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The business environment surrounding companies is now changing drastically as never before, and voices citing the importance of “digital management” are becoming more pressing in Japan as well. However, there are many people who do not really understand what “digital management” exactly indicates and how corporate management should be evolved in the future.

“Ignition Odyssey” is a media that was created based on such voices.

With Masayuki Chatani, Representative of KPMG Ignition Tokyo (KIT), serving as the “Pilot of Digital Management,” it introduces notable trends in the digital sector which KIT learned about while fulfilling its role to “guide management to a new stage by combining domestic and international leading-edge technologies with knowledge of the original businesses (tax services, auditing, consulting) that KPMG has been cultivating since its foundation.”

Now, Masayuki Chatani will explains how we are seizing “digital management” in the first place.

“Digital Management” Is a Form of Management Well-adjusted to a Complicated Society

Chatani

(Masayuki Chatani, Representative Director & CEO of KPMG Ignition Tokyo and CDO of KPMG Japan)

――In recent years, the importance of digital transformation (DX) has been strongly promoted and it has been indicated that “digitalization is a pressing issue” in the context of enhancing and streamlining productivity. In addition, the business environment has changed drastically due to COVID-19 since the beginning of 2020 and digitalization is an urgent issue that cannot be put off any longer. Consequently, there is not a single day that passes by without us hearing the word “digital management.”

However, I feel that there are few opportunities where we can discuss “what is digital management and why we must change in the first place?” in a convincing way. How do you define it at KPMG Ignition Tokyo?

Chatani:       Before I talk about it, let me put things straight that in regard to how management should be, there is “digital management and non-digital management.”

In my case, my working life started at Sony Corporation’s subsidiary Sony Computer Entertainment (currently Sony Interactive Entertainment), which developed the “PlayStation®️.” As you well know, Sony itself has shifted from analogue media such as records to digital media such as CDs, but as I had been involved from the beginning in the digital product “PlayStation®️ made with computer architecture, I have not experienced the analogue age. All the businesses I have been involved in since then have been based on digital technology.

This is why when I joined KPMG Ignition Tokyo, I came to recognize that “there are many companies that are not digital” and became more acutely aware of “digital management.”

Looking at social trends, we can understand that digitalization cannot be avoided not just for companies but for governments as well. This is a famous story, but in a small country like Estonia, almost everything has been shifted online through the promotion of e-Government.

This has enabled it to transcend the size and location of the country, which had been considered constraints before. Besides the case of Estonia, people who have gotten rid of their constraints have also started to increase recently.

In regard to where this appetite to “get rid of constraints” comes from, it may be easier to explain by using the example of trade conflict between the U.S. and China. As it has become impossible to procure parts from Chinese companies due to the policy of the U.S. government toward China, it has become necessary to review conventional supply chains and procure parts from alternative suppliers. As this will increase costs and influence the cost management of companies that are receiving the parts, its impact will expand to unexpected areas.

This can also be applied to changes originating from the recent COVID-19 crisis. As it is not just affecting one area but also spreading throughout the world, tremendous loads are being imposed to reoptimize various matters accordingly.

We can see from just these two examples that the entire social system is now rapidly becoming more complex then ever.

On the other hand, Japanese companies have been supported by human power in all aspects until now. It can be said that they have been driven mainly by the long years of experience, intuition and courage (KKD in Japanese) of the working people. While this method can demonstrate strength in matters that occur as an extension of the past, it cannot respond promptly to discontinuous changes such as the U.S.-China conflict and COVID-19, in which case, it will presumably be considered as a weakness.

In order to prepare for this, it is necessary to understand that there are signs of discontinuous changes and possibilities of changes in tacit knowledge, which has not become an empirical value, and that data is possibly the only thing that can serve as a hint. In other words, if long years of accumulation are considered an empirical value, singular points that occur therein can only be captured by data.

Even until now, we have been able to look back at the data and say “oh, this is what triggered the change.” However, my view is that from now on, it will be very difficult to maintain stable management unless we continuously collect and analyze data, trigger an alert when necessary or gather together teams and skilled personnel that can explore the data in a more in-depth way to prepare for discontinuous changes. This is because, otherwise, “everything that is outside the realm of experience, intuition or courage will become unexpected.”

However, we have learned that signs of what we believed to be unexpected matters, in other words, everything outside of experience, intuition or courage, can be noticed by actually collecting and looking at a lot of data.

This can be considered as evidence that “the social system is no longer simple enough for people to be able to cover it with experience, intuition and courage” because various matters have now become complex and have many parameters.

――Can it be said that one of the reasons why we can no longer rely on “KKD is that the industrial structure itself differs greatly between analogue and digital?”

Chatani:       In the 1990s, when Japan had the greatest presence in the world, business mainly indicated manufacturing businesses such as domestic appliances. If we look at the manufacturing industry from a management viewpoint, its structural outline, in fact, is relatively simple—profit is the difference between the selling price and the sum of parts and labor costs.

Compared to this, business is more complicated now. While hardware can still be evaluated by the difference between production costs and the selling price, we need to think of a fairly complicated equation such as, “how many software programs will be sold for one unit of hardware? How many peripheral devices will be sold? Will the software be sold as a package or through online distribution? And what will happen if an advertising campaign is launched...”

