What Kind of Companies Live Beyond Their Life Span?

Fellow, RIETI

The error of the "30-Year Corporation" theory

There are those who speak of a "30-Year Corporation" theory. They probably mean that companies, just like humans, have a life span, and that their lives inevitably end due to time limitations. But is this generally-accepted idea really true? Or if some companies do continue to thrive, contrary to this popular belief, what kind of firms are they?

In late autumn last year, I published a book, Nihon no Yushukigyo Kenkyu Kigyo Keiei no Genten - Muttsu no Joken ("A Study of Japan's Exceptional Companies: The Origins of Corporate Management - Six Conditions") (Nihon Keizai Shimbun, Inc.) which was a compilation of thoughts formed little by little over weekends for more than three years. Through the analysis of exceptional companies that have produced solid results despite the protracted economic slump, this book attempted to provide essential insights into - not one-time fads of - corporate management.

By the way, many of the exceptional companies that were used as samples in the book because of their good performance were, contrary to the widely-accepted notion, in fact quite old so far as corporate age goes. For example, Kao Corp. is 116 years old when counting from its founding as the Nagase Store in 1887, while Shimano Inc., which is famous for bicycle parts, is 82, having been founded in 1921. Shin-Etsu Chemical Co. (founded in 1926) is 77, as is Toyota Motor Corp., whose origins lie in the founding of Toyoda Automatic Loom Works. Yamato Transport Co. (founded in 1919) is 84. While there are some firms that were founded around the time of World War II, even they are at least in their mid-50s.

But as founding members depart and employees come and go, it becomes difficult even for top-notch companies to avoid a change in internal atmosphere and spirit, or to use the proper word, corporate culture. If this is the case, then it cannot simply be said that the older a company is, the better. Companies that are able to maintain a competitive advantage for a long period of time probably have some inherent organizational ability. What could that be?

Strengthening present advantages while developing new ones

The conclusion is, first and foremost, that a company strengthens its present supremacy. Firms must continually and gradually innovate, improving the products and processes of present business areas that corporate managers are familiar with so as to develop and deepen existing dominance, thus maintaining and building on their current success. Without such efforts, a company cannot continue to exist, much less continue to make a profit. In addition, firms must strive to develop new strengths. Of course, this should be based on utilization of what they already have, but involves the creation of new business pillars through the discovery of customer needs that have yet to be satisfied; the discovery of new opportunities and methods are the seeds for future success. This includes such efforts as the development of products that differ from current business areas as well as unique production methods.

What is difficult, however, is achieving both at the same time. A typical example of the former - strengthening present advantage - is the so-called "kaizen" concept. It involves step-by-step improvement by discovering the weaknesses of what is currently being done, determining the reason for the problem and then fixing it. This is well captured in the words of Toyota Motor Corp. President Fujio Cho who said that, "The horse's neck began to grow little by little, and one day it realized that it had become a giraffe." This should not be limited to partial activities such as removing wastefulness at factories or undertaking cost-reduction efforts. This idea boils down to an "all-out war" that involves practically every aspect of corporate activity, including planning, design, production technology, procurement and sales. In order to perfect these efforts, each division of the firm must work together closely and be managed with "total optimization." This is because there must be no redundancies or inefficiencies, and good results must spread to other sections.

Development based on customer views, but not simply following what they say

In contrast, keeping the organizational structure "loosely bonded" is often effective for the latter, or the development of new strengths.
In my book, I listed "the ability to think things through with one's own head from the perspective of the customer" as one condition for an exceptional firm. As an example of this, I cited the case of Seven-Eleven Japan Co. Ltd., which established the model for a Japanese-style convenience store by thinking like a layperson from the viewpoint of customers.

However, thinking from the customer's point of view does not mean "simply doing what the customer says." It is said that "market-in" is important, but in fact companies should not develop things just because customers say so. This is because if customer needs have become so tangible as to be heard, then rival firms are also aware of them. This in turn means that it is highly likely that after the development period, similar products will appear on the market, leading to quality competition, or in other words, price competition. In fact, it is safe to say that there is no firm that does not listen to what customers have to say. Similarly, in recent years everyone has been saying that the future lies in the "solutions business," but if the "problem" on the customer's side is already visible, it is the same as having the customer say what their needs are. A truly high value-added "solution" is one which "presents" problems before customers present or recognize them. In other words, it is not a "solutions business" but a "problem presentation business."

