No. 17: Take a Different Strategy and Keep It In Strict Confidence

A company should not take the same strategy taken by the competitor in business. Sun Tzu wrote "The Arts of War" about 500 B.C. in China and insisted the importance of the strategy to defeat the weak while avoiding a battle against the strong. In most cases, however, a company plays safe and follows its bigger competitor using the same strategy. It intentionally or unintentionally ignores the factors that make the strategy of the competitor successful and presumes that the strategy taken by the competitor will also be effective to it without careful consideration. As a result, it unknowingly attempts to attack on the strength of the competitor.

It is important to know that specific products of each company make its strategy work well. Not only visible products, such as equipment and apparatus, but also invisible products, such as technological strength, sales forces, developmental power, and service capability, vary with the company. In the subprime lending disaster, you can say that every company involved took the same strategy seeking big profits and fell into an abyss together. It is an honor for a company to have its strategy imitated by another company, but the competitor’s strategy is the worse strategy for a company that imitates it. Any strategy does not work as soon as it is known to your competitor.

Japan provoked a reckless war against the U.S. without notice in 1941, and it was knocked into smithereens in 1945. Putting aside the fact that Japan had no chance of winning in terms of military strength, it is important to know that the U.S. mostly knew Japanese strategies beforehand because they were too much faithful to the textbook. During the age of provincial wars in Japan (1467-1615), warlords worked out their own strategies and fought against their enemies with the strategy full of originality. The greatest warlord is Nobunaga Oda (1534-1582), and both Hideyoshi Toyotomi (1536-1598) and Ieyasu Tokugawa (1542-1616) are his students. It is striking to know that none of the three warlords shared the same strategy.

During World War II, headquarters of the Imperial Japanese Army was staffed only with the bright graduates from the military academy. They all were too faithful to the textbook to construct a strategy full of originality. In addition, they were too proud and gentlemanly. A high-raking official in the headquarters reportedly told “It is not gentlemanly to sneak a look at strategies that the U.S. keeps in strict confidence.”

No. 16: Profit is the Cost to Keep Your Company Running

A medium-sized foodstuff wholesaler exclusive for restaurants applied for court protection in Tokyo. The company started business by supplying foodstuffs to privately-owned noodle shops and grew quite rapidly by opening its own prepared foods corner in food supermarkets. It accumulated lots of knowledge and know-how on the prepared foods business and received a rush of orders for consulting on how to run a prepared food corner from food supermarkets with which it had no business relations. The consulting business helped the company increase the presence in the foodstuff wholesale business greatly. With the growing profits from the consulting business, it expanded the foodstuff wholesale business and opened an account with nationally-known restaurant chains.

Leading national restaurant chains that have lots of outlets across the country are very attractive for foodstuff suppliers. Total sales are easily calculable by multiplying the sales per outlet and the number of outlets and they will automatically increase every time the national chain builds a new outlet. However, the market is highly competitive because many suppliers seek the opportunity to underprice the competitor to get big orders. No existing supplier can lower its guard under any circumstances, however big they may be.

Your competitor will replace you the next day should you be unable to respond to the national chain’s requirements immediately. Even if the national chain changes the menu all of sudden, you have to respond to the change immediately even though the stocked foodstuffs for delivery become dead stocks. All suppliers have no way but to accept strict conditions to keep doing business with national chains. Accordingly, their business is very much like a roundsman and the profit rate is extremely low.

It is not advisable for a medium-sized supplier to do business with a national chain. A medium-sized suppler should take note the following four points if it tries to open an account with a big national chain. (1) Every business cannot be free from economic fluctuations. You get big sales when economy is brisk, but you lose big sales when economy becomes stagnant. (2) Your presence in the market is lower than bigger competitors. Because of your low presence, you cannot have good bargain power to secure enough profit. Namely, your profit rate tends to become even lower.

(3) Market is liable to change all of sudden. A big chain may acquire another big chain, or it may be merged with another big chain. The resulting big chain may not appoint you as supplier. (4) Your credit rating is lower than bigger competitors. Because of your low credit rating, you cannot get favorable conditions from the bank and you have to pay higher interest rate than your bigger competitors. It is necessary to purchase a large quantity of goods at a lower price to supply a large quantity of goods at a lower price. This business practice is hardly possible for a medium-sized supplier.

As shown above, it is not a good idea for medium-sized companies to do business in a big market. They should pick a small market and increase the share in it by virtue of the ability to respond customer’s requirements without delay. Likewise, a big company should not do business in a small market. They should do business in a big market by virtue of economies of scale. This company should have focused on opening its own prepared foods corner in food market making the best use of its expertise. It is very important to keep in mind that profit is the cost to keep your company running.

