The Skills of the Best Managers at Superior Companies

Fellow, RIETI

What on earth is superior business management?
In these past few years, Japanese companies have staked their survival in the extended economic slowdown on the introduction of various forms of management reform. Many of these efforts have been termed "American-style management" in Japan, and a great deal of energy has been devoted to altering the form of management at companies, e.g., changing corporate governance methods by introducing the executive officer system and the business company system and switching to performance-based employee evaluations.
The result has been that Japanese companies may appear, on the surface at least, to have accomplished reform. Have these efforts, however, in fact strengthened these companies' competitiveness? The economy remains stagnant, with no signs of dispelling the feeling of impasse pervading the whole of Japan. While many companies have initially attempted to introduce forms of American-style management, they appear to have stopped at superficial reforms without going as far as changing the substance of the company itself. This is the view of the problem that this author has come to hold for the past three years or so.
On the other hand, more than a few "superior companies" have continued to achieve remarkable results, even under poor economic conditions. Toyota Motor Corporation, for instance, realized ordinary profits exceeding JPY1 trillion in the fiscal year ended in March of this year. What characteristics do these superior companies possess? How do they differ from companies that are not doing so well? What measures have they taken to give their reforms substance and depth? It would seem that, if one were to show these problems clearly, the path to development for Japanese companies would come into view naturally. This was the author's motivation in conducting research on superior companies in Japan.

The author began this task with the selection of superior companies. Data from companies throughout Japan was requested, with attention focused on three elements: the company's profitability (ratio of ordinary profit to total capital), security (ratio of net worth to total capital) and growth (changes in ordinary profits). Figures for the past 15 years were collected and analyzed. Data for a short period of one or two years tends to be highly subject to positive and negative aspects of the external environment, making it probable that one will misread a company's good results as a consequence of structurally strong competitiveness rather than simply riding the currents of the times.
The author chose 30 to 40 companies from the full list of companies from this analysis, including the ten companies listed below, for a further detailed analysis, and decided to conduct interviews with relevant people, beginning with the top management of these companies.

Toyota Motor Corporation (Fujio Cho, President)
(1)JPY 15.1613 trillion, (2)JPY 1.1135 trillion, (3)5.95%, (4)36.83%
Canon Inc. (Fujio Mitarai, President)
(1)JPY 2.9076 trillion, (2)JPY 281.6 billion, (3)9.92%, (4)51.27%
Kao Corporation (Takuya Goto, President)
(1)JPY 839.0 billion, (2)JPY 113.6 billion, (3)14.60%, (4)59.54%
Mabuchi Motor Co., Ltd. (Takaichi Mabuchi, President)
(1)JPY 105.1 billion, (2)JPY 30.0 billion, (3)11.94%, (4)92.91%
Shinetsu Chemical Co., Ltd. (Chihiro Kanagawa, President)
(1)JPY 775.1 billion, (2)JPY 117.0 billion, (3)9.16%, (4)63.03%
Yamato Transport Co., Ltd. (Masao Ogura, former Chairman)
(1)JPY 932.1 billion, (2)JPY 54.4 billion, (3)8.07%, (4)53.73%
Shimano Inc. (Yozo Shimano, President)
(1)JPY 125.5 billion, (2)JPY 12.7 billion, (3)6.30%, (4)89.10%
Honda Motor Co., Ltd. (Hiroyuki Yoshino, President)
(1)JPY 7.3624 trillion, (2)JPY 551.3 billion, (3)8.75%, (4)37.08%
Seven-Eleven Japan Co., Ltd. (Toshifumi Suzuki, Chairman)
(1)JPY 384.4 billion, (2)JPY 148.5 billion, (3)18.99%, (4)74.96%
Nintendo Co., Ltd. (Satoru Iwata, President)
(1)JPY 554.9 billion, (2)JPY 186.6 billion, (3)16.77%, (4)80.84%

(1)Sales revenues, (2)Ordinary profit, (3)Ratio of ordinary profit to total capital, (4)Ratio of net worth to total capital
(These figures are not those officially released by each company, but those given in standardized form in the Nikkei Shimbun NEEDS (2001).)

