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$AS% ANA&'S(S A )ra*ition &ies +attere* Juan Fernan*e, What this case describes is not just a process of reforming Matsushita's Human Resource Management Systems, but a profound cultural revolution in this Japanese corporation. nstead of focusing on the reforms at Matsushita, the case might as !ell have been titled "Revolution at Matsushita.' #his deep transformation of one of its core values, lifetime employment, !ill, no doubt, have a long lasting impact in the relationship bet!een the company and its employees. #he change is much more serious than simply a reduction in the !or$ force in order to overcome an economic do!nturn. What %a$amura is actually doing is breaching the psychological contract bet!een the company and its employees. #he psychological contract is an implicit agreement bet!een the employer and the employees. t is based on a number of common e&pectations about the relationship bet!een the t!o parties. n contrast to the e&plicit labor agreements, it cannot be enforced by la!. Matsushita's old psychological contract offered lifetime employment and a sufficient income to have a decent retirement. t offered security in a society in !hich job stability is one of the most highly regarded values. #he ne! contract is based purely on economic interests, !herein stability is not guaranteed and pensions are reduced. 'ndoubtedly, this ne! contract has advantages as !ellit offers fle&ibility to Matsushita in times of economic do!nturns and better economic conditions to young employees. Ho!ever, this ne! psychological contract has a high price to pay( trust. )et's just ta$e one of %a$amura's *uotes from the case, + f every employee over ,- left the company, including myself, Matsushita !ould revive instantly.+ #ranslated into plain .nglish, this message is telling to all those old employees that have !or$ed hard during the best years of their lives, that they are no! a burden to the company. /ll those years of loyalty and sacrifices !ere of no value anymore. 0f course, %a$amura includes himself in his statement but doubt he !as seriously thin$ing of ta$ing an "early retirement' himself. )et's analy1e the old psychological contract and ho! it has been the foundation of trust at Matsushita. /s !e said, the old implicit agreement included life employment, promotion based on seniority and giving up present salary for future pension. n the old systems, employees !ere hired after graduation !ithout job e&perience. #he company invested heavily in training and education !ith the certainty it !ould recover that investment due to their loyalty to Matsushita. .ven more important, older employees !ere usually the best teachers of those ne! arrivals. Why2 Senior and e&perienced employees $ne! young people did not represent a threat to them as promotions !ere decided on seniority. 'nder those circumstances, there !as no chance of a conflict of interests. #his ready transmission of e&perience to younger employees benefited the company immensely. /ll that !ill change in the ne! contractual situation. 3urthermore, in times of economic strain, employees !ere !illing to reduce their salaries until the company !ent bac$ to profits. /s mentioned in the case,

Matsushita too$ pride in never resorting to layoffs even during severe recessionary periods. 4uring the Sho!a 4epression, 5onosu$e, founder of the company, operated the plants for only half6a6day and during the other half, as$ed his employees to sell their products door6to6door. #he reason for this sacrifice !as clear( their lives !ere closely lin$ed to the survival of the company. n the past, Japanese companies had t!o systems to respond to economic do!nturns( layoff of temporary !or$ers and across6the6board salary reductions. %a$amura is offering special conditions for "early retirement,' an euphemism for layoffs. Ho!ever, there is a critical point !e must consider. 3or most people, a job is not only a source of income, but an important component of their self6identity. t is !ell $no!n that employees undergo a sort of a personal crisis after retirement and, some go through an even more acute crisis of self6identity 7for being jobless8. #his connection bet!een job, social image and self6identity is even more prevalent in the Japanese society. /ll this is at ris$ !ith the ne! system at Matsushita. %a$amura !ill certainly succeed in his short6term objectives of improving operating profits. 3rom the economic point of vie!, layoffs have an immediate impact on profitability. t is a fast and relatively easy !ay to go bac$ into profits. Ho!ever, labor costs are only one part of the profit e*uation 79rofits : Revenues 6 ;osts8. <efore eliminating one of their core values, life employment, !ould as$ %a$amura( What are you doing to improve revenues2 Which other actions are you implementing to reduce costs besides layoffs2 7 raise these *uestions primarily since the case is silent on %a$amura's actions !ith respect to the efforts being ta$en to improve the revenues and reduce other elements of costs8. #o revisit a point raised earlier, early retirement is a glorified !ay of laying6off the employees and most employees $no! this. %e!s spreads rapidly and the problems at the baragi plant in 0sa$a !ill only help foster the climate of distrust. %a$amura has not initiated a reform but a revolution that !ill subvert a core value of the corporation( trust. #he old system obtained something that e&perts on motivation preach as a crucial element( alignment of the employee's objectives to the objectives of the company. 'nder the ne! philosophy, that spirit is gone. #rust is a very po!erful but, at the same time, fragile concept. t is very difficult to build, very easy to brea$ and once it is bro$en, things can never be the same, even if it is restored. The author is Associate Professor of Management at China Europe International Business School (CEIBS), Shanghai, China. = ;3/ 9ress. /ll Rights Reserved.

