Analysis of HRM Systems Based on Organizational

Proceedings of 24th International Business Research Conference

12 - 13 December 2013, Planet Hollywood, Las Vegas, USA, ISBN: 978-1-922069-37-5

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Analysis of HRM Systems Based on Organizational

Institutionalism

Toshiko Suda

The research underlying this paper involves case studies of

human resource management (HRM) in large pharmaceutical

firms operating in Japan. The subjects of the case studies were

four Japanese-owned and three foreign-owned pharmaceutical

firms, and this study found that the HRM systems of the subject

firms were moving more rapidly toward western-style HRM

systems than has been the general trend in Japanese firms. The

most striking feature in these Japanese pharmaceutical firms is

their use of market pay data for individual pay determinations;

the use of market pay data is not common practice in Japan,

where organization-based HRM is widespread. These findings

were analyzed based on institutional theory, and institutional

entrepreneurship was used to analyze changes in these HRM

systems. This study then discusses some of the causes of the

changes occurring in the HRM of Japanese pharmaceutical firms,

including the influence of large foreign-owned multinationals and

technological, market and regulatory disruptions in the Japanese

pharmaceutical industry.

Introduction

There have been lively debates about human resource management (HRM)

issues in Japan since the 1990s, and the evaluation of Japanese HRM has

changed during that time. From the 1980s to the early 1990s, the strengths of

Japanese HRM were praised by both Japanese and foreign researchers.

However, beginning in the mid-1990s, the weaknesses of Japanese HRM began

to be noted, and many Japanese firms have subsequently changed their HRM

systems.

___________________________________

Dr. Toshiko Suda, Graduate School of International Management, Aoyama Gakuin University,

Japan, Email: [email protected]

mailto:[email protected]



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The main types of Japanese HRM systems are organization-based,

person-based and seniority-based (Suda, 2007). Although Japanese HRM is

changing, the average years of service of Japanese employees remain among

the highest in advanced countries, and pay profiles in Japan continue to be more

seniority-based than those of other industrial countries in terms of both employee

age and years of service (JILPT, 2012). Moreover, although job-based grade and

pay systems were introduced in Japan in the late 1990s and the rate of

introduction of those systems has been increasing, person-based grade and pay

systems continue to be more common in Japanese firms, particularly for

non-managers (ILA, 2010; JPC, 2013).

In sum, although the direction of change in Japanese HRM is toward a western

model, it currently operates in a manner that is between the former Japanese and

western types. Several studies have described a complicated situation regarding

this change in contemporary Japanese HRM (JILPT, 2005; Suda, 2007).

The author of this study researched HRM systems in large pharmaceutical

firms operating in Japan to investigate the complicated process involved in

changing Japanese HRM. A particular industry was selected as the research

target because it is useful to identify a particular context in which to capture the

complicated process involved in transforming an HRM system.

The theoretical framework of this study is organizational institutionalism.

Among the various theoretical debates within organizational institutionalism,

institutional entrepreneurship was selected as the main approach to analyze the

changing aspects in the HRM system.

Theoretical Framework

New Institutionalism

The theoretical background of this research is organizational institutionalism,

based on the new institutionalism in institutional sociology. The “meaning of

institutions” in institutional theory is largely divided into two aspects: one consists

of formal institutions, such as laws and other regulations, and the other consists

of informal institutions that influence social actors, such as values, customs and

culture (Meyer & Rowan, 1977; DiMaggio & Powell, 1983; Scott, 2008).

Institutional theory focuses on the process by which formal and informal



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institutions spread and become established in a particular social unit, which is a

process called “institutionalization”. Scott (2008) noted that coercive, normative

and cognitive elements facilitate institutionalization and labeled these elements

the three pillars of institutionalization.

New institutionalism began to develop in the late 1970s (DiMaggio & Powell,

1991; Greenwood et al., 2008). New institutionalists claim that the activities of

organizations in the same organizational field tend to converge. The

organizational field is often considered to be a social unit of institutionalization

(Wooten & Hoffman, 2008). There are various definitions of the organizational

field such as “organizations that constitute an organized area of institutional life;

key supplier, resource and product consumers, regulatory agencies and other

organizations that produce similar services or products" (DiMaggio & Powell,

1983: 148p) and a field that is “formed around the issues that become important

to the interest and objectives of a specific collective organizations" (Hoffman,

1999: 352p). The areas indicated by an organizational field are not always the

same; however, an organizational field is generally considered to be the

meso-level of a social unit such as an industrial sector (Fligstein & McAdam,

2012).