Broadly speaking, company competitiveness can be classified into two types - competitiveness due to operational efficiency, and competitiveness due to managerial skill - and it is the latter that appears to be the biggest problem with companies that do not qualify as superior. The former is competitiveness achieved by a long series of ideas to raise blue-collar productivity, i.e., the productiveness of factories and work sites, as symbolized by Toyota's Kanban system. Undoubtedly, Japanese companies are no longer as strong in this regard as they once were, and areas in which they lag were discovered in the IT industry and the household appliances industry among others. More important, though, is competitiveness due to managerial skill, in other words, the ability of the top management to devise and implement strategies and to make efficient use of the head office functions. In the course of conducting these research interviews, there were also some instances where a particular company's good fortunes could be attributed to chance external causes instead of the company's structural competitiveness. Many of these cases did offer, however, profoundly interesting management allegories that can serve as lessons for other companies. The impressive explanatory skills of the interviewees merit special mention. The author was very pleasantly surprised to discover top managers with such remarkable explanatory skills even in Japan. For the purposes of this study, the selection of specific companies was made by using the characteristics common to superior companies as a dividing criterion to classify companies as superior or not superior.

When the superior companies are listed and examined, one notes that much of what is considered "conventional wisdom" by the public does not necessarily apply to these companies. First, the industries to which superior companies belong are commonly held to be cutting-edge industries that are vigorously growing. For example, Mabuchi Motor, established in 1954, is the world's top manufacturer of consumer-oriented motors, with a 55% share of the world market. Numerous people no doubt have fond childhood memories of inserting a Mabuchi motor in a plastic model of the battleship Yamato and setting it afloat in the bathtub. This company makes technically mature motors with an average unit price of JPY72, and manufactures approximately 1.4 billion of these motors annually. The company is thus a tremendous producer of goods that boasts a double-digit ratio of ordinary profit to total capital.
There is also Shimano. While its bicycle parts, the mainstay of Shimano's business, are "essentially the same low-tech products that blacksmiths made by pounding steel" (Yozo Shimano, President), the company is number one worldwide and head-and-shoulders above other competitors. Hence, an excellent business model can even be realized when the industry itself appears old-fashioned and regardless of the growth of the industry as a whole.

Another piece of conventional wisdom that does not apply is that companies exposed to international competition through trade are strong, while those depending on domestic demand are weak. Yamato Transport and Seven-Eleven Japan are both companies operating fundamentally within the framework of the domestic market, and Kao also does business focused on domestic demand, with only about 10% of its profits deriving from overseas sales revenues. What about Toyota, Honda, and Nintendo? These major export companies are indeed thriving, but one must not overlook the fact that these companies ventured overseas only after establishing a solid business model to meet the high standards demanded by Japanese consumers.

Broadly speaking, there are six points that can be found in common among superior companies, and these will be presented in order. It should be noted that the introduction of American-style forms is not included as one of these six. An examination reveals that companies having introduced American-style management methods and management indicators are not necessarily predominant. Some companies were doing well while others were not and, contrarily, there were also companies producing favorable business results that had not introduced such methods and indicators.
The author's aim in presenting these six shared characteristics is the belief that the allegories extracted from research on 30 to 40 superior companies is far more replete with suggestions than complicated management theories full of imported ideas and terms, whether they be American-style or Japanese-style.

The first characteristic is that the top management has an unambiguous understanding of the scope of business in which the company is engaged.
It is especially important that companies clearly recognize the businesses they should not be undertaking, and that they refrain completely from lines of business that the top management does not understand.
When asking the top management of superior companies about the concept of their companies, a lucid explanation was immediately forthcoming. In the minds of these managers, the company as a whole has become a single concept. At the same time, a key point to note is that this concept serves to narrow the scope of the business that the company should undertake. This differs substantially from the flowery language used to decorate the first few pages of company brochures. When these top managers were presented the name of a new line of business and asked if their company would be branching out to this new line, they rejected straight out any line diverging from their company's concept as "not our company's job." In a certain sense, the fields in which they compete are exceptionally restricted.
On the other hand, when the author read out a series of unconnected businesses in which companies not doing well are presently engaged, the managers from these companies quite often brought that line of questioning to an abrupt end with a curt "this is our company's concept." Many venture companies that had initially achieved remarkable results with a strong business model used the capital obtained through this success to depart from the original concept of the company, and this diversification ended in failure. Though the majority of companies today intone the mantra of selection and concentration, they find it difficult to put this idea into practice. Narrowing the focus of a company depends on the managers having a clear company concept for making selections on hand. In other words, the top management needs to have a physical sense of what their company's strong suit is.