$AS% ANA&'S(S )he -.u/ane' 0ay Out1 Aneeta Ma*ho2 #he !orld of !or$ and business in the global scenario is increasingly proving that the "!elfare6 oriented' model !ould not !or$ in competitive situations. <usiness partnerships bet!een management and employees are all about creating !in6!in situations that benefit both of them. When either party ceases to benefit, the partnership becomes unviable and this is a time to reconsider the commitments made to each other. #he commitment of Matsushita to life6time employment for its employees, given by 5onosu$e Matsushita in >?>@, !as made in the conte&t of a supportive economic environment, !elfare policies of the Japanese government that provided subsidies to companies in times of financial crises, la!s that regulated payment of retirement benefits and legal protection to management and employees in face of

layoffs. n this conte&t, employees too, !ould have felt secure and contributed to the company out of a sense of loyalty and faith generated by the company's investment in their training and gro!th. #he above scenario apparently created a !in6!in situation for Matsushita as !ell as its employees 7even though the company might have had its share of "dead!ood' or non6productive employees that the system of job security tends to create8. #he situation changed in the late >??-s as the economic environment no longer supported the !in6!in scenario. #here !as !idespread economic recession, government policies changed and competition increased from ne!comers !ith lean revenue models. /s a result, the !in6!in relationship bet!een management and employees transformed into a !in6lose situation that put the management on the losing side. t is a !ell $no!n fact that no business relationship can survive if one partner is on the losing side. #hus, it !as time to redefine some of the commitments made on either side. #he ne! policies of Matsushita, spearheaded by the ne!er thin$ing of 5unio %a$amura, !ere clearly aimed at re6creating the !in6!in scenario that supported performance and merit6based .*ual 9artnership 9rograms. #he steps ta$en by !ay of performance lin$ed incentives, internal placements to help employees reach their full potential, fle&ible retirement benefits, supporting entrepreneurial spirit and increasing understanding and acceptance of employees of their o!n need to develop their s$ills through the multiple assessment program held out the promise that the company had the development of its people in mind. #he old system of lifetime employment and all associated philosophies and policies, !as one of the reasons for the financial hemorrhaging of Matsushita. 9olicy changes !ere brought about at a fairly bris$ pace once %a$amura !as appointed the ;.0 in June A---. <y /pril A-->, the ne! policies redefining the philosophy from being !elfare6oriented to being partnership6oriented, !ere firmly in place. <ut Matsushita continued to bleed. #he reasons for this lay in many management processes that !ere obsolete in the face of ne!er technologies and efficient systems. 0lder technologies re*uired higher manpo!er, but the ne!er technologies !ere made for economies of scale and !ere more manpo!er efficient. <urgeoning costs of high interest rate pension plans, large numbers of unutili1ed !or$force, and !aste generated through obsolete management processes continued to !orsen this bleeding. #his led to the continued and increased losses in A-->. #he battle for survival had to go beyond policies and philosophies. /ction on all fronts !as needed to stem the losses arising out of business relationships that !ere no longer mutually beneficial. #he early retirement plan of July A--> !as the only step that could be ta$en to revive the !in6!in management6employee relationship. #he design of the policies for early retirement conveyed the good intentions of management as the employees !ere given three months paid leave to find other jobs and generous compensation !as offered to the older employees. n addition, the top management set an e&cellent e&ample by ta$ing a !age cut itself. #his is indicative of the honesty of the intentions !ith !hich the early retirement plan !as announced. ;hanging from "!elfare6orientation' to "partnership6orientation' !ould not al!ays be easy. ndividuals are ultimately human and !ould feel that the management is "inhuman' in letting go of old employees !ho have put in over B- years 7in some cases8 of service. Ho!ever, the difference is that the management changed from being humane 7!elfare6oriented8 to being human 7partnership6oriented8. t is a common /sian problem to loo$ at all attempts at establishing !in6!in partnerships as being inhuman, e&ploitative, or selfish. #his is the cultural baggage of the ndian and 0riental sociali1ation processes that have seen centuries of oppressive rulers and employers, !ho have e&ploited the !or$ing classes, thus leaving the /sian mindset basically incapable of differentiating bet!een attempts at establishing e*ual partnerships and e&ploitation. #his mindset then, proves to be the main resistance that Matsushita !as to

