New Challenges
for Management
Keisuke Kase
Keigo Matsumura
Fumiwaki Nishiwaki
Yuji Ogawa
August 2009
1
Contents
Ⅰ. Abstract
3
Ⅱ. Introduction
4-7
Ⅲ. Corporate Survival
・(A) Cost-cutting and creating commodities
・(B) Creating a new market: Kirin
・(C) M&A: GM
8-9
9-11
11
Ⅳ. New social responsibility
・A) Overview
12
・B) Case study
12-16
Ⅴ. The impact of state intervention
17-19
Ⅵ. Case study ( state intervention for producers)
20-24
Ⅶ. Case study (state intervention for consumers)
24-26
Ⅷ. Conclusion
27
Ⅸ. References
27
2
Ⅰ. Abstract
We would like to present a thesis under the title of "New Challenge for
Management." The business environment has changed greatly due to last year's
financial crisis, and it is necessary to think about the management for a new society that
is ahead of us, after we get over this crisis. The outline of the thesis is as follows:
Chapter 1 describes the serious management situation and business environment of
enterprises today. To deal with the changes in the environment, the enterprises are
adopting various methods to get over this crisis. The methods they are adopting can be
divided roughly into three: first, corporate survival strategy, second, new CSR and, third
government intervention. We would like to focus our talk on the third method,
government intervention because government intervention obstructs market competition
and leads to protectionism. Therefore, we would like to discuss what government
intervention should be for the society of the future. Before that, I would like to explain
the present situation.
3
Ⅱ. Introduction
At the moment, many companies all over the world are faced with a difficult
management environment because of the sub-prime loan problem. The cause of the
sub-prime loan problem is different from the causes of other financial crises of the last
20 years. The essential reason for this sub-prime loan problem lies in the fact that as the
housing loan problem affecting American society came to light, it started affecting the
real economy.
The United States is the world’s largest consumer, accounting for about 20% of
the world’s entire GDP, followed by Japan. The main part of the US economy is
consumption where people invested in something even if they have to borrow money,
unlike the main part of the Japanese economy, which is savings in the form of bank
deposits. This was possible because the U.S. government had a support system to
promote consumption. The system works as long as the value of the collateral keeps
rising and the difference in cash can be lent at a low interest rate to those who want to
get a loan. By using this system, even people with low-income, that is, the sub-prime
class, can also own a house and a car. However, this system is for a short-term lending
purpose, so the interest suddenly goes up when a certain period passes. At that time, the
4
United States was enjoying a huge economic boom so that this was not considered a
problem. The value of the property kept going up, driving the production, export and
consumption of countries such as Japan, the EU, and the so-called BRICs countries,
Brazil, Russia, India, and China. The rising price of the US housing markets was the
driving force of the world-wide economic expansion.
In August 2008, however, the worsening sub-prime loan problem forced
America’s fourth biggest investment bank to go bankrupt. Lehman Brothers announced
that it had applied for Chapter 11 of the Federal Bankruptcy Law on September 15. Its
liabilities totaled 613 billion dollars, about 64.5 trillion Japanese yen, making it the
biggest bankruptcy in the history of the United States. This “Lehman Shock” ignited a
sharp decline in the stock markets around the world. Let us take a look at the New York
Dow Jones Industrial Average here.
5
New York Dow Jones Industrial Average
Because of the “Lehman Shock,” the US market recorded the biggest decline
ever. The Dow Jones Industrial Average dropped from 11,543.55 at the end of August,
2008 to 7,552.29 (-35%) on November 20, 2008. This sharp decline in a two months
period was brought about by the investors’ desperation, which spread after the
emergency economic stabilization bill to Lehman Brothers Holding had been rejected in
the US Lower House, contrary to the positive expectation of the market.
Because of the financial crisis, the capital of financial institutions was also
damaged, leading to a credit crunch. Most of the corporate lending is nonproductive,
such as payment for employees and repayment of the corporate bonds. The fear that
6
such lending may become bad loans is driving the financial institutions into a further
credit crunch.
As a result, financial institutions of every country in the world found
themselves in trouble. They could continue their operations without help from the
public funds of their governments. Even City Group, one of the world's largest financial
institutions, posted a loss of about 27 billion dollars last year, and received public funds
of about 45 billion dollars. AIG, one of the world’s biggest insurance companies, also
had to receive the financing of 8.5 billion dollars from the US government.
7
What was the impact of the financial crisis on management?
