Panasonic: The Largest Corporate Restructuring in History

Panasonic: The Largest Corporate Restructuring in History

by Francis McInerney

Hardcover

$30.00

Overview

Panasonic is not about any ordinary restructuring. It is about a company of $72 billion in sales, employing 293,000 people around the world, the tenth largest industrial company not in oil or autos, whose thousands of products are so universally used that it may have more customers than any firm in history. Panasonic is so big that it is one of the few companies which has a product in just about every home and business in the developed world, has operations in almost every country in the world, and has a vast scope of markets—making everything from flat panel TVs to car audio and satellite navigation systems, even entire building systems and home interiors. Panasonic's breadth and size combined made reorganizing the company incomparably more difficult than even the task that faced IBM's incoming CEO in 1992.

Panasonic delves into how this great eleven-year restructuring (1995-2006) was accomplished without importing an outside CEO like Lou Gerstner. Panasonic was able to reorder a complex and tradition-bound organization in a country that is often thought, mistakenly, to deeply resist radical change, thus demonstrating how Japanese companies continue to adapt to the competitive forces roiling the markets around them.

Product Details

ISBN-13: 9780312371371
Publisher: St. Martin's Press
Publication date: 05/28/2007
Pages: 400
Product dimensions: 6.32(w) x 9.65(h) x 1.30(d)
Age Range: 4 - 8 Years

About the Author

Panasonic is not about any ordinary restructuring. It is about a company of $72 billion in sales, employing 293,000 people around the world, the tenth largest industrial company not in oil or autos, whose thousands of products are so universally used that it may have more customers than any firm in history. Panasonic is so big that it is one of the few companies which has a product in just about every home and business in the developed world, has operations in almost every country in the world, and has a vast scope of markets—making everything from flat panel TVs to car audio and satellite navigation systems, even entire building systems and home interiors. Panasonic's breadth and size combined made reorganizing the company incomparably more difficult than even the task that faced IBM's incoming CEO in 1992.

Panasonic delves into how this great eleven-year restructuring (1995-2006) was accomplished without importing an outside CEO like Lou Gerstner. Panasonic was able to reorder a complex and tradition-bound organization in a country that is often thought, mistakenly, to deeply resist radical change, thus demonstrating how Japanese companies continue to adapt to the competitive forces roiling the markets around them.

Read an Excerpt

Panasonic

The Largest Corporate Restructuring in History
By McInerney, Francis

Truman Talley Books

Copyright © 2007 McInerney, Francis
All right reserved.