The three pillars that facilitate institutionalization appear in each organizational

field. Thus, when firms that occupy the same organizational field are surrounded

by identical coercive, normative and cognitive pressures, their decisions and

behaviors—such as strategies and policies—tend to converge. DiMaggio and

Powell (1983) called this tendency to converge “institutional isomorphism” and

proposed that it operated through three mechanisms: coercive, normative and

mimetic pressures.

Furthermore, once institutional isomorphism occurs, isomorphic behaviors

become part of the institutional environment in that organizational field. As a

result, isomorphic behaviors in an organizational field tend to be stable (Meyer &

Rowan, 1977; DiMaggio & Powell, 1983; Scott, 2008). New institutionalism

brought new insights to organizational theory and explains why firms in the same

organizational field have strategies and policies that tend to be similar and why

some organizations cannot change even when they must cope with changing

environments (Greenwood et al., 2008).



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Institutional Entrepreneurship

New institutionalism is useful in analyzing convergence and stability. However,

many researchers have noted that new institutionalism is not as useful in

analyzing change (Greenwood & Hingings, 1996; Hoffman, 1999), which is a

frequent topic of research. Conversely, institutional entrepreneurship has been

one of the primary approaches to institutional change. DiMaggio (1988) proposed

the following concept of institutional entrepreneurship: “New institutions arise

when organized actors with sufficient resources (institutional entrepreneurs) see

in them an opportunity to realize interests that they value highly" (DiMaggio,

1988: 4p). Since DiMaggio’s conceptualization, many studies have been

conducted and research questions investigated in the area of institutional

entrepreneurship. Two of these main research questions are discussed below.

The first research question examines the types of firms that can act as

institutional entrepreneurs. The main issue in addressing this question is whether

the main actors in the current institutional environment can become

entrepreneurs. The actors that are powerful enough to change their institutional

environments are resource rich and are likely to have strong and influential

positions. However, these same actors are hindered in this regard by the very fact

that they are embedded in their institutional environments and are subject to

regulatory, normative and cognitive pressures. Therefore, such actors may not be

able to imagine new practices, and even if they can imagine new practices, they

may have difficulty initiating those new practices due to regulatory and normative

pressures. Moreover, because these main actors may enjoy a privileged status in

their current institutional environments, changes in those environments may be

contrary to their interests, and they may resist change as a result (Hardy &

Maguire, 2008; Greenwood & Suddaby, 2006).

By contrast, peripheral actors are able to imagine and execute new practices

because they are less likely to be embedded in their current institutional

environments. In this respect, such actors have an opportunity to act as

entrepreneurs, but they may not have sufficient power to change their institutional

environments (Maguire et al., 2004).

Many empirical studies have been conducted to investigate the issues

described above. According to the results of such empirical studies, both main

and peripheral actors can act as entrepreneurs. Regarding the main actors, their



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international experience is one of the primary reasons that they can act as

entrepreneurs. Because they tend to do business internationally, main actors are

likely to have overseas experience; as a result, they are likely to be familiar with

practices in other organizational fields. Consequently, they can introduce new

practices to a given country and generate changes in that country (Greenwood &

Suddaby, 2006).

The second research question examines what types of field conditions are

best suited to institutional entrepreneurship. Many studies have focused on field

conditions such as whether emerging or mature fields, or fields that are stable or

in crisis, are better suited to institutional entrepreneurs (Greenwood & Hingings,

1996). Several researchers have found that emerging fields are suited to

institutional entrepreneurs because the environments of emerging fields are less

likely to be institutionalized than those of mature fields (Maguiere et al., 2004).

Even in mature fields, fields in crisis may be suited to institutional entrepreneurs.

Disruptive events such as technological, market and regulatory changes often

facilitate institutional entrepreneurship (Hoffman, 1999).

General Trends in Japanese Firms’ Hrm Systems

This section discusses the general trends in the HRM systems of Japanese

firms that have been captured by large-scale surveys. Although HRM systems

have many features, this section focuses on employee grade and pay systems

related to Japanese HRM as organization- and person-based.

The first aspect of HRM systems is the employee grade system. There are two

types of grade systems: job- and person-based. The job-based grade system is

popular in many advanced countries, whereas the person-based grade system is

popular in Japan (Koike, 1999; Milkovich & Newman, 2002). According to a 2010

survey by the Institute of Labor Administration (ILA), in evaluating their managers

41.2% of Japanese firms used a person-based system, 30.9% used a job-based

system and 19.1% used a mixture of job-based and person-based systems.