We would like
to look at it from three points of view: corporate survival, corporate social responsibility,
and government intervention.
Ⅲ. Corporate Survival
First, we will look at corporate survival. Companies are trying to survive in
these harsh economic times by making a desperate effort to survive in two ways:
improving process (A) and improving product (B). Process means differentiating from
competitors in general business process design, such as improving the efficiency of the
distribution system by cost-cutting and providing new commodities and services. On the
other hand, product means making a difference by developing new products.
(A) Cost-cutting and creating commodities
Let us first look at the “process” side, or the question of “how to sell.” We
can improve the process by cost-cutting and creating new commodities and services.
Here is the example of IBM, Japan. IBM manages cost-cutting and creating new
commodities at the same time in the following way. They give software to other
companies to assist them in the process of asset management like assessing the status of
8
use or process of use. They also promote the utilization of group software. In this way,
IBM seeks to cut management costs by optimizing cost management. This enables a
company not only to review its conditions but also to evaluate its business activities and
improve them through management and analysis. As such, the example will prove
useful for many companies in financial difficulties.
(B)-1 creating a new market: Kirin
Let us now look at the “product” side of the question, focusing on “what to do
about a product.” Companies can improve their products in two ways. Here is the
example of Kirin Holdings, which entered the pharmaceutical field. Kirin started out in
the brewery field as Spring Valley Brewery, founded by William Copeland in 1870 in
Yokohama, Japan. After several transition stages, Kirin became a Japanese company,
and Kirin Brewery was founded in 1907 by the Mitsubishi financial combine. After
World War II, Kirin’s market share continued to grow and in 1954, it became Japan’s
leading beer maker. It held this position for a long time until Asahi Brewery came along.
As the producer of beer and soft drinks, Kirin is on the producer side.
Producers need technologies to win the market competition. In recent years, young
people are drinking less beer, so the brewery industry is trying to expand its market
9
share by using its fermenting technology, cultivated by manufacturing beer, in other
fields.
Another factor for consideration is the accelerating world population explosion.
The world population is expected to increase by 2 billion in the next 40 years and 60 %
of those will be in Asia, including China, India, and other developing countries. This
will mean increasing demand for food and medicine around the world, especially in
Asia. So Kirin entered the pharmaceutical field, hoping to satisfy global needs. Kirin
hoped the field will bring high profits and its affiliated companies will want to
participate in the new venture. Kirin has fermenting technology, which can be used to
make medicine, like anti-body creating medicine for cancer, but the company did not
have marketing know-how as a medicine manufacturer. It requires complex procedure
and enormous money to start a business.
So if Kirin and a pharmaceutical company join to make a new pharmaceutical
company, various costs like payroll costs or sales charges will decrease and the cost can
be used for product development. Therefore venturing into a new market can also mean
product development or improvement.
10
(B)-2 M&A: GM
We can also improve products by M&A. Let us look at the case of General
Motors, or GM. Although it was not realized, GM tried to acquire other major car
manufacturers like Chrysler in the third quarter of 2008, when the world economy was
affected by the Lehman shock. The aim of GM was to reduce the costs of overlapping
departments and downsizing, and recover its fiscal health such as cash flow by
obtaining Chrysler’s assets. Although this plan was frozen, possibilities of M&A at the
department level or company level spread rapidly even among big enterprises such as
GM. This trend is still continuing even now, and it will be an important factor to
consider for management of companies now and in the future.
Ⅳ. New social responsibility
A） Overview
The second point to consider is that companies have to seek new social
responsibilities. The original meaning of corporate social responsibility is for companies
to make profit, but many companies including big or global companies find it difficult
to maintain or make profit. They do not want to get into new fields such as environment
in order to survive because the costs are very high. But even in these difficult times,
11
some companies are eager to fulfill their new social responsibilities. Here is the case of
Fuji Xerox.
B） Case study
Fuji Xerox was established in 1962 as a joint venture of Fuji Film and Rank
Xerox. Its main business is to produce and sell copiers and ink cartridges and provide
document management solutions, which make use of its core technologies used in those
goods.
Figure1 Corporate Social Responsibility target of Fuji Xerox
Examples
Target
A) Create a circulatory form of
business group.
・reduce CO2 by Integrated Recycling System
・reduce CO2 by reusing parts and primary material
B) Provide
environmentally-friendly goods,
environmental solutions to
society
・reduce CO2 by using EA (emulsion aggregation) toner
C) Maintain
environmentally-friendly
・Maintaining a system of green management.
