Taking on Low Productivity and Labor Shortages at Japanese Companies Through Capabilities-Based Human Resources Management　 Part 2: (1) The Practical Process of Corporate and Business Strategy-Aligned HR Strategy

Since the publication of the ITO Report and the Guidelines for Human Capital Visualization, significant progress has been made on human capital disclosure at Japanese companies. However, now that we have gone through a cycle of “data visualization” in the initial phase of this process, the focus has now shifted to the “quality” of disclosure.

Of particular note is the fact that, from March 2026, it is set to be effectively mandatory for companies to describe in their securities reports how their corporate strategies and human capital management “are aligned” (source: FSA, “The first meeting of the Working Group on Corporate Disclosure of the Financial System Council (2025), Secretariat’s Explanatory Material”).
Behind these developments may lie a strong awareness of issues on the parts of investors and analysts. As indicated in the “Study on Global Investors' Focus Areas Regarding Human Capital Disclosure and Corporate Case Studies” released by the FSA in April 2025, capital markets are not looking for the simple enumeration of KPIs or disclosures alongside competitors. What participants in these markets focus on is logical relations that explain how said investment in human capital contributes to the realization of corporate strategy, through what causal factors.

Aligning strategy is essential not only for fulfilling the duty to explain to investors, but also for increasing the feasibility of corporate management itself. To date, many companies have engaged in across-the-board, undirected investment in trending themes of DX promotion and diversity. However, there are significant doubts as to whether this has contributed to improving real competitiveness. Business has now entered a phase where, if it is to define human capital not as a “cost” but as an “investment,” leadership will need to be strict in making the “return on investment” visible. To move beyond mere compliance for show and genuinely improve corporate value, companies will need to make clear how the investments they have made are generating cashflow, and present these causal relations as the will of the leadership. If they fail to do this, they will waste resources, and ultimately lose competitiveness in essential businesses, potentially leading to results that put the cart before the horse.

Despite this, companies where leadership and human resources are aligned in the truest sense are rare. The main cause of this is that, despite there being myriad ways of increasing competitiveness depending on the sector or business phase of a company, many organizations attempt to manage capabilities, which are key to executing strategy, through undifferentiated indicators such as “HR portfolio fill rate” and “engagement score.” Uniform indicators that ignore strategic context cannot build real competitive advantage.

In this Insight, we will present a framework for addressing such misalignments and identifying capabilities that directly tie into to the path to success for your company.

In this section, we explain essential approaches in the practical process of identifying capabilities and formulating HR portfolios in the subsequent phase.

Here we will trace the processes involved in the examples touched on in the previous section of type (1), “business portfolio transformation type (the automaker)” and type (2), “maximizing group synergies type (the financial institution)” companies.

One common trap in identifying capabilities is to just gather strategy “words” and define superficial skills. For this reason, what companies should first start working on is raising the resolution of their strategies and making clear “where they need to attack (the arena)” and “how they are going to win (the key to success).”

Looking at the example of the automaker, the shift towards EVs and SDVs is an irreversible trend. While EV growth is slowing down in the short term, responding to medium to long-term decarbonization and digitalization is essential to the survival of companies. What matters here is decision making with a “sense of intensity and speed.” Can companies go all in on EVs, or differentiate themselves by through SDV while leaving some hybrids? These gradations will decide the “arena” and “key to success” for a company.

But what of the financial institution? While there are promising materials to work with, such as the return of interest rates, there are limits to how much institutions can grow with their existing businesses alone. What is needed here is more than simply entering other industries. Rather, it will be important for them to combine their existing businesses through, for example, banking x sales channels, to create “new arenas of competition.” To figure out what business to create specifically and how to position existing businesses will require clear decision making.

Companies will not be able to identify capabilities through general ideas on the level of “adapting to the shift to EVs” or “creating new businesses.” Instead, it is important for them to identify how they will win a competitive advantage in which particular domains.

The next step is to make lists of the capabilities the company will need, based on the competitive advantage it will pursue to succeed in its chosen arena.

If our automaker decides to make its competitive advantage its high quality in the EV/SDV domain, for example, through “pleasure of driving” or “seamlessness of experience,” then it will need capabilities such as “electrification technology” and “capacity to insource software development” in order to control technology in house. By contrast, if the company intends to succeed through “overwhelming price competitiveness” or “production scale,” then it does not need to focus on self-sufficiency. To the contrary, the capabilities that will likely be decisive will be the “post-merger integration (PMI) capabilities” and “culture integration” that combine organizations with different characters in order to better ally with other companies or move quickly with acquisitions.