Alternatively, for non-managers, 65.5% of respondents used a person-based

system, 15.9% used a job-based system and 15.2% used a mixture of person-

and job-based systems (ILA, 2010). Thus, although Japanese firms have

introduced the job-based system, the person-based system remains the

dominant employee-grade system in Japan.



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The second aspect of HRM systems is the pay system. Although pay systems

have several aspects, this study focuses on base pay. Regarding the pay system,

this paper focuses on person- and organization-based systems as the two main

characteristics of Japanese HRM pay systems.

First, this paper focuses on the person-based pay system. According to a 2012

survey by the Japan Productivity Center (JPC), with respect to managerial pay

systems, 65.5% of respondents used the person-based system and 79.2% used

a job-based system. For non-managers, 77.3% used the person-based system

and 58.4% used the job-based system (JPC, 2012). The sum of the respondent

rates exceeds 100% because many of the respondent firms combined person-

and job-based systems. The rate at which job-based pay systems have been

introduced is higher than the rate of introduction of person-based grade systems,

particularly for managers.

Second, this paper focuses on the organization-based system, in which

individual pay is based only on an internal assessment within the given

organization and market pay for a job is not considered. This type of pay system

is widespread in Japan under the organization-based approach. In fact, there are

little available market pay data for Japan (ILA, 2011, JILPT, 2004).

Research Design

This section presents the research theme, the research questions, the

characteristics of the pharmaceutical industry (which is the subject of this

research) and the research methods utilized.

Research Theme

The theme of this research is an investigation of the complicated process of

changing HRM systems in the pharmaceutical industry in Japan.

Research Questions

Although the research questions address both change and stability, the paper

focuses more on aspects of change than of stability. Therefore, only research

questions related to aspects of change are discussed below.

- What aspects of HRM in the pharmaceutical industry have been changing,



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including to what extent they have been changing, why they have been

changing and how they have been changing?

Characteristics of the Pharma Ceutical Industry

The pharmaceutical industry was selected as the research subject because it

represents the organizational field; large pharmaceutical firms operating in the

Japanese marketplace were targeted for the study. Pharmaceutical firms are

subject to strong coercive and normative pressures. In terms of coercive

pressures, most of the management functions of pharmaceutical firms are

regulated, including development, production and sales. Pharmaceutical firms

also experience strong normative pressures because they make products for

human health care.

In the international pharmaceutical industry, European and U.S. firms are the

main players, whereas Japanese firms are smaller and weaker. In terms of sales

turnover, the largest Japanese pharmaceutical company was ranked only 14th in

the world market in 2011. Until the mid-1990s, approvals to sell pharmaceuticals

were required on a country-by-country basis. However, in 1998, the International

Conference on Harmonization of Technical Requirements for Registration of

Pharmaceuticals for Human Use (ICH) stipulated that once a pharmaceutical was

approved by one country (such as Europe, the U.S. or Japan), it could be sold in

other countries (after adding data to examine ethnic differences). Before this

agreement, the Japanese pharmaceutical business was relatively protected from

large foreign-owned pharmaceutical firms; after the ICH agreement, however,

foreign-owned firms pursued the Japanese market more aggressively.

Research Methods

The main research method used involved case studies; the main research

methods used in the case studies were interviews and analyses of internal

documents. Therefore, the case studies used in this research are characterized

as qualitative case studies. Qualitative research is suited to cases that (1) are

contextualizable, (2) contain vivid descriptions (3) involve the dynamic (and

possibly causal) structuring of an organizational member’s socially constructed

work, and (4) describe the worldview of the people under the study (Lee, 1999).



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The subjects of the case studies were four Japanese and three foreign-owned

pharmaceutical firms operating in Japan, and the time frame was from January

2010 to February 2012. Follow-up research was conducted with three firms

between 2012 and 2013 (i.e., with A pharm, B pharm and D pharm).

Table 1: Profiles of the Firms in the Case Study

Home country Sales turnover

(International market)

Sales turnover

(Japanese market)

A Pharm U.S. 1st 9th

B Pharm Switzerland 2nd 8th

C Pharm France 4th 12th

D Pharm Japan 17th 3rd

E Pharm Japan 19th 2nd

F Pharm Japan 14th 1st

G Pharm Japan 35th 5th

Sources: (1) Sales turnover (international market): Pharmaceutical Executives. 24 (5). (2) Sales

turnover (Japanese market): IMS.