This means that businesses are composed of more complicated causal relationships than the “subtraction” evaluation which has been used in the manufacturing business, and that they are entwined with various companies like a mesh. It is impossible to resolve such a structure that may change with a chain reaction with intuition.

Such an age when answers can no longer be provided easily is called “the age of VUCA (volatility, uncertainty, complexity and ambiguity). There may be executives that would think, “so, we have no choice but to go with our intuition!” Of course, I do not reject intuition but executives must take responsibility if their intuition turns out to be incorrect.

In that case, it is more rational to seek more certainty and if the next move derived by computer calculation is more probable, one would be a fool not to utilize it.

More than anything, while people need sleep, computers do not and so it may become possible to handle system events that occur when people are sleeping by having computers monitor them 24 hours a day. If we delegate authority “up to a certain range,” they can process it automatically and reduce operational risks.

However, as digital technology is only a tool, we must treat it as a substitute, even though it may be better to use computers than have people do things. That said, I am confident that transition to a form of management where data-driven management decisions are made will occur without doubt.

How Digital Management Should Be in 10 and 20 Years

――We have come to understand the need to shift from conventional management to digital management and what digital management specifically is. However, if computers filling the role of management becomes common, as Mr. Chatani thinks, we may be able to see a future image where people no longer run businesses.

Chatani:       I think that there will be no change in basically people running businesses in the future. However, a digital “buddy” will be right there next to the management team including the CEO to help them when they are in need.

Just like cars that are equipped with safety features to protect drivers from fatal accidents in recent years, safety features will also be introduced in management to assist in avoiding fatal situations and preventing derailing. 

As for cars, it is expected that services and technologies that provide entertainment and non-driving amusement will develop if self-driving becomes possible. Digital buddies for management will also evolve to safely increase profits and value.

Chatani

On the other hand, there are many executives that have developed a “syndrome to do something with AI” on hearing that “the development of technology is amazing!” They insist on doing something, saying, “we need to do something because other companies seem to be doing something” and “AI can do anything, can’t it?”

It can be said that they have misjudged the skill in solving the problem and the sense of distance from the problem. I may venture to say that it is similar to saying “if we can go to Mars, we can also go to Pluto, can’t we?”

Going back to the example of cars, if we are told that “the car will turn right eight out of ten times,” we wouldn’t want to go in that car. Even if we are told that it is successful 99.9% of the time, we won’t feel good. But in the field of entertainment, a slight error will be ok. Another good example is, if you make a mistake in the seasoning of food, it is not much of an issue but a mistake in the amount of medicine will be fatal.

The point is, the accuracy required differs according to what field it is applied to. If we do not set the application range correctly, it will not only lead to not being able to respond to the expected value but will also be fatal.

When we receive requests, we also think it is important to provide correct explanations such as “that is technically impossible for this reason” or “it will be possible up to this part but from there on it is not possible at the current stage.” In such cases, if customers insist on “gambling on the possibility,” that will be a management judgement and it will also be important to deliver information so that they can make a correct judgement.

What is Essential for Shifting to Digital Management

Chatani

――To implement digital management, it will be necessary to organize an environment to collectively gather all kinds of data within the company. There may be many companies thinking that they must promote IT to prepare for this. An initiative to “promote DX” may also be possible as an extension. What will be important in promoting DX (digital transformation)?

Chatani:       When we work on DX, this leads to a discussion on how to transform the company itself. The problem that emerges here is the “syndrome to do something with AI” such as we will be able to understand or see something if we use AI. As the president and the management team are of a similar age and tend to think in the same way, there are many cases where they try to entrust this operation to the next-generation managers in charge of corporate planning.

However, as AI is one of the tools, nothing can be done unless decisions are made on “what and where this company wants to be.” This will mean that in order to clarify “what and where this company wants to be,” the company will go on a “self-searching journey” to think about “the purpose of the company.”

Sales targets can be achieved quickly, as they are included in medium-term management plans. However, unless we can clarify “what is the purpose of doing it in the first place? What is the raison d’etre of the company?” it will be impossible to correctly utilize AI. If corporate transformation (CX) is not carried out correctly, we will not be able to respond to their request to do something with AI.

We can cite Nokia as a successful case of CX. It is a famous story that the company started as a manufacturer of boots and became a mobile phone company.

In the CX process of developing the business from boots to mobile phones, we imagine that they did not set the business divisions involved in boots at the center, but rather planned a corporate architecture that was appropriate for the mobile phone company they were aiming to become in the future, and pressed ahead to realize it. They must have gone through many transformations such as the deployment of personnel under the management team and also the investment methods and locations of the factories. This kind of CX could not have been realized unless it had been structured.

To think about CX through AI, like Nokia, could be extremely meaningful for that company. However, it is becoming an important mission for many Japanese companies to pass the baton to the next generation by maintaining safe and stable management based on what was relayed from the previous president. We can imagine that this is why they did not want to transform or change until now.

However, when things that were believed to have been correct can no longer be applied, such as in the COVID-19 crisis, all of us including executives cannot help but think about the future with our own brains. As it is unprecedented, we cannot repeat past cases. Also, as AI and data itself do not give us an answer, it will be necessary for us to think by ourselves. In order to offer answers, we must first of all pose questions and I think this is what matters the most.

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