Mabuchi Motor provides an extreme example of limiting the range of one's business. This company's concept is to direct all its efforts into one type of product: small (200-watt or less) consumer-oriented steel-core DC magnetic motors with brushes. Starting from motors for toys, the company expanded the use of its motors to household appliances, audio equipment, and automotive equipment, but it has never increased or diversified its product line beyond such motors. Even when presented with an attractive proposal from the German company Braun, the world's leading manufacturer of electric razors, to develop a motor without a steel core, Mabuchi boldly and flatly turned the offer down. Instead, the company suggested that Braun take a closer look at the true capabilities of the company's steel-core motors and made a counter-offer to develop a new motor priced about one-tenth of the motor Braun had been thereto using. Mabuchi Motor is now the exclusive supplier of motors to Braun.
The drawback in single-product operation is, of course, the difficulty of ensuring an adequate volume of demand with just one type of product. The brothers who founded this company, Kenichi and Takaichi Mabuchi (the latter now serves as president), understood this fact well, which is why, when they established the company in 1954, they set out with the ambitious objective of competing in the world market. By any conventional standards, this might seem implausible for the owner of a small-scale factory with a dozen or so employees. This was not at all mere boasting. This ambition was backed by the cool-headed calculation that the company would have no choice but to branch out into other motors to survive in the domestic market, thereby spreading thin the company's resources, but that trading with the rest of the world would allow the company to acquire adequate business as a specialty shop. It hardly needs to be said that behind this calculation was the company's confidence in its own technology.

Called the "Intel of bicycles" for its similarity to the CPU manufacturer that is the Gulliver of the PC industry, Shimano has also limited its business scope, though not to the same extreme as Mabuchi Motor, and concentrates on final consumption goods for outdoor use, an area in which the utmost in performance and advanced metal processing technology are required. These demands make it difficult for other companies to imitate. Bicycle parts, accounting for 68.3% of sales revenues, top the list of the company's products, followed by fishing gear and golf clubs. Supporting this production is the cold-forged manufacturing technology established by the company in the 1960s (by which metals can be forged at room temperature without heating) and other metal processing technology. The high degree of precision achieved in processing has proven crucial in the processing of bicycle gears and brakes and other precision metal products. The company has refrained from expanding into an area where this metal processing technology cannot be applied, a decision that President Shimano modestly attributes to cowardice. The drive and control components for bicycles produced by Shimano have become the de facto standard.
What the examples of these two companies show is that the top management has a very good sense of conditions on the ground and the demand for products, i.e., the executives understand the realities of their business. The importance of the top management perceptivity to production conditions, to the products themselves, and to market circumstances turned out to be greater than initially supposed.

With regard to top management having a sense of conditions on the ground, Honda also merits special mention. The designs for Honda's automobiles have all been subject to approval by its company presidents. This holds true for cars developed in the US as well, and President Hiroyuki Yoshino listens to all input and then has his say. Not a single design proposal has ever made it past Yoshida's very intense scrutiny on the first try. Given the recent uptrend in sales of Fit and other Honda automobiles, one must conclude that the president possesses a very discerning eye and an awareness of circumstances needed to determine the direction of the market. At enormous general electrical equipment manufacturers and other such companies where the scale of operations is exceedingly large and the product lineup broad, numerous, and unconnected, it is practically impossible to demand that top management be able to ascertain actual conditions for each individual product their company produces. In that sense, Honda can be said to operate as a small company with a global scale.

The same holds true for Shinetsu Chemical. In the chemical industry, an area in which Japan is said to be not very proficient, Shinetsu ranks fifth worldwide - behind DuPont, Dow Chemical, BASF, and Bayer - in terms of total market value of the company's shares. The company holds the top share globally in chloroethylene, used broadly in such goods as water and sewage pipes and the interior fittings for cars, and silicon wafers, the base for semiconductor devices. A well-established firm, Shinetsu concentrates its business efforts in those fields in which it leads and to this day maintains the positive features of a small company.
One of the strengths of Shinetsu Chemical is that managerial decision-making rights are concentrated in the distinguished manager, Chihiro Kanagawa, the company's president. Making this possible is that business has been restricted to a scale on which Kanagawa can understand all aspects of the business, including that of consolidated subsidiary companies. The efforts Kanagawa makes to maintain his sense of conditions on the ground are astonishing. He arrives at the company just past 7:00 each morning and reads over all of the FAXes that have arrived from around the world, replying to these that same day. If questions remain about a document submitted to him for approval, he telephones the person in charge directly and listens to what he/she has to say; he does not use e-mail because e-mail doesn't allow for real discussion. He also tracks the earnings of subsidiaries on a monthly basis, reading through the financial statements of about 20 companies each month. The president is truly on the ground no matter where he is.
An additional characteristic of this company is that responsibility for determinations of risk lie with the company president, and the company takes a clear stance that this is the job of the top management. Opinions may be divided among executives at times over large-scale investments, but even if, say, nine of ten executives were opposed to the president, the final decision would still rest with the president. Naturally, he must also assume responsibility for failures, a conspicuous difference from some companies where credit still goes to superiors and blame to subordinates.