・Constructing environment indicator management
system
management infrastructure.
for making ink cartridges
・Raising awareness of the environment—3Rs
Cf. http://www.env.go.jp/council/19keizai/y190-04/mat_03.pdf
Keiei-Douyukai and Fuji Xerox 2003, Fuji Xerox co.
12
Fuji Xerox has set up three pillars to fulfill its social responsibilities (Figure1).
The first is creating a new circulatory business group. This aims at recycling the
resources through constructing a new manufacturing system, “Integrated Recycling
System” and reusing or recycling the parts used in the product. The second is providing
environmentally-friendly goods and environmental solutions to society. This means
eliminating waste by focusing on each commodity. The third is maintaining
environmentally-friendly management infrastructure. This also means eliminating waste
in management in general. This involves raising awareness of the environment through
the 3Rs—reduce, reuse, and recycle—maintaining a system of green management by
obtaining ISO 14001, etc.
The case deserving a special mention is the integrated recycling system of Fuji
Xerox (Figure 2).
13
Figure 2
Integrated Recycling
System
Cf. http://www.fujixerox.com/eng/company/ecology/index.html
FUJI XEROX Environmental Archives, FUJI XEROX Co.
The chief purpose of this system is to prompt the reuse of resources by
decreasing waste as much as possible. It is based on a closed loop control system, a
system that gives high priority to recycling and reusing parts. The system is developed
mainly in two stages. The first is inverse manufacturing—making new environmentally
friendly office goods like EA (Emulsion Aggregation) toner cartridge that is made for
reuse. The second is zero emission—for goods which cannot be reused, breaking them
down and analyzing the parts so as not to release substances harmful to the
environment.
14
How is the system carried out? As a typical example, let us look the ink
cartridge. First of all, the used ink cartridge is considered not as waste but as recyclable
resource. This is the concept of closed loop control system. At the inverse
manufacturing stage, the cartridges go through a process of being broken down into
components, cleaned, and inspected in factories.
After that, the parts that pass
inspection for quality control are reused on the production line, reducing the need for
new resources for manufacturing. At the zero emission stage, careful attention is paid
to maintaining the quality of each part used in recycling and reuse. Accumulating the
data on the status of machine use in detail makes it possible to analyze environmentally
harmful material, and produce high quality, environmentally-friendly goods of wide
variety.
In this way, this recycling system will contribute greatly to reducing the load
on the environment.
In this undeveloped field of environment, Fuji Xerox has established a system
of analyzing and classifying in detail the items to be checked in management, practicing
it repeatedly and confirming it. As a result, the company moved from deficit to surplus
after starting the system in 2003 (Figure 3). This should serve as one of the models of
new social responsibility for companies which are finding it difficult to make a profit
and to gain consumer trust.
15
Figure 3
http://www.fujixerox.co.jp/xdirect/magazine/rp0612/06121b.html
Ⅴ.The impact of state intervention
As we have seen so far, companies are struggling to survive, using all means
possible, in order to cope with the society changing rapidly under the impact of the
financial crisis. Under the impact of this economic crisis, the role of the government is
increasing. Governments all over the world are intervening actively in the private sector,
and the private sector is also demanding help from the government. As shown in Figure
1, governments of countries are trying hard to look for ways to bring the economic
crisis under control. Governments are not only pouring public funds into financial
institutions but also giving government assistance to private corporations such as the
Big Three in rapid succession.
16
Figure 1
Governments helping major companies under the impact of the economic crisis
Enterprise
Type of
Amount of
assistance
assistance
Bridge loan
$19.76 billion
Notes
US and Canadian governments and Ontario provincial
GM (USA)
government poured into GM a total of 39.5 billion dollars
to establish a new GM.
Italian company Fiat purchased it.
Chrysler (USA)
Bridge loan
$500 million
US and Canadian governments poured into Chrysler a
total of 10.5 billion dollars.
AIG handed over the acquisition right of 80 % of its
AIG (USA)
Loan
Opel (Germany)
Bridge loan
Elpida
Loan
(Japan)
＋
$85 billion
issued stocks in exchange for a loan.
As its parent company GM went bankrupt, this was a
1.5 billion Euro
bridge loan until a buyer could be found.
In addition, megabanks poured into Elpida a total of 100
100 billion yen
billion yen.
Development Bank of Japan and Industrial Reform
Mechanism poured into Elpida 30 billion yen ＋tens of
billion yen.
contribution
Development Bank of Japan and Japan Bank for
International Cooperation poured into Elpida about 40
billion yen.