No. 15: Military Strength is Proportionate to the Square of Troop Strength

A medium-sized supermarket chain headquartered in Tokyo filed for court protection. The biggest reason for its failure is that it extended the battle line too much. In the height of its prosperity, it had 20 outlets in four prefectures instead of operating 20 outlets in one prefecture. A medium-sized supermarket chain can hardly compete with nationally known big supermarket chains that have lots of outlets across the country in an extended battle line. Of course, you can find not a few medium-sized chains that compete successfully with national chains, but you have to note that they are successful because they are pursuing customer-oriented marketing in a geographically limited trade area.

Nobunaga Oda (1534-1582) accompanied by 3,000 soldiers defeated Yoshimoto Imagawa (1519-1560) accompanied by 30,000 soldiers in 1560. This is the “Battle in Okehazama” characterized by the famous phrase “A small number of soldiers defeated a large number of soldiers.” However, knowing well that the winning was a very lucky one, Oda never tried again to fight against an enemy that had two times the troop strength he had. Even the world-famous Napoleon never tried to fight against an enemy with two times the troop strength he had.

It is important to know that military strength is proportionate to the square of troop strength. That is, the ratio of one to two in troop strength is one to four in military strength. It is, therefore, advisable for a medium-sized company to limit the trade area geographically and compete with big companies in a geographically limited trade area. In business, troop strength can be defined as the number of employees, market share, sales, and capital of a company. That is, if your competitor has two times bigger market share as you have, it is hardly possible for you to beat the competitor. Suppose Toyota has 40% share, while Nissan has 20% share. The ratio of military strength of these companies is one to four not to one to two. It is hardly possible for Nissan to beat Toyota under the same business environment.

Japan has the Edo period (1603-1868) that was extremely peaceful. During this nearly 270 years of peaceful period, Japanese seemed to have abated the awareness of battle and cultivated somewhat strange aesthetic feeling about battle. They became impressed with the battle that an army with a small number of soldiers provoked against an army with a large number of soldiers. This aesthetic feeling culminated in extolling undauntable warlords like Nobunaga Oda and peaked at the end of the Japanese-Russo War (1904-1905) in which Japanese navy defeated overwhelmingly powerful Russian navy in the Japan Sea, and the overconfidence finally ended in the disaster in 1945.

The Zero fighter was unquestionably the world’s best fighter in the early stage of World War II. With its excellent maneuverability and powerful weaponry, it could down up to three Grumman F4F Wildcats should an ace pilot like Saburo Sakai maneuver it. But it is totally impossible for one Zero fighter to down four Grumman F4F Wildcats. What should the pilot of the Zero fighter do? Run away immediately.

No. 14: Build a New and Better Distribution Channel

A prestigious Japanese sake brewery filed for court protection. This sake brewery is famous for the brand sake supplied to the Emperor. The major reason of the failure is that people drink Japanese sake less in these days. However, the president cannot be free from the responsibility of the failure because not a few Japanese sake breweries are recording good results despite the dwindling sake consumption. No companies can survive unless they make strenuous efforts to sell their products by themselves. Every company should know that it is no longer possible to survive only by producing the established products and distribute them only through the established distribution channels. Innovation not only in production but also in distribution is vital for survival.

In the magazine report on the failure, the president of this sake brewery who studied engineering in college talked much about production and little about marketing in his remorse. This indicates the problem that many engineering-educated presidents have in common. All that he has in his mind is to produce excellent quality sake from excellent quality rice to maintain the tradition. His attitude should be praised, but he is lacking in the perspective to build a new distribution channel. However excellent his sake is, its sales will not grow unless he builds a new distribution channel suitable to the new age. Youth do not drink as their parents did in the past. Many liquor shops used to sell sake to salaried workers on a cup basis at the shopfront in Japan. Salaried workers used to grab a drink at a liquor shop on their way home, but no more.

He could have realized the necessity to build a new distribution channel if he had studied in detail how consumers purchased sake and where they drank sake. He should have realized much earlier the mistake to stick only with the long-established distribution channel. If he had worked on expanding business abroad, he could have taken advantage of the growing popularity of Japanese cuisines in foreign countries. Every company needs to abandon the idea to stick only with the distributors with whom it has been enjoying long and established business relations without trying to build a new and better distribution channel. Some companies may say, “We cannot do such a ruthless thing.” These companies will be wiped out from the market in the long run. It is not a ruthless idea to abandon the distributor that cannot cope with changes of the times.

In Japan, there was a famous phrase “Toyota’s marketing and Nissan’s technology” in the past. Possibly fascinated by this euphonious phrase, Nissan emphasized technology because it thought technologically excellent cars would sell fast. Nissan should have realized that marketing is much more difficult than production. While production is internal work, marketing is external work. No automaker can satisfy the infinite requirements imposed by consumers, no matter how big it is. Even the almighty Toyota cannot order a customer to buy a Toyota. Even Toyota salespeople can at most say, “We have built this car by getting together our wisdom and technology. Please check is closely. We would appreciate it very much if you would be interested in this car and purchase one.”

The story of the prestigious sake brewery tells the sorrow of an engineering-educated president who did not sell his products by himself and could not abandon the Ptolemaic theory that the distributor was selling his products very hard for him.

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.”