Household goods manufacturer Kao has adopted an autonomous business division system for each product type - hair care goods, laundry detergent, paper diapers, etc. - but the business of the company as a whole is, as one would expect, limited in scope to what one member of the top management team can grasp and thus not too large at all. Among the ills that can easily befall a company with an autonomous business division system is the failure of a company to function as one because individual divisions are pulling in different directions, but this weakness does not seem apparent at all in Kao. President Takuya Goto himself frequently makes an appearance at the company's research centers and factory sites and engages the heads of business divisions in lively discussions on doing this or making use of that idea. Goto, who is familiar with the company's overall operations, and the rest of the management team are thus able to respond to the ideas of a single research with the concrete suggestion of, for example, discussing the idea with Mr. A over in the Cosmetics Division.
A recent major hit product that has emerged from this synergistic effect on the ground is Quickle Wiper, a floor care product. Close communication between business divisions enabled technology originally developed for use in paper diapers and sanitary items to be converted for use in cleaning goods. One reason that Kao has produced so many hit items is the corporate climate of respecting the creative resources and independence of its employees. For example, ringisho (circular memos for approval) are not used when making investment decisions so that employees can work without sticking to formalities. This is a marked difference from companies where decisions are put off until a ringisho has been passed around among dozens of superiors for perusal and approval. Kao also uses no "job manuals" and no organized training system. There are no gulfs or formalities dividing superiors from their subordinates, no executive dining room, and no doors installed in executives' rooms. The climate is such that employees can come to an executive's office without an appointment to talk. Order does not break down in these circumstances for the single reason that the majority of employees are not content to rest on their laurels and are always working to make things better (employees refer to Kao as the "dissatisfied-with-the-status-quo company").

The second element shared by superior companies is that the top management is logical, i.e., they think about things long and hard themselves. Managers in Japan have all studied and become well versed in management theories from Japan and abroad during the extended economic slowdown. The divide is whether one simply crams in knowledge or thinks for oneself after gaining the knowledge. Managers at superior companies never unconditionally accept conventional wisdom, commonly accepted views or the examples of success of other companies, instead questioning the conventional wisdom and thinking long and hard for themselves. The result is that, in contrast to the view that management is fact and not theory, these managers can actually explain the logic for every one of their decisions, without exception.

Toshifumi Suzuki, Chairman of Seven-Eleven Japan, the largest convenience store chain in the country, remarked that observing other companies in the same industry and reading books will lead to failure as one ends up imitating someone else. Human beings often get caught up in their own experiences and examples of success, and when examining too great a variety of information they tend to extract only the positive aspects, producing a patchwork approach. Good managers are familiar with circumstances, think foremost of the customer, develop hypotheses by themselves, and implement and verify these, all as a regular part of their job. If they were to imitate others or make their decisions based on other people's opinions, Suzuki says, the present Seven-Eleven could never have become the success it is today.
While Director at Ito Yokado, Suzuki met with fierce opposition from both inside and outside the company when trying to conclude an agreement in 1973 with Southland Company in the US in regard to convenience store operations. The majority opinion, supported by owner Masatoshi Ito, advocated a cautious approach, claiming that small-scale stores would not be able to compete with the supermarket chains expanding as they were throughout the country, and these critics were unable to distinguish between convenience stores on the one hand and general stores or old-fashioned five-and-dime stores on the other. Suzuki refuted this position by pointing to Japan's export industries such as electrical equipment. At that time, Japan's household appliance manufacturers were overpowering much larger European and American manufacturers and extending their market shares worldwide. Japan's export industries won out, not because of scale, but because of productivity. Even small stores can overcome competition if productivity is improved. Suzuki thus used logic to open the way to the first full-scale convenience store business in Japan.