The research also employed two additional research methods. The first was

group interviews of 30 employees of the pharmaceutical firms, consisting of six

researchers (including two medical doctors), nine clinical researchers, nine

medical representatives, and six administrators (two of whom were former

medical representatives). The group interviews were conducted between

January and June of 2011. The main purposes of the group interviews included

investigation of the labor market in the Japanese pharmaceutical industry and the

career aspirations of pharmaceutical-firm employees.

The second research method consisted of interviews of professionals related to

the pharmaceutical labor market, including researchers, consultants, recruiting

agencies, contract organizations in the pharmaceutical industry—such as clinical

research organizations (CROs), clinical sales organization (CSOs) and clinical

manufacturing organizations (CMOs)—and professionals working in personnel

functions at other large pharmaceutical firms operating in Japan. These

interviews were conducted between 2011 and 2013.



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Research Findings

The case studies gathered data for various aspects of the HRM system,

including recruitment, employee grading, performance reviews, pay and

development; however, this paper focuses on employee grading and pay.

Employee Grading

Six out of the seven firms in the case study used a job-based grade system to

evaluate their managers, which was based on job analysis and a point-factor job

evaluation. These six firms also implemented job-based grade systems for

non-managers. To some degree, there were variations among the six firms in the

employee grade systems used for non-managerial employees. Some of the firms

implemented job analyses and a point-factor job evaluation (as they did for

managers), whereas other firms loosely defined “jobs” and considered

competencies in determining individual grades. Thus, each of these six firms

implemented an employee grade related to each job to some degree, although

the extent of rigor that went into defining each job differed among the firms. In

summary, for both managerial and non-managerial employees, the employee

grade systems at these six firms were basically similar. By contrast, the seventh

utilized a person-based system.

The six firms had two main objectives in using job-based grades. One objective

was to implement performance-based HRM and the other was the use of market

pay. For both purposes, it was necessary to define jobs because the jobs

provided the underlying bases to evaluate individual performances and to gather

market pay data.

Pay

Although there are various aspects of pay (such as base and incentive pay),

this paper focuses on base pay. The six firms that utilized a job-based grade

system implemented job-based pay based on their grade structures. Therefore,

the base-pay systems in the six firms were basically identical, although the

details of the pay systems differed. By contrast, the seventh case study firm,

which used a person-based grade system, implemented person-based pay.



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The case studies collected information about market pay from the six firms that

used job-based grade and pay systems. Market pay information was gathered

using several methods. For example, the six firms participated in market salary

surveys and exchanged pay information with other large pharmaceutical firms.

The primary reason that these firms considered market pay was to cope with

increased labor mobility in the pharmaceutical industry. Because labor mobility

has increased, market pay for each job family has gradually been established in

the pharmaceutical industry, and firms must set pay levels based on market pay.

In other words, these firms believed that they had to offer competitive levels of

pay for job families with high market pay, but they did not need to be as

competitive for job families with low market pay. The situation in the

pharmaceutical industry is different in this regard from many other industrial

sectors in Japan in which market pay has not been developed.

The employee group interviews also revealed evidence of increased labor

mobility in the pharmaceutical industry. The majority of the interviewees had

experienced job-hopping, which was typically a career aspiration. Moreover, all

30 interviewees but one had had contact with recruiting agencies, which is quite

different from many industries in Japan.

As indicated below, interviews with specialists in the pharmaceutical labor

market confirmed the research results reported above. Labor mobility in the

pharmaceutical industry in the past has been higher than in other industries

because general skills requirements are high in many job families in the

pharmaceutical industry. Recently, labor mobility has been on the upswing. One

of the main reasons for this increasing mobility is that large foreign-owned

pharmaceuticals have been recruiting more aggressively. Because mid-career

recruiting is the typical practice in the home countries of many foreign-owned

pharmaceutical firms, it is easier for foreign-owned pharmaceutical firm to explain

the need for mid-career recruiting (as opposed to new-graduate recruiting.

Because it is also normal for foreign-owned pharmaceutical firms to use

recruiting agencies, it is easy for foreign-owned pharmaceutical firms to explain

recruiting through agencies. Although Japanese-owned pharmaceuticals rarely

engaged in mid-career recruiting and hardly ever used recruiting agencies in the

past, they recently have adopted a more positive view of mid-career recruiting

and the use of recruiting agencies.



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Discussion

The section analyzes the findings gathered by this research, including the

three research methods of case studies, employee group interviews, and

interviews of professionals in the pharmaceutical labor market. As noted above,

the analytical framework is Organizational Institutionalism.

