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Tuesday, May 18, 2010

No. 3: What is necessary in business

All products are destined to be wiped out from the market, and it is imperative to continue putting new products on the market incessantly. Creative destruction is out of the question if you think regretfully of products. The same is true of business. Your business may be replaced by new innovate business some time in the future. Keep innovating and have courage to abandon unprofitable and unpromising business as needed. However, people are conservative by nature and liable to avoid a change.

There are three major obstacles to the decision on withdrawal. The greatest obstacle is rivalry. Think about Toyota and Nissan back in 1999. Back then, Toyota was called Toyota Bank because it was a super excellent cash-rich company, while Nissan had as much as 2 trillion yen interest-bearing debts. Even with these huge deficits, Nissan gave a big command to employees, asking them to try harder to catch up with and overtake Toyota. Because of this reckless command, Nissan finally had no way left but to ask Renault for financial help. What Nissan should have done is to abandon unsalable and unprofitable models, but it couldn’t.

The second is sticking with the traditional business domain, saying that this is our company’s DNA. Railway companies faded out in the U.S. in the early 20th century because they defined their business as transportation. Japan’s the great Ichizo Kobayashi, founder of Hankyu Railway, defined the railways business as the business to provide people with communication places materialized by the railway. He famously said, “If you need a customer, you try to create a customer.” His comment has something in common with Peter Drucker’s famous definition: “Business is to create and keep a customer.”

The third is the perceived notion that this business will be profitable some day in the future. This is often observed in medium-sized companies, and the business is usually a pet project of the president. Often, the president grumbles about the stagnant sales and attributes them to the insufficient efforts of his employees. The fact remains, however, that employees are trying very hard to make the president happy, but in vain.

Every company has it own capacity in terms of financial resources, management resources, etc. Even Toyota does not have infinite capacity. The super computer has grown competent enough to beat the world champion in chess. This is not a surprise. The competency of a computer increases as the data stored inside it increases. If a computer becomes too small to store the increasing data, what you need to do is to build a bigger and powerful computer. However, a human brain has a totally different story from a computer. No brain can be made bigger, nor can it be made more powerful over a short amount of time. Accordingly, human has no way but to abandon old pieces of information to incorporate new pieces of information.

Every company wishes to beat its competitors in its traditional business domain with products that sell forever. However, this hardly comes true. What is important is to analyze the reality and make a change as needed. Management is reorganizing a company to cope with ever-changing business environment.

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