While external labor markets, pay for the job and downsizing have played a major role in countries such as the US, they are not found to a comparable degree in Japan. The employment system still places great emphasis on employability, and although the lifetime employment system has changed to some extent the big corporations still try to take care of the careers of their employees, even after retirement. While this may seem paternalistic to some foreign critics, it has led to a remarkable capacity for everyday, incremental learning and innovation at the heart of a mighty economic machine. It is certainly different from the hire and fire system, and places a very different set of knowledge management capacities at the heart of the organization.

After 1990 many companies suffered from low profits or financial loss, and some were allowed to go bankrupt – itself divergence from the bank–industry relations that previously prevailed. However these failed companies were mostly in financial services and rarely in manufacturing. In the past some of these companies were undoubtedly too oriented towards growth as an end in itself. Too many investments were made in unrelated areas; banks made promiscuous and reckless loans based on inflated real estate values, while construction companies became mired in trying to master hotel operations. Decisions were not made by consensus but by a few autocratic leaders, on premises that were more intuitive than analytical. Bad decisions were not corrected, instead, in an attempt to recover from failure, more mistakes were made and then repeated as firms fell deeper into debt. Problem solving was put off until disaster loomed like a tsunami on the near horizon. While such problems were not due to the Japanese management system they have changed some of its features.

To the outsider there is much about Japan that is puzzling, even mystifying. Few things are quite what one would expect. For an observer used to the dictates of Western management theory, with its stress on the supremacy of competitive and market-oriented institutions, much of the way in which the Japanese do business will seem wrong. The state will seem too directive, the banks too powerful and shareholder value too poor. The internal labor market will seem a costly waste of resources and a source of far too much organizational slack. The importance placed on creeds will seem naive – even the most uncritical would argue that it is not very likely that a few words could capture the complex relationship that people have with the world in which they work.

These outsider criticisms are readily answered. Long ago, before much was known about comparative economics and management, Karl Marx's Capital warned nineteenth-century economists not to assume that the current political economy – nascent industrial capitalism in this case – would remain an eternal verity. Comparative analysis only underscores this point for those who are able to see it – where seeing it means being able to work from the inside out rather than the outside in.

Although much traditional theory works from the inside out, it works from a different inside – an interior that is much more like that of the Anglo-Saxon economies, as seen in its most developed form in the United States but also evident – with local differences – in other countries of the former British empire, such as Australia, Canada and New Zealand. And while many of the studies that have been conducted in the traditions of this analysis are helpful in understanding particular institutionally authentic aspects of Japan, we believe that some things have been left untouched. And these, we contend, are capturable only by living in and observing its culture, and by deep and lengthy reflection.