Management is logic," insists Masao Ogura, the founder of the home delivery service and now Director of the Yamato Welfare Foundation. Before Ogura set out in the home delivery business in 1976, the post office held a virtual monopoly on the market for small-lot individual transport. Given the indeterminate nature of the business - not knowing when and from what households items would be shipped, nor where they were destined - there was no way to predict demand, and thus it would not prove a paying proposition for private companies?cor so it was believed. Ogura questioned that conventional wisdom. Though faced with opposition from other executives, he gave long and careful consideration to a system for operating a home delivery service, and this came to fruition as an express home delivery service. Without doubt, this was the very embodiment of the idea that "management is logic."

The introduction of American-style forms mentioned at the beginning of this paper also will see completely different results if one is not content to simply introduce the form, but rather to use the introduction as an opportunity to think about these forms.
In 1999 Kao was the first large company in Japan to introduce the Economic Value Added (EVA) index, an economic indicator created in the US, but President Goto did not adopt this indicator simply to keep up with the latest fashion. Jergens, Kao's US subsidiary, had earlier introduced this indicator, and an awareness of capital costs and a sense of vigor emerged among the employees. Seeing this, Goto chose to bring this approach to Japan intending to raise employee awareness of capital costs, with EVA to be used as no more than a starting point.

Having paired with Soichiro Honda, an engineer by trade, to manage the operations of Honda, Takeo Fujisawa once addressed the following comments to a group of division and department heads after a study group session.
"I think we have been taught some extremely meaningful things here. You should ensure you have a good understanding of the instructor's lecture and then give it some thought. You are bound to run into trouble, however, if you accept it all without question." (from "A Manager's Work is Never Done").
Fujisawa seems here to be remarking very explicitly on the importance of treating knowledge as knowledge and of thinking long and hard on your own.

The third element is that many members of the top management of superior companies seem to have spent some time on an offshoot during their careers. Those who have faced hardships while working in peripheral departments or subsidiaries have generally been more successful in carrying out reforms than those who were swept along in the company's mainstream and moved smoothly up the ranks.
One example is Fujio Mitarai, President of Canon. His eldest son, Hajime, succeeded Takeshi Mitarai, the company's first president. Hajime was a talented engineer, having received a doctorate in electrical engineering from Stanford University, but in 1995, only two years after being appointed president, he passed away at the young age of 56.
Following his sudden death, Chairman Ryuzaburo Kaku led the deliberations on a successor, and Hajime's cousin Fujio (59) was singled out for the position. Although Fujio is a member of the Mitarai family, a glance at the list of past presidents shows that Canon is not a family company, and he was not groomed for the position from the outset. In 1966, his fifth year with the company, Fujio was assigned to Canon USA, and he was named president of that company in 1979. He has spent the majority of the 23 years since, working in America. Only an emergency led to the appointment of someone outside the mainstream to head Canon Inc.
He made use of his "outsider" experience in the US, however, after assuming the post of president. Fujio noted: "When I returned to the head office, I noticed there were certain inefficiencies there. I might not have regarded them as unusual if I had been groomed for a long time in the Japan head office."
The first step he took was to sell off unprofitable businesses. Believing strongly that the company should even be able to produce a profit when revenues decline, he pulled the company out of personal computers, word processors, and FLC displays. The company consequently lost a total of JPY73.4 billion in revenues but managed to cut its deficits by JPY26.2 billion, thus the company was reformed into a more profitable one. He also turned his hand to organizational reform. Before Mitarai's appointment as president, Canon saw its autonomous business division system swelling, with the management convinced that the optimal approach was to have one business division for each specialty. When the company built plants overseas in response to a rising yen, for example, individual business divisions might build their own separate plants in the same country - with subsidiaries constructing yet more facilities independently in certain cases - and these self-centered efforts passed without remark. Business divisions turned into "companies within a company," with finance and accounting departments unable to object to the budgets submitted by the more powerful divisions, such as office equipment division. During this period, the limitations of Canon's autonomous business division system, which had been seen as a successful model, burst forth all over.
To free the company from the harmful effects of the vertically-divided business division system, Mitarai established a Management Reform Committee in 1998. He set up committees to address eight topics such as development systems and production/logistics systems that cut across the vertical boundaries between business divisions. For the most part, he assigned the head office managers from these business divisions to chair these committees. For instance, Mr. A, the head of the Printer Business Division Head Office, might concurrently serve as Chairman of the Special Committee on Development System Reform, thereby creating a fusion of vertical and horizontal organizations.
This being the case, Mr. A could no longer think only of printers. To carry out his additional assignment, that of reforming the development system, he had to communicate and exchange views with other business divisions. Consequently, Mr. A's perspective would naturally transcend the boundaries between business divisions and take in Canon as a whole. Mitarai's goal was to get the executives somehow to assume a company-wide point of view, and the committees served as one device for achieving this.
The American-style approach of establishing independent business divisions under a holding company has become popular of late. While it is indeed a legitimate alternative, many of the Japanese companies adopting this method have become "flounders" (whose eyes are always turned upward), as the presidents of these new companies always consult with the president of the holding company. The end result is nothing more than an additional link in the chain of command. As can be seen in the reforms at Canon, this holding company system is not likely to work unless carried out while teaching employees to think of the company as a single entity.

