No. 13: Listen to the Voice of the Market, First

A municipality in the Tokyo Metropolitan area started to commercialize brandy using pears that are its signature agricultural products, but things did not go well as expected. It publicly sought a person to preside this business and recruited a competent person, but even he did not succeeded in making a turnaround. The greatest problem with this case is that the municipality did not ask beforehand whether or not pear brandy would sell fast enough to make the business viable. As this case shows, many municipalities try to commercialize products using their signature agricultural products, but few of them succeed.

It is obvious that some one already tried to commercialize pear brandy in the past and proved that it does not sell fast enough to keep the business running. Since ancient times, human has been trying to brew various kinds of fruits to produce original liquors. As the result of trial and error, only the existing products are available on the market. The same is true of jams. Many municipalities make efforts to commercialize pear jam and peach jam, but in vain.

To make the matter worse, agricultural products are greatly at the mercy of market conditions. You cannot stop producing liquors and jams only because the purchase cost of agricultural products is high, keeping the production equipment idle. It may be possible to market pear brandy on a small scale as a gift for sightseers. But, it is hardly possible to market it as business. To be rather modest, the municipality should not have tried to commercialize a product that large companies do not try to commercialize.

Quite some time ago, local brand beers created a sensation in Japan. Many municipalities joined the boom and introduce their own brand beers one after another. Today, we do not hear much about them. In this case, beer is beer. The point is how to differentiate your local brand beers from Asahi’s Super Dry and Kirin’s Lager. The story about pear brandy is totally different from the story about the local brand beer.

Today, every technology is highly advanced and product development is brutally fierce. Therefore, it is vital to change thought from using the signature agricultural product as it is to growing specific agricultural product best suitable to a product to develop. Otherwise, it is hardly possible to create products that satisfy consumers’ requirements. Think about grapes. The grapes from which wine is made are the result of selective breeding. In addition, it is important to know that the technology to produce best fruit is quite different from the technology to produce wonderful wine using the best grape. You had better not think illogically that you can produce wonderful wine only if you can get the best grape for wine.

Because business is the activities that involve the market and consumers, you always need to look into various aspects of the market and consumers. That is, you need to build a product concept by listening to the voice of the market and observe market trend in detail. It is not advisable to build a product concept only on the basis of your self-centered view, however wonderful your technology and know-how may be.

No. 12: On future prediction

Figures based on future prediction attract wide attention as an election approaches and campaigns grow furious. Nothing is more appealing to people than figures based on future prediction. Many intellectuals predict the future, and mass media release their predictions. Listening to the reports released by mass media, people believe that an upheaval will come soon and a reform will change the world soon.

People become optimistic or pessimistic depending on the prediction. In the days when PCs started to increase the presence in business, many intellectuals predicted the arrival of a paperless society. However, you still need to depend on hard copy documents in your business. Several years ago when gasoline prices soared, many intellectuals predicted that gasoline price would exceed 200 yen per liter. It is about 130 yen per liter now. All predictions do not necessarily come true. Even the famous book “The Limits to Growth” written by the Club of Rome does not have as high a hitting ratio as people expect.

You have to note that the future is not an extension of present. As the great Peter Drucker told us, the only thing we know about the future is that it is going to be different. It is possible to predict the future of a natural phenomenon to a certain degree of accuracy. If you plant a seeding, it will certainly put forth ears as time goes by. However, you can rarely know the future precisely seeing what is going on now. A temporal enthusiastic trend has the possibility to become a thing of the past. Even hot water in a kettle will become water unless it is heated continuously. In addition, no phenomenon will stay in the same direction. People those who lived in a lap of luxury during the bubble yell out “We need a society without disparity” as soon as the bubble bursts, but they expect next bubble as soon as economy shows the sign of recovery.

No. 11: No Company Can Go Up to the Second Floor in One Stride

You need to win in business because business is a war. Otherwise, you will be beaten by your competitors. In this sense, you may sometimes need a gimmick to break them down. However, the gimmick unsupported by sufficient amount of financial resources will definitely fade away as time goes by. Vainglory is a big no-no in business. Even if you create a flashy gimmick, gilt comes off sooner or later. A company that attracted wide attention in the mold-making industry filed for bankruptcy protection under the Civil Rehabilitation Law with about 15 billion yen (about US$160 million) in debt.

When you see the 20 years’ history of this company from the foundation to the bankruptcy, you can see the stereotype story that emerging companies have in common. The company developed innovative technology and achieved a rapid increase in sales. Delighted with the rapid sales increase, it moved its headquarters to an expensive building located in the super expensive business district in Tokyo. It decked the office with expensive furniture as if it looked like a palace, and attracted excellent engineers with the fabulous working conditions on the assumption that its business will grow continuously.

The company president was pretty sure about eternal development of his company. He pressed his employees to focus on developing state-of-the-art technology and asked them to develop the technology that is the best or the second best in the industry. He must have great respect for GE’s Jack Welch, but it is not a good idea for a small company to do what the world’s best company does. This company spent nearly 50% of its sales on building an unmanned plant to show its excellent technology.