Demand is recognized after some "ostentatious" person develops it

There is a word in Japanese slang called "toppoi." It means "to be a show-off and impertinent," but history shows us that the creation of a new business model occurs when a handful of people who are "impertinent" and have a "down-to-earth sense" of consumer sensibilities drive against obstacles fuelled on their own faith and intuition and begin to bring the shape of a new product into the world. Only upon seeing this new product do consumers and customers realize that they want it, thinking, "I didn't know such a wonderful thing existed" (initial recognition of demand), while rival firms view the product with admiration, as they had never thought of it, and then begin to try and copy it. And yet because of the nature of this activity, the development of new strengths comes with much uncertainty and it is practically impossible to secure a full consensus as to what direction a project should take. At the same time, the more participants there are, the greater the conflict of interests becomes. For this reason, unless the binds within the corporate structure are relaxed, there is a high likelihood that the project will grind to a halt.

Separation from the central body

Owing to the fact that the organizational management methods and corporate culture required for the two "activities" are so different, it becomes desirable for the development of new strengths to be "separated" from the central body. In other words, it needs to be segregated from the corporate culture and political influence that controls the main unit. In this way, current business sections need not be distracted by the development of new strengths and can concentrate on strengthening current advantage, while those trying to develop new strengths will not have to worry about maintaining the current competitive advantages of the company.

Innovation that leads to the creation of a new business pillar often appears in a shape that not even internal management can predict, and it is impossible to foresee whether it will succeed or fail. In my book, for example, I cited the case of Kao's "Kenko Econa Cooking Oil," which took 15 years to develop and, what was more, was initially a project that attempted to develop a cooking oil that was easy on the stomach; it saw success only after many twists and turns.

This is why it is important for development activities to be separated from internal management. If a firm is in the services or distribution business, one idea is to utilize a franchise network by signing contracts with members that are independent corporations and then making use of the business innovation capabilities of independent, able member stores rather than using direct expansion.

When we look at successful subsidiaries, they often operate in a different business field from their parent firm. This is because those at the parent company are more likely to interfere if the subsidiary is doing something similar. If the operations of the two are different, they do not possess the knowledge to poke their noses in, even if they wanted to. That is why it becomes comparatively easier for people at the subsidiary to do what they please and succeed. In addition, even if innovative trials are conducted, so long as organizational control is relaxed the direction of development will also be spread out and the overall risk for the company is actually reduced.

The pioneers themselves are not the problem - those around them are

Generally speaking, the people who developed the core business on which a firm's current dominance is built are said to be bound to that experience of success and find it difficult to keep up with new ways of thinking. However, in reality, it is not only these people who are "bound" by past success. It is rather those who cooperated in the success (those in the same generation) that are more likely to be bound to the taste of it and have "groundless confidence" in current methods, because they do not really understand the reason why they succeeded in the first place. May I add that the recent trend seems to be one of valuing youthfulness for its own sake. But while it may seem that the younger generation is less prone to be bound to past success, there are times when people who join a firm upon seeing the success of its current business model in essence unexpectedly become the most conservative, because they originally had the idea of working under that model and are at a loss when told that it will change as soon as they join. If such "followers" of business model pioneers run rampant within the corporate organization, it can be detrimental to efforts for change. This is why it becomes important to find so-called "internal entrepreneurs" who are in a sense high-handed and can speak out, think for themselves and assemble their own team. Companies should find people with such an aura within the firm, "isolate" them from the main unit, let them do as they like and tell them to ignore all the rules of the main firm, even venture to "think as though to destroy the main company." Some people may say that no such person exists in their company, but in many cases candidates can be found in nonmainstream divisions. This is because such people are often aggressive by nature and do not get along well with their superiors.

The "wall" that led PlayStation to success

Let us consider the development of Sony Corp.'s PlayStation as an example. The first person that said he wanted to develop a games console for home use was Ken Kutaragi, who was a young engineer at Sony's Information Processing Research Institute at the time. He found himself uncomfortable at Sony after some contractual problems arose, so Norio Ohga placed Kutaragi and some other engineers in the care of Shigeo Maruyama at Sony Music Entertainment Inc. All of Sony's board members save Ohga opposed any foray into the games console market, but in the end, Sony Computer Entertainment Inc. was established in November 1993 as a 50-50 joint venture by Sony and Sony Music Entertainment (a firm 100% owned by Sony). This was interesting in that the parent firm and a subsidiary jointly set up a firm. In December the following year, Sony Computer Entertainment launched the PlayStation games console.