What should be done at owner-run companies when the selection of successor candidates has been quickly narrowed down? This question applied in the case of Masao Ogura, whose father, Yasuomi, had founded the company. Ogura had to undergo treatment for tuberculosis soon after joining the company, and less than a year after returning he was assigned to Shizuoka Transport, an affiliated company. Speaking of his time at that company, Ogura remarked: "I had to give my attention to everything from labor management to operations because the company was so small. This actually proved very useful in acquiring the basics of business management."
Successful examples of "outsiders" are not limited, of course, to relatives of the company founder. President Goto of Kao came not from the Household Goods Division, the company's principal line of business accounting for more than 80% of sales revenues, but rather from the Chemical Business Division, in a sense an offshoot organization. In addition, he spent two assignments spanning a total of 11 years working outside the Kao head office. Unlike earlier extroverted and flamboyant presidents, he is a practical business type. Upon assuming the post of president in 1998 he made a bold cut by withdrawing completely from floppy disks and other computer-related businesses. The eight sales companies divided by region were consolidated into one company in 1999, the same year the company began sales of the hit product "Healthy Econa Cooking Oil," a vegetable oil that helps prevent fat deposits. These successes were, of course, built upon the efforts of predecessors, but both Mitarai (3.5% to 9.9%) and Goto (7.9% to 14.6%) have achieved startling improvements in the ratio of ordinary profit to total capital during their terms.

One reason "offshoot" experience is so valuable for top managers is that they were able to make bold decisions because their operations were not tied to the company's core or existing businesses. Another is that such experience gives them an opportunity to examine the company objectively from the "outside," dispassionately study the naked truth about the company and uncover inefficiencies that need to be corrected. The personnel policy at Japanese companies thus far has generally been to promote those who have produced exceptional business results in some division - the "hard chargers" - to executive positions as a reward for their efforts. Company managers are professional specialists in the field of management, however, and star players do not always make star team managers. In the future, early appointment of individuals slotted for executive positions, in their 30s if possible, as president of a subsidiary is essential for them to gain a wide range of experience. Offshoot experience should become an intentional, not a chance, part of the career track. Companies must bring to an end the usual practice of assigning those employees in their 50s who cannot rise into the executive ranks at the head office as presidents of subsidiary companies.

The fourth element is an indomitable spirit among top managers to "turn crises into chances." Many superior companies have a history of uncovering new directions to turn when pressed by circumstances and transforming that crisis into a golden opportunity.
In 1957, only its third year in business, Mabuchi Motor faced a crisis that threatened its very survival. The lead contained in the paint used on metal toys manufactured in Japan became a problem in the US, and the toy industry faced a disastrous halt to 90% of Japanese-made toy shipments to the US. At the time, motors for toys constituted 100% of Mabuchi Motor's business. Inventory piled up, bringing home to the company the risk of depending on single-item management of motors for a single industry.
Had the company chosen this moment to diversify into other businesses besides motors, it probably would not have grown beyond the extent of an ordinary company. Mabuchi Motor did not think in that fashion, believing instead that what had gone wrong was the use of its motors only in toys. If the company could discover demand in other industries as well, it could avoid being sucked down again by a sinking industry, while it was in danger of being swept around by conditions in one particular industry if it could not find multiple uses for its motors. The keys to expanding the uses of its motors were improved functions and low cost. If those could be achieved, the company's products would see a broader range of use, stabilizing the company's operations despite single-item management.
Hair dryers, for example, used to be quite large, with most people associating them with professional hair salons. The introduction of Mabuchi's small motors, however, reduced the size and lowered the cost of hair dryers, which became regular household items. The tape loading motor for video decks (the motor that pulls an inserted tape into the interior of the deck) frequently made electrical noises and caused flickering on the screen. Mabuchi developed a motor with reduced electrical noise and, despite its late start, it soon acquired a 70%-80% share of the market. As described earlier, Mabuchi also skillfully turned a crisis into an opportunity by providing Braun steel-core motors for its electric razors at a surprisingly low price.

