Bouncing back: Two Japanese corporations’ road to resilience

Authors: David Jansen and William Macmillan

Recent years have severely tested the resilience of Japanese companies and the country as a whole. Japan has experienced severe catastrophes including earthquakes, typhoons and the Fukushima nuclear plant meltdown. These natural and man-made disasters have occurred in a country that is also grappling with a struggling economy and a shrinking workforce.

The risk resilience of Japanese companies has been repeatedly put to the test in recent years.

The common view sees risk resilience in terms of how a company can respond to discrete ‘shocks’: natural disasters, cyber-attacks, fraud and regulatory actions, for example. Even strategic risk is normally viewed through this event-driven lens. Is the company equipped to deal with sudden strategic challenges such as a disruptive new market entrant, or a production or demand shortfall?

But resilience is not just about discrete events. It is also a question of how well companies weather more gradual disruption to their business. And while shocks to the system are pretty obvious, gradual change is much more difficult to see happening – and equally important to prepare for.

Dealing with gradual and sudden disruption requires a strategically risk-resilient mindset. This is a mindset that embraces strategic risk-taking, and readies the organisation to recover from, or even capitalise on, sudden or gradual change.

So a highly resilient company will be ready to respond to gradual disruptions with a series of smaller and gradual changes. In contrast, failure to adopt a strategically resilient mindset in time can lead to a point where gradual disruptions must ultimately be resolved with dramatic changes.

Losing ground to gradual disruption

As in most developed economies, Japan has been grappling with slow, or nonexistent, economic growth, a changing workforce and the mutating shape of their key industries, among other disruptions. And Japanese companies seem to be struggling to find a new path in a changing world.

This once thriving economy has built global brands, managed complex sales and distribution channels, pioneered ground-breaking innovations and established premier positions in industries such as chemicals, aerospace, automotive, electronics and infrastructure.

Today however, many formerly leading companies are losing ground to new rivals in foreign markets at the same time as the domestic market continues a two-decade long slide. Gradual disruptions are grinding down these once great giants.

Time for change?

In a recent interview with PwC, Atsushi Saito, CEO of the Tokyo Stock Exchange Group (TSE) and former President of the Industrial Revitalisation Corporation of Japan, described the situation like this: “Even though many Japanese companies still boast very strong marketing power, production power, or engineering power, they are losing their global position. Japan’s first-class companies are now reviewing their strategies and feeling the necessity for radical change, but the question is how quickly and how effectively can they do this. Everybody can imagine change and talk about change, but the point is to what degree can they really change?”

There is a growing consensus through-out corporate Japan that it needs to ‘transform’ itself in response to the last 20 years of gradual disruption. Transformation or ‘radical change’ as the TSE’s CEO put it, is dramatic. But this is the bitter pill that has to be swallowed for those Japanese companies wanting to position them-selves for faster recovery from future challenges and changes. The time for small and gradual changes is over.

Although most business leaders would rather avoid the drastic, the good news is that if dramatic change is well-executed and sustained, it is also a route to resilience. That has certainly been the story of two of Japan’s leading companies, which have made bold, and sometimes challenging, moves to restore their competitiveness and strategic resilience. The challenging corollary has been a departure from time-honoured practices, the relinquishing of many traditional ties and the need for difficult trade-offs between competing priorities.

Healing Hitachi

In many ways, Hitachi exemplified a traditional Japanese approach to business. As one of the largest and most prestigious Japanese companies, Hitachi’s wide-ranging business units stretched from consulting and business services to aeroplanes and nuclear reactors. But this sprawling empire became increasingly unmanageable over time. In 2009, Hitachi posted the largest loss ever by a manufacturing company in Japan, 787.3 billion JPY or $8.03 billion at 2009 exchange rates.

The response was a new broom that saw Takashi Kawamura named as chairman, and in 2010, Hiroaki Nakanishi taking over as CEO. Together they began substantial reform.

Broadening the board

The new leadership recognised that an organisation competing in a global marketplace needed to embrace more diversity within. As seasoned executives at one of Japan’s most prestigious companies, they had the political capital to insist on a more global approach to management.