Now, if Kutaragi, who is obviously an "ostentatious" person, had been able to remain in the main body of Sony, would the world have ever seen the PlayStation console? I doubt it. I believe that the "wall" that was ensured between Sony and the firms more related to intangibles within the Sony group, such as Sony Music Entertainment (the former CBS Sony), provided breathing space for the group firms to foster unique cultures and made it possible to utilize people with unique characters and abilities. This is not unrelated to the fact that Mr. Ohga probably took great care to prevent as much as possible any parent-subsidiary relationship from coming between Sony and its group firms.

While companies need to both build up existing dominance and develop new strengths in order to secure their long-term survival, it is true that all firms have their strengths and weaknesses. Sony's traditional strength lies in its "placing of priority on ideas and planning, and possessing a spirit of rising to the challenge of doing what others cannot" (the words of Sony founder Masaru Ibuka). In other words, it is a company whose competitive advantage springs from the development of new strengths, and it is relatively weak in the area of "improvement" ("kaizen"). For such a company, a centralized corporate management style where the company checks every step of the development process would tend to make it difficult to maintain its competitive advantage.

Pastimes should only be pursued as far as one's resources allow

The development of new strengths is not only an uncertain process in terms of results, as I have already mentioned, but is also currently unproductive, as it is not something that will directly lead to profit or be reflected in corporate business performance. Furthermore, even if there were successful developments, "kaizen"-type total optimization efforts are indispensable for the firm to enjoy the fruits of such labor (by properly nurturing them into a business). In any age and in any country, there are countless examples where firms that found a new domain had the fruits of their labor taken away from them by another company because they could not turn it into a profitable business. This is why the main pillar of a company's competitive advantage should be in strengthening present dominance. Efforts to develop new advantages are important for lengthening a company's life span in that new business pillars will spring from them, but they are simply grand "pastimes" (or organizational slack as it is known in business administration) for the future. That is why it is important for "pastimes" to be kept in line with a firm's resources. For example, one idea is to set a rule that 5% of sales can be devoted to a "pastime" and funneled into research and development. But some may say that their firm is a small business and that they are unable to undertake any new development. However, if a company has only about 10 employees, then it should work to develop something that can be put on the market in six months' time. If a firm has 20 to 30 employees, then the target should be 12 months. The time frame for putting a product on the market need only be extended according to the size of the company, for example, five years if the firm has 1,000 people, and 10 years if it is a major corporation. Kazuo Inamori, who founded Kyocera Corp. when he was 27, said that "the fight should take place in the center of the sumo ring" (Inamori Kazuo no Jitsugaku - Keiei to Kaikei ["The Practical Learning of Kazuo Inamori - Management and Accounting"] [Nihon Keizai Shimbun, Inc.]) even when his firm was still a small company. He says the fight should be fought in the center of the ring, where there is still room to use various moves with all one's might, rather than trying to wriggle out of a tight spot after being pushed to the ring's edge.

In closing

As mentioned above, I have spoken about firms that have been around for a long time. When I make such presentations, some people come to me and say, "I understand what you are saying, but we cannot do this, so please analyze or justify why we can't." My opinion is as follows. In recent years, there has been endless debate claiming that Japanese businesspeople are no good. What is worse, the direction such criticism has taken has been so varied. I think that this has led businesspeople to become confused, agitated and lose their confidence. Perhaps this has led them to lose sight of the proper prescription, and the correct one is not being understood. So, if we can convince businesspeople that the natural thing to do is the right thing to do, and that the solution lies in simply and honestly following that path, things will likely change without much difficulty. In fact, my opinion after writing Nihon no Yushukigyo Kenkyu is that there was only a fine line between firms that were exceptional and those that were not. For this very reason, it has now become necessary to present a "focal point" on the essence of corporate management that meets actual needs (Stanford University Professor Masahiko Aoki). It probably boils down to this: "The greatest reason for failure is the lack of experience in observing examples of real success" (Harvard Business School Professor John Kotter).

>> Original text in Japanese

* This article appeared in the special February issue of Bungei Shunju under the title "21Seiki 'Ikiru Kigyo' to wa" ("What defines a firm that can survive in the 21st century?").

February 2004 Bungei Shunju

May 25, 2004

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