Just before starting its express home delivery service, Yamato Transport also faced a life-or-death crisis. Hampered by the first company president's belief that trucks were only for short-distance small-lot shipping, Yamato Transport was a latecomer to the age of long-distance large-volume transport by truck. The company that Masao Ogura took over was under heavy pressure, even on the verge of bankruptcy. With the prospects not good for catching up with the competition in commercial cargo transport, Ogura turned his attention to an entirely different market, small-lot individual transport. His idea was to overturn the post office monopoly on small parcel delivery by offering a private-sector service perfectly suited to the needs of shippers.

The remarkable achievements of Mabuchi Motors and Yamato Transport are simply the results of having turned a pinch into an opportunity, and some companies attempt to arouse a sense of crisis even before any real problems occur to prevent complacency and to maintain a degree of tension among employees. The employees at companies that are not doing well are often convinced, even in the face of a genuine crisis, that their companies cannot possibly fail.
To this day, Toyota Motors maintains a culture of regularly inducing a sense of crisis among its employees. When the current president Fujio Cho joined Toyota, then president Taizo Ishida welcomed him and his fellow new employees with the comment: "Toyota itself will disappear if you all are not sharp and on the ball." Cho, too, quickly finds small problems popping up in day-to-day operations and converts these problems into numerical figures to encourage a sense of urgency within the company as part of his policy of making management visible. As has been mentioned, Kao also has a culture that qualifies it as a "dissatisfied-with-the-status-quo company."

Moving on, the fifth element is a management policy of directly examining business risk while aiming for growth suited to the company's stature. Superior companies generally feature a financial independence unhindered by capital markets, but this is a matter of cash-flow management. In other words, these companies engage in investment and R&D suited to their stature within the scope of the cash flow that they themselves generate. These companies can afford to make bold investment decisions because they are able to carry out risk control should these investments fail.
President Fujio Mitarai of Canon sang the praises of cash-flow management in the reform program he put forth when taking office. At the time, his company had total investments of JPY130 billion, with JPY80 billion in depreciation, thus Mitarai believed that, with JPY50 billion in net profits, net profits and depreciation alone could cover all of the investments. JPY50 billion in net profits corresponds roughly to JPY100 billion in ordinary profits. A target of JPY100 billion was set, and this objective was achieved as early as 1996.

Nintendo is famous for having enormous sums of cash in hand, making it also the butt of criticism from financial institutions and consultants as a company oblivious to the importance of capital efficiency. Its approach stems from the accurate views on business risk held by previous president Hiroshi Yamauchi, who resigned this past May, and is based on the idea of ensuring a certain amount of financial leeway.
Video game software is not an order-based industry. The software is developed by forecasts, it is manufactured by forecasts, and inventory is built up and sold by forecasts, making it a business with extremely high development and manufacturing risks. Atari Corporation, the dominant player in the US game industry at the beginning of the 1980s, saw its market suddenly dry up to a mere fraction of the previous year's in the Christmas season of 1982, placing the company in serious straits. Nintendo sees this "Atari shock" as an example from which to profit, and ensures that it has liquid assets readily available at all times. There are risks in focusing the company's business exclusively on amusement, and liquid assets are considered a necessary hedge against those risks.
On a note aside, Nintendo did not involve itself at all in speculative investments during the bubble economy. While the company did not hesitate to put money into creating amusement, its particular area of expertise, it felt that stocks and other investments were outside its area of expertise. Nintendo was not alone; other companies in which the relatives of the founders still have a strong say in management maintained very firm financial discipline as capitalists, even during the bubble.

The final element shared by superior companies is that the managers impart to the company a sustainable culture of discipline. Superior companies have discipline, and have corporate cultures that emphasize constant discipline among both company managers and employees.
Discipline in a company immediately brings to mind the discipline imposed by the capital markets, i.e., the valuation of a company by the stock market. The author has come to the conclusion over the past three years, however, that discipline by the capital markets is a necessary, but not sufficient, condition to produce a durable superior company. Truly superior companies also display discipline in non-financial matters, specifically in a sense of mission and an ethical code. Some may object to this assertion by declaring that the principal job of a company is to make money and that this is not accomplished by uttering high-sounding ideas. Profits are naturally very important. Profits are a necessary means for a company to continue contributing to society, and looking down on profits is essentially the same as looking down on a continued contribution to society. A one-time contribution to society can be made adequately through a donation, without going to the trouble of forming a company, but a continuing contribution to society cannot be made this way.
On the other hand, superior companies do not think that anything goes as long as it makes a profit. If the purpose of a business is just to make money, then that business is not any different from gambling or speculation, and companies seeking to secure profits without making a contribution will fail to become durable superior companies and will go under at some point. The recent bankruptcies and scandals at Enron and Worldcom offer clear evidence of this. Superior companies view their organizations as having the purpose of contributing to society over the long term by making profits.