While the business lines were diverse, the business leadership was not. They started right at the top – with the board. As a result, Hitachi now has seven external board members on its 13-member board. Another rarity for Japanese corporations, the board also has three non-Japanese members: George Buckley, former CEO of 3M, Phillip Yeo, the chairman of Singapore’s government development agency and Sir Stephen Gommersall, former British ambassador to Japan and current CEO of Hitachi Europe.

Forging a global perspective

Figure 1: Hitachi stock performance relative to selected peers

The imperative to be global has filtered out from the board all the way through the organisation. In another example, Nakanishi has put in place a system to benchmark Hitachi business units against their international peers as well as their local rivals, such as Toshiba and Mitsubishi. This forces managers to focus on global trends as one way of escaping the ‘Galapagos syndrome’, which stems from excessive focus on the domestic market. Armed with this broader perspective, managers are better able to assess the potential for new competitors emerging from a new geography, like Indonesia or South Korea. This is resilience in practice – generating knowledge to be better prepared to respond to changing circumstances.

Aligning the organisation with market demands

At Hitachi there are clear signs of a new spirit of boldness – fuelling readiness to take the difficult steps needed to bring the business closer to the market. In November 2012, Hitachi finally closed down its television manufacturing business, a move other troubled Japanese consumer electronics companies have been unwilling or unable to make.

Figure 2: Hitachi return on equity compared to selected peers

In a recent story in The Economist, Nakanishi gave another anecdote. He described persuading the company management to invest the $800 million dollars necessary to turn the hard-disk drive unit business around. Rather than resting on this accomplishment, Nakanishi subsequently sold the business this year for almost $5 billion.

This defines the spirit of boldness that is helping to transform Hitachi into a more resilient and successful organisation. Hitachi leadership is having the courage to break with the past and the financial rewards are clearly measurable. Since Nakanishi took the helm in 2010, the firm has added more than 16% to its market cap, compared with a decline of 15% in the broader Nikkei 225 Index.1

Reinvigorating Lawson

Lawson is a major convenience store operator in Japan. In preparing for its IPO in July 2000, Lawson was opening more than 1000 stores a year in the already crowded Japanese marketplace. In the year after its flotation, the company’s share price fell by nearly forty percent. There was a clear need for drastic measures. During this period of turmoil, Lawson brought in Takeshi Niinami from Mistubishi Corporation, a major shareholder, to turn the company around. Appointed CEO in May 2002, he was charged with reversing the company’s decline, and restoring investor confidence.

Creating a convincing case for change

Figure 3: Lawson stock performance compared to selected peers

When he arrived, Niinami described encountering deep scepticism from the Lawson employees. He picked up the challenge by visiting Lawson convenience stores all over Japan. In an interview with PwC he described how face-to-face interaction was necessary to increase motivation: “I wanted to convey my passion and emotion, whatever it is, because I was unknown to them, and because I was a trading house guy [not a retail guy]. But I wanted to share my vision with them, and strong passion should be conveyed directly.”

Fostering the right alliances

This credibility was exceptionally important in achieving one of Niinami’s most important short-term goals. In order to establish the right business alliances that the company needed for its future operations, Niinami knew he would have to uproot long established interests leftover from the previous management.

But this was no easy task. In many Japanese companies strong links between shareholders and management, including widespread cross-shareholding complemented by lending relationships and supply arrangements, provide an informal safety net for many Japanese companies. This has in turn created a corporate culture that places great emphasis on preserving long-established relationships, be they with lenders, former partners, or suppliers. This corporate philosophy has one clear advantage, management can be confident that their lenders and suppliers are tied into their long-term survival. In practice, however, this often decreases the speed with which decisions are made and promotes an extremely headquarters-centric management of the company.

