Recent Trends in Technology-Driven Companies

By Hajime Yamada (GLOCOM)

In this series I have reported that the government has begun unilateral drafting of plans for Science and Technology policies, and that cooperative systems among industry-academia-government in Japan have gained recognition. I would like to report on how reforms are carried out in some Japanese corporations, especially those with technology-centered management (Technology-Driven Companies) here and in the next several issues.

In this first report I explain the Nissan Motor case. In the 1990s the company faced a financial crisis. Its share in the automobile market decreased annually, and at the same time its business worsened dramatically. To break through this situation the management of Nissan Motor agreed to cooperate with Renault of France, and Mr. Carlos Ghosn arrived as Chief Operating Officer (COO) in June of 1999.

In the beginning there were reports of wariness about Mr. Ghosn because "he was parachuted out from France," and because of apprehension about his drastic management reforms. However, as a result of enjoying substantial profit as of March 2001, Mr. Ghosn's reputation in Japan is skyrocketing.

The following is from an article from Nihon Keizai Shimbun, June 3rd, 2001.

We are now in an era when abilities and talents of management directly affect achievements of corporations. A great change of management environment has caused this situation. Automatic increases in revenue cannot be taken for granted anymore because of low economic growth. Competition has steadily grown stronger by globalization and deregulation. If management makes a mistake in steering a company, it will in no time reach a critical phase.
The Snow Brand milk products company is an example. Food poisoning incidents last summer affected the company's achievements, the company's sales dropped from the top to the third in the industry in the first quarter of the year, and the current balance went into the red. As a result, the former president--who lacked risk management skills--lost credibility with consumers.
On the contrary, Nissan Motor achieved a V-shaped recovery in its achievements after welcoming Mr. Carlos Ghosn from Renault of France as its president. Talk such as, "he is different in managing ability and in execution speed from executives in the past" can be heard from inside the company. Although management is naturally important, "puppet" managements had survived until the collapse of the bubble economy. Until then middle-management and their junior colleagues actually drove a company, and the president was only expected to plant himself in a chair and to do his job of getting along well with relevant authorities and in business circles, as well as adjusting opinions within the company.

Mr. Ghosn's management reform plan announced in the fall of 1999 was named the Revival Plan. This plan included the following steps: to close down five of its factories, including Murayama and Kyoto plants; to let go twenty-one thousand employees on a consolidated basis; and to cut by half the number of parts suppliers. This plan was highly regarded in business sectors, and Mr. Ghosn's method was described as "drastic but not cruel considering Nissan Motor's present situation in which deficits had been neglected until it got out of hand." On the other hand, the plan met with objections from employees who were to lose their jobs or were forced to move to other factories, and from people in districts where the factories were to be closed down. However, as a whole, the plan proceeded well and the company's situation improved greatly.

It is interesting to find some aspects I have been pointing out in this Japan Technology Review series in Mr. Ghosn's conduct.

The first point is that the Revival Plan was drafted by a wide range of middle managers. The group consisted of individuals from such sections as R&D, Manufacturing, Sales, Finance and Personnel, and was named the Cross Functional Team. Overall policies were reviewed in this team. It could be said that information was made clear in the process of transforming tacit knowledge within each section into explicit knowledge in the group, upon which the reform measures were considered. In other words, the Plan was drafted by means of knowledge management. Some of the members of this Cross Functional Team were promoted to higher management, and they conducted the actual performance of the reform plan.

The second point is that the relationship of Nissan Motor to its parts suppliers was shifted into a business-like one. In the automobile industry in Japan, a keiretsu relationship has been traditionally very strong. Manufacturers of automobile parts cannot easily have trade with assemblers other than those in the keiretsu company. In exchange, however, the assemblers guaranteed certain amounts of purchases and prices of parts. When an automobile manufacturer would advance into a foreign country, its parts suppliers sometimes would also follow. Executives have often been sent from assembling makers to the keiretsu parts manufacturers.

Mr. Ghosn declared these relationships unnecessary. He gave the parts suppliers a chance to trade with assemblers other than Nissan Motor, and, in return, selected suppliers based on their product prices. Nissan Motor has begun moving toward a division of layers as is performed in the information industry, where one maker manufactured processors and others assemble personal computers with purchased processors.

Third, it is noteworthy that a certain level of Research and Development expenditure has been maintained. R&D needs time for its achievements to show as profits. Therefore, it is convenient to reduce R&D expenditure in order to improve management status from a short-term point of view. We often hear that R&D expense is reduced in American companies, but Mr. Ghosn did not use such a technique.

The table below consists of associating numeric values from the consolidated accounts of Nissan Motor. It is obvious from this table that Mr. Ghosn has kept a certain amount of expenses for R&D, which potentially affect the company long-term. That is considered to be a very important point for a technology-driven company's management.