Making the shift from ‘defensive’ to ‘offensive’ restructuring

by Yoshio Nakamura

Most of the major Japanese corporations have released their earnings results for the latest business year ended in March. Many of them reported brisk earnings, including Toyota Motor Corp., whose net profit topped 1 trillion yen for the first time. According to the Bank of Japan’s “tankan” survey and other estimates, Japanese businesses as a whole rang up higher profits for the second year in a row.

These brisk earnings are attributed not only to external factors, such as the upward trend in the global economy, but also to internal ones, such as each company’s progress in executing management reforms. For a long time now, the main agenda of corporate Japan has been to eliminate excess labor, plants and equipment, and debt. In the 1990s, many companies spent their time executing restructuring of a “defensive” sort of nature, and market watchers hailed their efforts. In many cases, share prices would actually rise when a company announced layoffs.

However, the results of a recent Keidanren survey on management strategies at blue-chip manufacturers like Toyota Motor Corp., Canon Inc. and Takeda Chemical Industries Ltd., indicates that many of the firms doing well are engaged not just in “defensive” restructuring, but in “offensive” efforts designed to expand their business. In fact, many of the surveyed companies were found to be investing more in research and development, beefing up sales capabilities, aggressively pursuing overseas operations, and hiring and developing more human resources.

True, the strategies of these major companies have been studied for some time, and books with titles like “Learning from the Toyota Management” are everywhere. But if their strategies cannot be imitated by just anyone, some of them are effectively irrelevant, except for a handful of big corporations. So what are the lessons to be had for the entire Japanese economy?

Keidanren carried out a statistical analysis of the data from the survey and came up with a model that can be applicable in a general sense. Specifically, we carried out a panel data analysis on the financial conditions of more than 1,000 listed firms in order to carry out a numerical examination of how each type of corporate strategy would affect their operating profit/sales ratios.

The result clearly shows that, to a varying degree, each corporate management model can be applied to a number of industrial sectors. For example, it has been confirmed that in most sectors, promotion of R&D will lead to a higher operating profit/sales ratio. In human resources development, many of the surveyed companies put priority on long-term employment, and our analysis indicated that corporations with less turnover tend to have higher profit/sales ratios.

In recent years, Japan has witnessed a rise in workforce mobility, but it is worth noting that many excellent companies place high importance on establishing long-term relationships with their workers.

It was, of course, impossible to translate all the corporate strategies into numerical terms, but we believe that such an analysis can serve as a guide for Keidanren’s member companies to improve their earnings and embark on “offensive” restructuring.