Building agility and flexibility

At Lawson, the headquarters-centric style stifled innovation at the store level. But a resilient organisation ensures that the best ideas can be implemented no matter where they are born. So a radical transformation of the organisational structure was needed to give local units the autonomy to respond to changing circumstances. Niinami describes the new management approach he instituted like this: “I delegated decision-making authority to the general managers of our regional headquarters for day-to-day management. By empowering people, I could raise their motivation and increased their productivity. This was completely different from the usual practice of the Japanese retail industry.”

Figure 4: Lawson return on equity compared to selected peers

Creating the appropriate culture

In a move that would bring painful short-term consequences to some, Niinami put an end to the ‘job for life’ employment philosophy common to many Japanese businesses, which offers security and guaranteed promotion in return for loyalty. He recognised the need for full meritocracy in promotions to create a culture that fosters fresh thinking and enhances motivation. The company’s headcount shrunk by 20% in one year. But these changes didn’t end with the rank and file employee. Niinami took the risk of reducing the size of the board from 21 members to just 9, removing 18 insiders.

A more diverse workforce stimulates more diverse ideas – necessary for resilient organisations to rapidly react to change. Lawson fully embraced the challenge of diversity, by naming two women to its board and requiring that 50% of all new hires are women. These are pioneering moves in a nation ranked 101st of 135 in gender equality, according to the World Economic Forum.

Unleashing innovation

This fresh thinking released a wave of innovation within Lawson, breeding the strategic resilience necessary to survive these tough economic times. One example is the recently launched ‘Natural Lawson’ product line of fresh and organic foods targeted towards a population increasingly focused on sustainability. Another new business idea is the launching of pharmacies aimed at Japan’s rapidly ageing population.

Trade-offs and pay-offs

  1. Breaking with the past

    The level of risk the Hitachi and Lawson leadership were willing to take, and the sacrifices the companies had to make to improve the company’s financial performance were greater than once would have been thinkable in corporate Japan. At Hitachi, Nakanishi took the bold step of closing the once iconic TV business as part of a broader shift away from consumer goods. Niinami of Lawson was willing to break with the entrenched interests of large shareholders and form new alliances.

  2. Open to new ideas

    A substantial restructuring of the board was a feature of both turnarounds. The fresh global perspectives on Hitachi’s board are anchoring a pivot towards international markets and competitors. And as Lawson embraced full meritocracy in its employment practices, it was able to enlist the entire knowledge of the organisation to innovate in line with the changing market.

    While the long-term pay-off is greater ability to adapt to changes - a hallmark of resilient companies - the trade-off would not have been small. Both Hitachi and Lawson leaders will have had to weigh those benefits against the risk of compromising Japanese cultural norms where loyalty to company employees is long-heralded, as well as creating uncertainty and dissatisfaction for employees who assumed career security.

    Atsushi Saito of the TSE evocatively describes this change as “destroying the triangle” – dismantling the age-based and hierarchical system of talent management. In practice, this means identifying and promoting talent that does not come from the traditional sources for Japanese companies.

  3. Broadening horizons

    At Hitachi, managers were instructed to benchmark against international competition as the company reoriented itself towards providing infrastructure solutions around the world. It’s a tactic that will prepare it to pre-empt and rival a new set of competitors. Lawson has identified an ageing population in Japan and a society more focused on sustainability as demographic trends that open up market opportunities.

    In monitoring new competition or identifying new markets, both illustrate risk resiliency. By analysing what’s going on ‘out there’, they have improved their ability to assess risk and turn it to their advantage.

  4. Strengthening flexibility

    At Lawson in particular, the company recognised the need to decentralise decision-making in a move that ran counter to Japan’s headquarters -centric approach. While the trade-off would have been a release of control and perhaps increased inconsistency in decision-making, the upside is a flexible and nimble organisation. At Lawson it also released innovation and gave rise to motivation.

    Local units are empowered by, and better able than, their headquarters to respond to changes with speed and agility.

    The measures taken by the two companies by no means comprise an extensive list of reasons why Japanese companies are struggling. However, they provide a practical understanding of some key and ultimately successful steps that each company took to be more resilient.

1 Since Nakanishi took the helm in 2010, the firm has added more than 16% to its market cap, compared with a decline of 15% in the broader Nikkei 225 Index.