ISBN: 9780312371371

Chapter 1
On June 6, 1995, two managers from Matsushita Electric Industrial, one of Japan’s largest companies, visited Sean White and me in our offices in New York. Masayuki Kusumoto and David Chapin asked if we would speak at a July management conference at their U.S. headquarters in Secaucus, New Jersey, just across the Hudson River. Matsushita’s CEO, Yoichi Morishita, was coming from Japan for the occasion, and their U.S. boss, Kunio “Kirk” Nakamura, wanted us to speak. The subject was to be our 1993 book, Beating Japan.
We were worried about meeting Kusumoto and Chapin because our comments in Beating Japan about the staff at Matsushita’s Park Avenue showroom being hungover or worse were pretty hard hitting. We had not met anyone from Matsushita before and we expected a sharp response. The discussion went well for an hour or so and our seminar was arranged. Just before leaving, Kusumoto said that there was one more thing he would like to bring up: our comments in Beating Japan about the showroom. Out of his briefcase, he pulled a copy of a talk Kirk had recently given his management and pointed to what he said about our book. The page was too hot to handle. But, to our astonishment,instead of dumping all over us or slamming the company’s image doctors, he told his managers in no uncertain terms that there was something wrong with the system and that it must be fixed. Now.
Must be a different kind of executive, we figured.
Beating Japan had been ferociously critical of Japanese management styles, saying, in short, that most Japanese companies were designed to put too much distance between themselves and their overseas customers to engender any hope of long-term growth and profitability. Japanese companies were, for the most part, designed to maximize domestic customer input and to minimize, even extinguish, input from foreign customers. After a good run in automobiles and consumer electronics, the business model of an entire nation was bankrupt.
We reached this conclusion after nearly two decades in the telecommunications business. We built our first company, Northern Business Information Inc., into the world’s largest telecom market research house, which we sold to McGraw-Hill in 1988. (McGraw-Hill sold NBI on to Gartner Group some years later.) For several years, our biggest customer had been Japanese telecommunications giant Nippon Telephone and Telegraph.
While running NBI, we noticed something unusual about Japanese companies. The commonplace in telecom was that Japan was soon to emerge as the information industry’s dominant force. In the early 1980s we even published a research report saying this was so. Except that Japan didn’t become a dominant force. It didn’t become much of anything. The more we looked around, the more we noticed that apart from a few laptop computers and some very large machines, Japan didn’t exist in computing, or in microprocessors, and certainly not in software.
So we asked the question the other way round. Where was Japan succeeding in global markets? In cars, certainly, and in consumer electronics, but in little else. Why? Were its companies doing something right in a couple of industries, like cars and cameras, and something wrong in all the others? If so, what was it, and what could be learned from this? Were other companies around the world making similar mistakes or different ones? If we could map these distinctions, we believed, we could create a grid, or a lens, that would enable us to see the problem in its full set of dimensions and prescribe practical solutions to modern market challenges useful to CEOs the world over.
To add to our certainty that there was something to the Japan question, a cursory overview of Japan’s postwar history threw our inquiries into high contrast. Almost from the moment the Americans arrived in 1945, the Japanese authorities realized something that the North Koreans, Iranians, and other nuclear pretenders today do not: Japan was not defeated by the atom bomb but by the overwhelming force of cheap information technology that made the bomb possible. Japan moved immediately to secure its postwar position in the information world, pouring tens of billions of dollars in the following decades into computers, semiconductors, and telecommunications. Japan directed the capital budgets of the then government-owned Nippon Telephone and Telegraph, for many years the largest company in the world by market capitalization, into these core sectors.
At the same time government officials, whose “guidance” matters a lot in Japan, were said to have told Eiji Toyoda, the leading light of automaker Toyota, never to export cars. And told Soichiro Honda not to make cars at all. So why did they do well when so many infotech companies did poorly? For most Americans, Japan’s postwar misadventures in information technology are simply an example of government trying to meddle in the private sector, messing things up, and wasting taxpayer money. There is some truth to this, and many Japanese will agree. But it is far from the whole story, as we soon discovered.
The year after McGraw-Hill bought our company, we were approached by Nippon Electric Corporation (NEC), a client since 1976, and asked to go to Japan to figure out why the company, which had been a telecommunications pioneer practically since Bell invented the phone, was seeing its once-promising U.S. telecom business stall, then shrink, while competitors were growing fast in the decade of opportunity after the 1983 breakup of AT&T. It made no sense to NEC, and not much to us either, why an early leader in the United States should stumble so badly.
A bit of corporate archeology reveals that NEC was once part of the old Bell System that included the American company Western Electric (now Alcatel-Lucent Technologies) and the Canadian firm Northern Electric (now Nortel Networks). NEC was the first company to introduce computerized telecommunications products into the United States. But Nortel entered the American market after NEC and quickly pushed it aside. So, whatever the issue in the U.S. market was, it wasn’t being foreign. There had to be something else.
From our work with NEC, we learned a lot about the operations of Japanese companies. At NBI, we put all the companies we studied on a grid, comparing financials to financials, R&D organization to R&D organization, and sales structure to sales structure, and so on. When we plotted NEC on our grid, anomalies leapt out at us. Places where we expected a large organization, like sales, were tiny. Where we expected to see many fewer people, like R&D, there were lots. And there were equally curious overlaps—places where reporting structures were duplicated, even triplicated, when only one, and sometimes none, were needed.