Another feature of superior companies is the simple belief that the key to corporate governance is a sense of mission and not the system. Companies will not turn their businesses around by just introducing an outside director or executive office system. Only with discipline in areas outside of money - a sense of mission and an ethical code among employees - can people and companies be motivated to work. Such a company enjoys a strong resilience in crises because declines in business and even pay cuts will not set off an avalanche of talented personnel fleeing the company. The most durable companies are those staffed by employees who feel that they are part of a group that shares the same destiny.
In this regard, companies under the influence of a founder's family have an advantage. From a capitalist standpoint, the family members see the company from the broader prospective of long-term growth and continued contribution to society. Nintendo's rapid growth and its steadfast business policies are due in great part to the centripetal force of the Yamauchi family, and the Ogura family of Yamato, the Mabuchi family of Mabuchi Motor, and the Shimano family of Shimano play similar roles. Even at companies as large as Toyota, where there is no direct influence, the idea that "the Toyoda family is watching" exerts a considerable impetus to maintain discipline.
Company management involves exceptional and humane oversight of operations. People are not such simple-minded creatures that employees will work devotedly just because they receive good compensation. Only when employees feel their efforts are benefiting the world and society will they forget to sleep and eat in their enthusiasm for work. Without such motivation, companies will find it hard to combine the vectors of their employees into a strong force. One fad in recent years has been to motivate employees by offering stock options. Having money is unquestionably better than not having it, of course. The danger in pulling people along with financial incentives, however, is that it inevitably tends to give an employee the idea that the company as a whole does not matter as long as he/she is doing well.
Masao Ogura of Yamato distributed dorayaki (two small pancakes with sweet bean jam in between) to his employees every time the volume of express home delivery shipments increases. Stock options and dorayaki; is the view that everyone would prefer the former really in line with the subtleties of the human heart? Even as his company disguised its failing finances with window dressing, the former CEO of Enron exercised his stock options, sold off his shares in the company at a bargain, and acquired an enormous amount of wealth. The regular employees, however, lost not only their jobs, but their precious retirement funds as well, when Enron went bankrupt. Confronting realities such as these, how many company managers can really laugh at the "psychological approach" of Ogura's dorayaki?

Six elements common to superior companies have been considered here. Summarizing in his own way the conclusions to be drawn from these on the conditions for a superior company, the author would consider the best managers to be:
"Those who adhere to, and do not go beyond, the business they best understand, who think long and hard themselves with simple honesty and seriousness, and who tackle their jobs with passion."
This could be seen as an overly simplistic and exceedingly obvious conclusion. However, with companies having grown bigger since World War II and having passed through the bubble period, might it not be the case that many have lost sight of their starting points? Canon, Honda, and Sony were all companies founded during or after the war when the country was impoverished, and the founders of these companies all held to this conclusion. When establishing Tokyo Tsushin Kogyo (which later became Sony) in 1946, Masaru Ibuka included the following comments in the company's prospectus:
"We shall eliminate any unfair profit-seeking, persistently emphasize substantial and essential work, and will not merely pursue expansion for its own sake, and shall endeavor to the best of our abilities to select products and develop them independently."
It would be a mistake to think that Japanese companies do not have management strategies. Regardless of the forms or systems adopted, be they American-style or Japanese-style, it is important to once more return to the starting point. Could it be any simpler?
Someone once said, "Don't act the part of a president, act as a president," and this does not apply only to company presidents. "Don't act the part of a company director, act as a company director" or even "Don't act the part of a legislator, act as a legislator" and "Don't act the part of a bureaucrat, act as a bureaucrat." If everyone would call up the discipline within himself or herself and return to his/her starting point, Japanese society will see a much brighter future.

>> Summary Results of the Corporate Excellence Research Project [PDF: 23KB]

>> Original text in Japanese

* Reprinted from Bungei Syunjyu, September 2002

September 2002 Bungei Syunjyu

September 26, 2002

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