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Wednesday, June 16, 2010

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.”

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