From this work, we looked at other Japanese companies and quickly realized that NEC’s market share problems were common to many and that all the American hysteria in the eighties and early nineties about how Japan was about to roll over the rest of the industrial world, which we had helped foster, was grossly misplaced. Japan was in deep trouble.
Moreover, while the American press was working itself into a xenophobic lather about Japan, the view from Japan itself was quite depressing. Japan’s Dow, the Nikkei 225, peaked on December 29, 1989, at 38,916. That day the Dow was at 2,753. By the time Beating Japan was published in May 1993, the Nikkei was down to 19,590, having lost 50 percent of its value. By March 2003, when the Nikkei bottomed out, it had lost 80 percent of its value, which would be like the Dow falling to 550 rather than the 8,000 it was at.
In the Great Depression, the Dow fell roughly as far as the Nikkei in percentage terms, and bottomed out in about three and a half years. It took the Dow a quarter century to surpass its 1929 highs, and the Nikkei looks set to take as long.
In 1989, Japan entered a prolonged period of economic stagnation from which it is now recovering, and businesspeople there were not shy about expressing their worries. As we were researching Beating Japan, they could see clearly that markets had turned against them some time previously and they saw few practical solutions to their problems. Even now, the Nikkei trades at only 40 percent of its 1989 peak and is just reaching its October 1986 level—twenty years ago. You don’t have to watch grainy newsreels of soup kitchens and President Roosevelt’s speeches to imagine the convulsions in the United States if the Dow today was running at its October 1986 level of 1,800 instead of the record highs it is testing. Japan has been through a rough time and has lost large amounts of its wealth. The fact that it has steered through is testimony to the resilience of the Japanese people. How Japan did so is the story of this book.
The short of our diagnosis of Japan’s troubles was simple: when information costs fall, more information is substituted for other factor inputs like land, labor, and capital. Price-performance shifts fast and customers gain large consumer surpluses that move market power from producers to their customers. Cheap information also gives customers more and more control over information generation and dissemination, adding to customer market power. Low-cost information, therefore, allows customers to move quickly to those producers offering superior customer service and greater levels of value added. The faster the cost of information falls, the more dramatic this power shift is, destabilizing markets everywhere. I like to say that Karl Marx was right (sort of): when information costs fall far enough, all power goes from producers to customers.
If you lack a strong customer connection in the first place, you won’t see this power shift until long after your market share has shrunk to the vanishing point. Even then, you will see it only retrospectively, like driving by your rearview mirror, as Marshall McLuhan used to say of his fellow Canadians, when there will be little you can do about it. Without a strong customer connection, Japan was seeing its infotech markets disappear in its rearview mirror.
As I will show you in Panasonic, designing your organization to profit from fast-falling information costs, rather than being victimized by them, is the key to success. I call this design the Soccer Ball System: an information-efficient company has all its assets and operations are on its surface, as it were, where they touch customers.
Many personal computer makers, for example, have been savaged by Dell’s integrated distribution that puts the whole company on the “surface.” Of the original PC makers of a quarter century ago, only Apple survives. After decades of lassitude Apple is only now figuring out how to ride the customer power curve with its iPod/iLife combo. All the now gone PC makers were supposed to be sophisticated information companies.
Get the information cost-driven power shift to your customers wrong and, to put it mildly, you have an issue, no matter how hot your technology.
Japan had an issue. The whole country. Japan’s tech sector was addicted to pumping out ever-cheaper products and the large part of its industry had no overseas customer service relationship to speak of. What had been its differential advantage for decades—efficient manufacturing—was going to lower-cost countries like South Korea and China. Winning companies the world over had superior control over the sales process and deeper customer service relationships than did Japan’s information technology sector. Without these customer-facing operations, customer information was not cycling back fast enough, or coherently enough, to be turned into ever more valuable products and services. The size of this gap between Japan and the expectations of its markets was impressive to us. Actually it was shocking; it implied the potential collapse of the world’s second-largest economy, the centerpiece of geopolitical stability in the increasingly sensitive Pacific Rim.
Very few others outside Japan saw it this way. One who did was Bill Emmott, the recently retired editor of The Economist, who wrote The Sun Also Sets in 19891 just as the Nikkei was about to go off a cliff. Emmott focused on macroeconomic and policy challenges while Sean White and I looked at business models and how they work. Emmott returned to the subject sixteen years later with a special section in The Economist, “The Sun Also Rises,” in October 2005.2 Like Panasonic, Emmott points to a resurgent Japan.
When I first met Kirk Nakamura in 1995, a half-decade before he became CEO, Matsushita showed all the outward signs of malaise. Sales were ¥6.8 trillion but operating profits had slid 54 percent to ¥266 billion, from their ¥578 billion peak in 1984 when sales had been 31 percent lower at ¥4.7 trillion. Operating margins that were north of 12 percent in 1984 were south of 4 percent by 1995. They would continue to drift south for five more years, falling another 29 percent.