In the case of the financial institution, if, as stated above, the path to success is to be “new business creation through the combination of existing businesses,” then “capacity to create innovation” that envision value across multiple organizations will likely be central to capabilities.

In house resources are, however, limited. For this reason, it will be essential to prioritize investment among candidate capabilities. The framework through which such decisions are made is the “capability portfolio” (see Figure 4).

Prioritization is a method of evaluating candidate capabilities based on “importance to corporate and business strategy” and “contribution to competitive advantage.” Capabilities that are both high in “importance to corporate and business strategy” and “contribution to competitiveness” belong to the priority investment domain, while capabilities that are high in “importance to corporate and business strategy” but low in “contribution to competitiveness” belong to the maintain or maximize investment efficiency domain. Other capabilities need to have their investment levels adjusted through selective investment according to business area or substitution using AI or external resources.
For example, if an automaker has made advancing the shift to EV or SDV core to its corporate strategy and is pursuing competitive edge in high quality, new driving experiences, then “electrification technology” and “software development capacity” will be priority investment domains and the company will make all possible investments aimed at acquiring these capabilities itself. On the other hand, to profit from tradition internal combustion engine (ICE) and hybrid vehicles over the coming years, “capacity to develop ICE through enhanced precision surface finishing” and “global mass production capabilities” will likely be domains where investment should be maintained or have its efficiency maximized.
Because the company cannot go without any of these capabilities, it will invest in all of them in parallel. It is important, however, to decide the size and speed of investment and promote a dynamic distribution of investment by means of such prioritization.

Even if a company has properly defined its capabilities, the exercise will have been moot if acquiring those capabilities remains no more than a slogan. Companies therefore need to transform and connect capabilities into “HR portfolios” that human resources can operate, and incorporate those portfolios into human resources management.

However, when formulating HR portfolios, many companies fall into the trap of “lining up headcount.” There is no strategic value to an exercise that begins and ends solely at adjusting supply and demand by asking, “how many people are we short?”

The detailed practical processes involved in doing this will be covered in the next theme in this series, “HR Portfolios.” In this Insight, we will present three strategic perspectives to consider in formulating an HR portfolio aligned with corporate and business strategy.

The granularity of the capability of “having foundations for continuously creating new innovations” is difficult to connect to individual employees and to incorporate into human resources management in practice. Consequently, companies need to break down capabilities to the right granularity to execute human resources management, that is, into HR portfolio management units.

What is key here is to change management units per capability. Where the assumption is that the company will engage in hiring highly skilled personnel such as in the case of an automaker, they should manage this using units such as “roles” and “skills” – for example, “battery engineer – that are shared with the external labor market. At a financial institution, on the other hand, where complex coordination and conceptual thinking are required and internal development is assumed, it makes more sense to manage human resources based on internal personnel archetypes such as “business developer” and “next-generation leader.” Rather than imitating other companies, companies need to adjust these settings in line with their own capabilities.

In addition to setting the right management units, companies also need to calculate how many of that type of personnel they will need in future (the to-be headcount). The key point here is to set the right labor allocation rate.

For example, if a company needs to improve the competitiveness of an existing business, it must calculate an upper limit on expected labor costs by working backwards from the profit and loss statement (P/L) it has set as a management target, then make suitable allocations based thereon.
The same basic approach applies when needing to launch a new business. Companies first analyze the personnel types they need across their value chain, then work backwards from the scale of business and profit targets they envisage for the future, set the necessary numbers of each type of personnel and perform investment allocation among those types.

Creating a headcount plan that is optimized for the entire company by aligning with corporate and business targets, rather than setting headcount based on what business units and departments say, is key to the practice of human capital management.

Another angle that is related to A and B is that companies cannot ignore irreversible changes in the external environment. In particular, the “severity of labor shortages” and the “rise of generative AI” are decisive variables influencing quality and volume. The decline in the working age population means that there is a physical limit to the “volume” of personnel that can be obtained. Additionally, generative AI has dramatically rewritten the definitions of “quality” and “volume.” While reductions in labor needs through substitution by AI are advancing, the barriers to the added value demanded by humans have increased.

For this reason, HR portfolios are not just an extension of what has come before. Rather, they must be dynamic processes that redefine supply and demand in a zero-based manner by incorporating market and technological trends.