encounter in the process of transforming from !elfare to partnership orientation. #he reports of "pressuri1ation' of employees to accept the retirement plan !hen there !as no !or$ for them and different perceptions of "redundancy' by employees !ho !ant to cling to jobs even !hen there is no !or$ for them, are all a part of the difficulty and the resistance put up by the employees to the changed philosophy. While the company continued to reassure the employees that no one !as being forced to retire and the choice !as left to the employee to ta$e the retirement, in practice, there !ere many !ho !ere still employed but did not have !or$ to do and thus could not justify that employment. #hese !ould probably be the ones that !ould ma$e the loudest noises of "human rights violations.' f one loo$s at things positively, !hat is ama1ing to $no! is that over >-,--employees 7of !hich @,C !ere non6managerial8 opted for the early retirement scheme by 4ecember A-->. #his !as far beyond the e&pectations of the organi1ation. #his is ample proof that there !ere enough employees for !hom the lifetime employment guarantee !as also becoming a burden and they preferred to ta$e up other means of employment. #ransformation does not come easily, especially in /sian countries !hich have strong socio6cultural roots that ma$e people !ant to cling on to the status6*uo. Matsushita is an e&ample of ho! companies can achieve transformation in free mar$et economies, provided they have the right intentions and are not driven by greed and a need to e&ploit, but by a healthy !in6!in orientation that ensures pay for performance and profit for all. The author is Professor - uman !esources an" #rgani$ation %e&elopment at 'arsee Mon(ee Institute of Management Stu"ies('MIMS), Mum)ai. = ;3/ 9ress. /ll Rights Reserved. $AS% ANA&'S(S Matsushita Nee*e* this $hange 'ichi 3hang #he case raises many significant *uestions from the human resources management arena, focusing on employment relationships in business organi1ations. #he reform of human resources management system at Matsushita touches on "changes of psychological contract' bet!een employer and employees. n essence, it is all about a firm shifting its strategic position in balancing the relationship among $ey sta$eholders under the pressure of competition. #his shift also reflects ho! the company's decision6ma$ing perspective changed from a long run6oriented one to a short run6oriented one. 9rominent among the several *uestions the case leaves one !ith are( Ho! to understand the impact of changes in employment relationships on the firm and its employees2 Ho! to evaluate the implementation of the early retirement plan2 /nd lastly, !hat is needed to ma$e such reforms a success2 <y nature, the e&change relationship bet!een employer and employees is a psychological contract. #his is to say that at the beginning of the employee's tenure, neither party can specify very clearly !hat !ill be the employee's contribution to the organi1ation and vice versa. n other !ords, it is a $ind of an open6ended contract. #he t!o parties cannot forecast even roughly ho! the ne! situations in the future !ill influence their relationship. <ut, no matter !hat concrete e&change terms are there in the employment contract, the fundamental principle is to $eep the interests of the t!o parties in balance all along. Historically, lifetime employment has been a typical feature for large6si1ed organi1ations in Japan's business fraternity. 3or many years, the system left a positive impact on the performance of Japanese firms. Since both the parties involved perceived a long term e&change relationship, they adopted long6term action plans. /t the early stage of the employment relationship, firms invested heavily in s$ill and $no!ledge training. Mean!hile, the employees too !ere !illing

to learn. Hence, firms !ere able to develop a productive human capital base. /nother point to be considered here is that under the lifetime employment system, employees are !illing to accept relatively lo!er !ages in the initial years, in anticipation of a gradually fattening pay pac$et during the later years of employment. /s theoretical analysis of lifetime employment systems indicates, the e&change bet!een employer and employee is of long6term e*uality. n the first half of the employment relationship, the employer pays less than the contribution of employeesD and in the later half, the employer pays more than the contribution of employees. ;onsidering this situation, leaving a firm early6on !ill reduce the overall income of the employee. #his is the main reason !hy employees usually do not *uit easily under the lifetime employment system. #his specification !ould be helpful for us to understand !hy it is more difficult for Japanese employees to accept early retirement programs than their counterparts in the 'S. .vidently, the lifetime employment system benefited Japanese firms prior to the early >??