First, the paper analyzes institutional isomorphism within the organizational

field. The case studies found that six out of the seven firms in the case study

implemented essentially the same employee grade and base-pay systems as

job-based systems. This finding supports institutional isomorphism because

practices among organizations within the same organizational field seem to have

converged; as a result, their practices tend to be similar (DiMaggio & Powell,

1983).

The main reason for this similarity is that HRM in the case study firms has been

moving toward a more western style of HRM system than has been the general

trend, as indicated in the research findings discussed above, and the extent of

the changes in HRM systems in the case study firms were similar. Next, based on

institutional entrepreneurship, the author analyzes why the case study firms

changed their HRM systems more than general trends indicate.

Who Are The Institutional Entrepreneurs?

One of the main questions in institutional entrepreneurship is who can be

institutional entrepreneurs. Furthermore, one of the main questions regarding this

issue is whether main actors, who tend to be embedded in the current institutional

framework, can act as institutional entrepreneurs. The previous research has

found that main actors can act as institutional entrepreneurs because they have

extensive experiences in other organizational fields, such as overseas

experiences. HRM systems in the case study firms appear to be evolving toward

a western type of HRM. One of the main reasons for these changes is increased

labor mobility in the pharmaceutical industry. Foreign-owned pharmaceutical

firms are the main actors that facilitated the increase in labor mobility; thus,

foreign-owned pharmaceutical firms appear to be the main actors that changed

the labor market and the HRM systems in the Japanese pharmaceutical industry.

Large western pharmaceutical firms are the main actors in the international

market, and they operate under the necessary conditions to be institutional



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entrepreneurs; this is consistent with DiMaggio's position that “new institutions

arise when organized actors with sufficient resources (institutional entrepreneurs)

see them as opportunity to realize interests that they value highly” (DiMaggio,

1988; 4p). The Japanese pharmaceutical market has become increasingly

attractive to large western pharmaceutical firms, which have increased their

investment in the Japanese market by changing their sales policies, for example,

from consignment to Japanese-owned pharmaceutical firms to direct sales. This

situation in the Japanese pharmaceutical market is the very situation in which the

institutional changes proposed by DiMaggio (1988) occur. The present study

found that the main institutional entrepreneurs that facilitated changes to HRM

systems and the labor market in the Japanese pharmaceutical industry were

large, foreign-owned pharmaceutical firms. As the main actors in the international

pharmaceutical market, these firms had sufficient power to change, and they had

sufficient experience to change because they had direct experiences with other

types of HRM systems and labor markets in their home countries.

The second question is what field conditions are suited to institutional

entrepreneurship. The pharmaceutical industry is a mature industry and the main

players, including the case study firms, are established firms with long histories.

Moreover, the pharmaceutical industry in Japan has faced disruptive events in

technological, market and regulatory areas. With respect to technological

changes, the development of new drugs has become more difficult and requires

larger amounts of money than in the past. Under these circumstances, Japanese

pharmaceutical firms have had more difficulty competing against large U.S. and

European pharmaceutical firms. In terms of regulatory changes, large U.S. and

European pharmaceuticals have increased their investments in the Japanese

market since the regulatory changes initiated by the ICH agreement. As a result,

market competition in Japan has intensified. Disruptive events have occurred in

all three of the above-referenced areas: technology, market place competition

and regulation. Therefore, the pharmaceutical industry in Japan is suited to

institutional entrepreneurship.

Conclusion and Implications

As discussed, this research examined HRM systems at large Japanese

pharmaceutical firms and found that the HRM systems at the case study firms

were similar. The main reason for this similarity is that the direction and extent of

the changes are similar among these firms. The similarity among the case study



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firms supports institutional isomorphism. Thus, this research supports many

aspects of organizational institutionalism’s claims that are discussed in this paper.

Due to word limitations, this paper cannot discuss the reasons for the similarities

in terms of the three proposed types of mechanisms of institutional isomorphism

described by DiMaggio & Powell (1983): coercive, normative and mimetic.

With regard to analyzing changes to HRM systems, this research generally

supports discussion within institutional entrepreneurship. However, also due to

word limitations, this paper cannot sufficiently examine the reasons for and

mechanisms of these changes as they relate to institutional entrepreneurship

because it is outside the scope of this paper. Another important issue that this

paper is not able to address relates to differences between HRM systems; only

one case study firm implemented a different type of employee grade and pay

system than the others. The author plans to discuss these issues in other papers.

References

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