Apart from his somewhat optimistic prediction, this company depended on the automobile market for 60% of its sales. The ratio was clearly too high. If the target market grows continuously, no company comes across a tragedy as long as it has highly sophisticated technology vital to the market. However, things will not necessarily go well as you expect. Even Toyota Motor is not free from economic fluctuations.

Empirically, it is advisable for a company not to depend on one market for more than 20% of its sales. Even if a company loses sales from one market entirely, it supposedly can manage to make up for the loss as long as the ratio is less than 20%. It is vital for a company to upgrade its technology continuously and diversify the target market. At the same time, it needs to accumulate equity capital to prepare for an economic downturn. Fixed costs, such as employment cost and rent, cannot be reduced even if sales go down. In this sense, a company president should have recognized the necessity to know how to protect his company as well as how to develop it.

As the great Konosuke Matsushita who is the founder of Panasonic said, “A company has to make efforts to go up to the second floor, but no company can go up to the second floor in one stride.”

No. 10: Consumption trends change faster than foreseen

Domestic demand in Japan is not growing fast despite the government shouty announcement, “Expand domestic demand.” The retail industry prompted M&A to materialize economies of scale under the assumption that domestic demand will expand given the government’s dramatic drive. However, the fact is that demand is not expanding fast enough, and the M&A strategy is not working well. Management integration of leading department stores attracted public attention, none of them are reported to have improved their results dramatically. Consumers rush to department stores to buy low-priced products offered by the tenant retailers. This is not what an M&A is intended for. After management integration, two leading department stores introduced the central buying system by headquarters, but this system is not working well because demand varies with region considerably.

You may say that retailers are not successful in M&A because they took the government’s Ptolemaic policy based on the assumption that Japan is Tokyo-centered at face value. No companies can achieve an M&A easily only by pursuing economies of scale, even though they are in the same industry. As the negotiations between Kirin Brewery and Suntory showed, the bigger the two companies are, the more difficult an M&A is. Consumption trends change with lots of factors. The factors are getting more diverse and changing at an accelerating pace. Even though an M&A successfully increases management efficiency, it will not be as effective as originally planned if it fails to cope with changes of consumption trends.

No. 9: Do not rely too much on a big company

Big companies are decreasing the number of their suppliers in view of the current stagnant economy in Japan, and many suppliers are struggling to overcome the hard times. It is easily imaginable that they are surprised to have their business with big companies discontinued. They must have been optimistic about future business prospect because they are doing business with a big company. Even big companies are not free from stagnant economy. Because they are big, they have to try hard to streamline operations to secure necessary profits. They first lay off employers, and second decrease the number of suppliers.

What supplier is the first to be wiped out? Unquestionably, it is the supplier that has the smallest share in the supply market. Suppliers with a small share cannot satisfy the requirements of a big company in a short period of time when economy recovers in the future. There is no room to give consideration to human empathy. The decision to discontinue business transactions does not allow for any delay. No purchase agent of a big company wishes to lose a job as a salaried worker. As always, human is self-centered.

Many small companies are trying hard to do business with a big company by some means or other. However, they need to remember that big companies have to make a ruthless decision purely because they are big. They have to support the livelihood of many employees. There are three reasons why a small company wishes to enter into business relations with a big company. Every three reason is quite understandable, but it has pros and cons.

(1) As the big company is financially strong, the small company does not have to worry about debt collection. How do you explain the GM case? Even a super big company goes into bankrupt. In addition, if you establish business relations with a big company, you need to accept long drafts. Sometimes, you need to wait for 180 days to encash a draft. It is not a good idea to receive such a long draft in terms of cash management. You need to pay salary to your employees in cash for 180 days before you can encash the draft.

(2) Because an order is big, it allows a small company to have a big sales increase. You have to examine the profit rate of a big order you get from a big company. It must be extraordinary low, though the profit in value is rather fancy. If you get a big order, you have to cancel small orders from small companies to execute the big order. Suppose a big order from a big company discontinues all of sudden, you cannot escape from leaving your production resources idle. That is, you are not free from great fluctuations in operations if you rely too much on a big order. If you lose the big company, you will have to ask small companies to increase business volume despite the fact that you cancelled their orders in the past to execute a big order from a big company.

(3) Because a big company is famous nationwide, a small company can gain prestige. Most small companies think that they can maintain business relations with a big company forever once it succeeds in establishing business relations with them, and employees get intoxicated by the excitement to do business with a big company. Delighted with a happy future, they construct a new building and employ many workers to be prepared for a further increase of business. That is, they go beyond the border between fiction and reality. It is not unusual that a small company suffers from financial trouble once it constructs a new building to commemorate the steep business growth realized by the business with a big company.

It is said that a crab digs a hole suitable to its shell. That is, people act in ways that show their worth. It is the right strategy for a small company to do business with a small company. It is not advisable to reduce profit as much as possible to do business with a big company. Small companies should be very cautious about starting to do business with a big company unless it is equipped with technology unique in the world.

If a small company cannot secure a necessary profit rate from the business with a big company, it had better give up the idea of doing business with a big company without hesitation and think that it is not competent enough to do business with a big company, and make further efforts to develop its competitive edge.