-s in the form of a compatible climate of high training investment, lo! turnover rate and high employee loyalty. +#he lifetime employment system has created among Japanese employees a degree of loyalty to the firm that is much envied by /merican managers.+> #his is very helpful to e&plain !hy the overall productivity in Japan gre! rapidly during that time period and !hy product *uality of Japanese firms enjoys a good reputation all over the !orld. When the e&ternal environment changes and global competition ma$es it hard for firms to maintain the lifetime employment system, a change has to be brought about. <ut as the dominant player of the relationship, the firm must be very conscious to the potential influence of its decisions on the employees 7and itself as !ell8. #echnically, in the design of early retirement programs, some cost6benefit analysis can be very helpful. /s a voluntary *uitting system, the inducements for early retirement need to be calculated carefully. /ccording to study conducted by 4r. .d!ard 9 )a1ear,A there are four $ey variables at !or$ in this $ind of an early retirement situation. <ased on these four variables, believe firms must try to ans!er the follo!ing *uestions( >. Ho! much !ill the employee contribute to the firm if he or she remains in the firm till hisEher regular retirement2 A. Ho! much !ill the employee cost to the firm if he or she remains in the firm till hisEher regular retirement2 7#he comparison of ans!ers to the above t!o *uestions can tell the firm !hich employees should be targeted for early retirement plans8. B. Ho! much he or she !ill earn if he or she leaves the firm and finds a ne! job outside the firm2 0nly after ans!ering the above three *uestions, the firm can determine ho! much to pay the targeted employee in order to induce him or her to leave voluntarily. #he underlying principle is to ma$e the sum of the severance fee and the future income in outside mar$et e*ual to or larger than the income !ithin the firm if he or she remains an employee. #o ascertain !hich employee segment should be induced to leave, !e can get another hint from the field of .conomics. /ccording to the human capital theory, the amount of firm6specific human capital in an employee !ill increase along !ith his tenure !ith the firm. #he implication is that it !ould be better to "buy out' the very young employees and not the older ones, as done in the case. Since the learning ability of younger !or$ers is high and their firm specific human capital lo!, their cost of leaving the firm is also lo!. #he reform of lifetime employment system at Matsushita gave employees an option to choose the early retirement plan at their !ill. #his !as very similar to the

mechanism of the so6called "retirement bridge' plans in the 'S. <eing based on the employee's o!n choice, it !as very li$ely that problems !ith adverse selection !ould affect the concerned employees immediately. n other !ords, those !ho !ere capable and s$illed !ould find a ne! job easily than those !ho !ere not. /s a conse*uence, the firm !ill lose more competent employees and retain the less competent ones. #his is contradictory to the interest of the firm adopting the voluntary retirement system. /nother issue in implementing the early retirement plan is the procedural justice of the reform. Since it is essentially a voluntary process, middle6level managers should not push the !or$ers hard andEor in an ill6 mannered !ay. What happened at Matsushita is not a uni*ue casein fact, it is one among many such instances. #he reforms reflect a major change in the management philosophy. #o cope !ith the fierce competition, the firm had to shift from the age6 old long6term e&change set6up to a short6term one. #he net effect of the reform is difficult to specify for no!. #he benefit the firm gets is that its labor cost are no! lo!er and conse*uently, profitability is high 7even if it is only a short6term impact8. S n the long run, there is a danger that organi1ational commitment to the firm from employees !ill be lo!er than !hat it !ould have been under the system of lifetime employment. /ccordingly, areas such as job satisfaction, product *uality and many other factors could also suffer. 3inally, !ould li$e to add that for such reforms 7of lifetime employment systems8, the government has to play an active role to protect the interests of the !or$force. The author is Professor at the %epartment of #rgani$ation an" Management, *uanghua School of Management, Pe+ing ,ni&ersit-, Bei(ing, P ! China. Richard # Johnson and William F 0uchi, "Made in /merica 7under Japanese Management8,' ar&ar" Business !e&ie., ,A6,, September60ctober >?GH, pp. I>6 I?.
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.d!ard 9 )a1ear, "9ersonnel .conomics for Managers,' ;hapter G, 7John Wiley J Sons, nc. >??@8.
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Reference K >H6-B6>-6-> = ;3/ 9ress. /ll Rights Reserved