Sources: newspaper reports
On the other hand, the Japanese government has put in place a new economic
policy of giving subsidy to consumers.
As it is, if governments did not support companies, the economic bottom may fall
17
out, so we have entered an age when governments must actively intervene in economic
activities. But it is highly possible that state intervention will impede fair competition
and invite moral hazard and corruption.
So we now want to discuss the impact of state intervention.
As mentioned above, state intervention has two patterns. One is where subsidy is given
to support the producer. The government gives subsidy to private companies in an effort
to help and improve its management. The other is where subsidy is given to support the
consumer. The government gives subsidy not to companies but to consumers in an effort
to ease the reluctance to buy because of drastic contraction in demand, improve
company sales, and promote management recovery. Let us now look at the case study of
GM, which is, of course, in the producer position.
Ⅵ.Case study (state intervention for producers)
General Motors Corporation is a holding company founded by William. C. Durant
in Flint, Michigan on September 16, 1908. The head office of GM is in Detroit,
Michigan, and GM is one of the three major companies of the American automobile
industry. Ford, also one of the three major companies, sold one model all over the world,
18
but GM sold various models from its early days. As a result, in the post-war days, GM
became the biggest American company in the 1950’s, and the first company in the
United States to earn a billion dollars at the end of December, 1955.
But since the Lehman Shock of last year, GM fell into a serious management crisis.
By March 2009, the total liabilities of GM had reached 17 billion 28 million dollars. At
first, GM tried to make a recovery on its own. But the negotiation between GM and its
creditors to reduce GM’s debt broke down, and the negotiation was discontinued.
Eventually, on June 1, 2009, GM, the biggest automobile manufacturer of the United
States, applied for federal bankruptcy under Chapter 11 and went bankrupt. In March
2009, the total liabilities of GM reached 17 billion 28 million dollars, making it the
biggest bankruptcy in the history of American manufacturing industry.
The direct cause of GM’s bankruptcy is the worsening global economy because of
the financial crisis, but it was reported that GM’s business was in a slump long before
this. Various factors had had an impact on GM before GM reached the state of
bankruptcy: high cost of labor, delay in responding to environmental issues, shifting to
the production of big cars, and multi-branding strategy. In particular, as far as
environmental issues were concerned, people had become more aware of the need for
19
environmental protection from around 2000, and consumer preference shifted to
fuel-efficient cars like sub-compact cars and hybrid cars. But GM went against the times
and kept producing full-size SUVs and pickup trucks, vehicles with high rates of profit.
GM actually restructured and downsized its compact car section. GM’s failure to
respond flexibly to changing social environment is the biggest factor in its bankruptcy.
Before GM fell into bankruptcy, the U.S. Government had poured into GM a total
of 200 billion dollars of tax money. Furthermore, after GM fell into bankruptcy, the U.S.
Government has poured into GM an extra funding of 300 billion dollars of tax money.
The U.S. Government has so far poured into GM a total of 50 billion dollars of tax
money. At the same time as giving assistance, the government obtained 60% of the
stock of the new GM. Between them, the American and Canadian governments own
72% of the stock of the new GM. State intervention on this scale has never happened in
private manufacturing industry. This is to say, GM, a representative company of
America and the world, became nationalized and is trying to restructure itself, a most
unusual situation.
These government measures threaten the freedom of business management, and
20
distort market competition. In addition, if these state interventions accelerate, capitalism
would collapse and may lead to protectionism. Protectionism is defined as a practice of
protecting articles manufactured at home from cheap articles manufactured in other
countries. So, ordinarily, we think of protectionism as raising tariff imposed on
imported articles. However, in a broader sense, subsidizing domestic industries, infusion
of public funds, and efforts to expand domestic demand can also be called protectionism.
We must avoid protectionism.
Protectionism must be avoided because it would prevent free economic activities.
When protectionist measures are taken, competition decreases and the price of
commodity rises, leading to a decrease in manufacturing efficiency and delay in
implementing improvement. In the long term, protectionism is certain to be
disadvantageous. If countries take vindictive protectionist policies against each other,
the lower manufacturing efficiency and shrinking trade volume will lead to lower
income level worldwide and higher unemployment.
Moreover, avoiding protectionism is very important because protectionism was one
of the causes of the Second World War. At that time, developed countries like Britain,
21
France, America, and Japan and so on formed a bloc economy and became very
protectionist. These countries formed a bloc economy at home and in the colonies, and
excluded products from other countries in order to protect the demand for their own
products and their own manufacturing industry. This undermined the economic
efficiency of these countries and became one of the causes of the Second World War.
We must counteract protectionism which has surfaced under the economic crisis. If we
do not, we cannot hope for further economic development.
Ⅶ.Case study (state intervention for consumers)
On the other hand, what is an example of government subsidy to support
consumers?
We think that we should promote government intervention in the form of
giving subsidy as a purchasing incentive. When governments intervene, rather than
supporting corporations directly, supporting consumers is more effective because it will
indirectly result in supporting corporations.
The world economy is experiencing a historical slump now. Slump means
companies cannot sell even if they offer goods and services of fine quality. Why can’t
they sell? It is because many people do not have the purchasing power to buy anything
but the necessities of life.
22
In addition, we also think that, from the point of national sentiment, supporting
consumers is better than supporting corporations. When supporting corporations,
governments have to choose the companies to support and pay tremendous amount of
tax money. This will cause negative feeling in people. Even if it is criticized as money
politics, people will feel better if the money is for them rather than for the corporations.
Let us now look at one of the examples of consumer support, the system of
subsidizing consumers. A typical example of consumer subsidy in Japan is “Eco-point”
and “ECO-CAR tax cut.” As the car industry is one of the main industries of Japan and
has an enormous spillover effect, we will inspect the Eco-car tax cut that was put in
operation from April 1, 2009 as a form of customer support. TOYOTA is an example of
a company using the tax cut successfully, as shown in the next table.
The changes each quarterly earnings
2009.１ｓｔ/4
2009.2nd／4
2009.3ｒｄ/4
2009.4ｔｈ/4
2010.1st/4
Sales
6,215,130
5,975,275
4,802,843
3,536,322
3,836,077
(%)
-40.7
-6.3
-13.8
An operating profit
412591
169477
-360551
(%)
-38.9
-54.2
-88.2
A pretax profit (quarter)
453,054
183,433
-282,139
(%)
-38.7
-53.3
-82.4
-38.3
-682528
-194,863
-914,729
-13508
Making TOYOTA HP
Monetary unit: a million yen
%: to camper the preceding year
Accounting Standards：FAS
23
The table shows that after the Lehman shock, the financial markets were in
turmoil and the serious decline in demand hit TOYOTA heavily, just as everybody else.
This is clear from the account settlements of March, 2009, from January 1, 2009, to
March 31, 2009, which reported great losses. However, in the first quarter of 2009, from
April 1 2009 to June 30, 2009, deficits went down, although it was still in the red. The
reason is subsidy by the government, that is, the effect of the ECO-CAR tax cut,
explained below.
ECO-CAR
tax cut in Japan applies to the next generation cars like hybrid
cars ,electric cars and other fuel-efficient cars which have cleared the Ministry of Land
and Transportation standards of fuel consumption and emissions. This preferential
system makes the car cheaper by 250 to 400 thousand yen. We think this way is
effective because the subsidy can change the purchase pattern and awaken latent
demand. In other words, the subsidy can awaken potential demands of consumers who
had felt that hybrid cars were too expensive. The subsidy can change the market
structure and also the scale merit. As a result, support in the form of such subsidies
helps to bring the price of the car down.
24
Ⅷ.Conclusion
When governments make interventions, if they support companies directly,
consumption will not increase, but consumer support as a means of sales promotion and
effort will lead to increased consumption. So if there is to be government intervention,
we think that supporting consumers is more effective than supporting companies.
Ⅸ.References
1. http://www-06.ibm.com/industries/jp/shop/direct/software/
IBM Soft Direct, IBM Japan Co.
2. http://www.unfpa.or.jp/p_graph/pgraph.html
World population transition
United Nations Population Foundation, Tokyo
3. http://www.kirinkyowa-foods.co.jp/business/
Kirin Kyowa Foods Enterprise, Kirin Holdings Co.
4.http://www.f-reb.net/blog/archives/2009/06/gm_2.html
5. http://www3.keizaireport.com/report_daily.php
6. http://r25.jp/b/honshi/a/ranking_review_details/id/110000006470
7. The National Tax Administration Agency
http://www.nta.go.jp/
25
8. TOYOTA MORTER CORPORATION
http://toyota.jp/
9. Ministry of Land, Infrastructure, Transport and Tourism
http://www.mlit.go.jp/index.html
26