Late in July 1995, Sean and I were ushered into a large meeting room at Matsushita’s U.S. headquarters in Secaucus to give our Beating Japan prescription for Japanese companies. The meeting was more formal than anything we were used to: a stage with large flower arrangements, highly orchestrated introductions of President Morishita, Kirk, and ourselves, with entries and exits timed to the second. Our relaxed presentation style—we don’t stand at podia reading timed scripts, and we flip back and forth between each other depending on the issue—was maladapted to the occasion. I was sure that we went over badly.
But we must have made at least a passing grade because in June 1996, Kirk asked us to return to Secaucus to advise him on a series of reforms he planned to make.
Matsushita was not the only company in trouble in its sector. Many are still sorting themselves out ten years after Kirk Nakamura began planning Matsushita’s long road back. Panasonic shows what these firms are up against. The picture isn’t pretty and their late start leaves them vulnerable. Panasonic shows what it will take to put them on a firm footing.
The New York Times reported, for example, that in 1988, Japanese IC makers accounted for 51 percent of the world’s supply, and NEC, Toshiba, and Hitachi ran one, two, and three in the market. Today, Japan gets just over 23 percent share. NEC, which was the largest chipmaker in the world when Beating Japan was published, is now the tenth-largest chipmaker.3 This is a major shift in competitive position that really hurts in a country that spent so much of its national treasure to establish dominance in IC markets.
Caught in Japan’s downdraft, Matsushita entered this massive shift in competitive forces as the world’s largest producer of consumer electronics. Its products are, as I said earlier, in literally every home and office in the developed world. But Panasonic was a failing global brand, and MEI had stagnating sales, anemic and falling profits, and wobbly operating fundamentals. In one of the most significant course corrections in industrial history, Matsushita broke ranks, drove changes that others would not, and did not look back.
When Kirk invited Sean and me to help him in his U.S. operation, this companywide turnarounds was still a few years off and we were confronted with a long list of numbingly complex issues: • Morale was poor.
• The simplest procedures were antiquated.
• Half a dozen or more firms had rights to the Panasonic name and all had different strategies.
• Products from these companies overlapped; some were duplicated, even triplicated, and competed for the same customers.
• The company was designed to force-feed sales at the expense of operating free cash flow.
• There was no system for collecting customer information.
• Because there was no customer information, products
were designed in a vacuum, and often launched into markets for which there was no certain demand.
• When demand for products failed to materialize, sales operations that had no influence on products were blamed.
• Overseas sales operations learned over the decades to keep their heads down, shuffle paper, and do what they could. Star performers left for better-run companies.
• There were no clear lines of authority connecting customers to decision makers; in fact, we could see no lines at all.
• The North American sales operation, run from Secaucus, had a shadow staff organization in Japan that had no identifiable value.
• Large numbers of products were assigned to Matsushita’s sales companies around the world regardless of demand.
• Matsushita had clear leadership in few major product categories; in most it was somewhere between average and an also-ran.
• There was no brand we could point to—was it National, Panasonic, Quasar, NAIS, Technics, Ramsa, or what?—and no strategy for getting one.
• Matsushita lacked any sense of how to manage its customers’ experience of its products.
• There was no system of demand creation.
• Advertising had all but ceased and what there was of it was uncoordinated and had no clear theme or company image.
• Major retailers like Wal-Mart were revolutionizing their operations to cut inventory while minimizing stockouts, but Matsushita had no way of supporting this.
• Consolidation in the retail sector meant that the company had many fewer but larger customers, yet had not adapted its sales or production systems to this.
• Nothing the firm did was designed to maximize profitability. In fact, it did the opposite: it force-fed the market large numbers of marginal products instead of concentrating on big-selling profit spinners.
• If MIS had a purpose, we could not figure out what it was. No one seemed able to tell us.
• Management education was almost nonexistent, and the firm was not hiring professionals from the best business schools.
• The firm made only limited attempts to bring in expertise from top-performing companies; and management had become inbred to a dangerous degree.
• Women? What women? Try designing products and selling them in modern markets without women in management. MEI did and was getting the results to show for it.
• There was no idea whatever of the impact of computer technology on consumer electronics, communications, or media.
• Local management was prevented from achieving officer rank, forcing top players to look elsewhere for opportunities and institutionalizing mediocrity at the company’s cutting edge—where it met its customers. Put simply, Matsushita was in no position to deal with competitors like Dell, which surged from nowhere in the mid-nineties to become half Matsushita’s size a decade later. Nor could it support customers like Wal-Mart, which inflated from one and a half times the size of Matsushita to four times the size during the same period. By 1996, Dell and Wal-Mart had models for scaling quickly and profitably, and Matsushita did not.
Matsushita was being hit by better-managed competitors on one side and better-managed customers on the other, an exceptionally nasty position to be in.
In 1996, there was considerable shock in Secaucus when Dell’s sales of just one product, a PC, surged past Matsushita’s U.S. combined sales of many thousands of products. The logic of what was happening—that simplicity and speed win—was lost on the company. When Sean and I went to Japan in early 1997, no one there seemed aware that this had even happened. I didn’t know what was more troubling: shock in the United States, the lack of it in Japan, or perhaps the dichotomy itself. One thing was obvious though: there was no management information flow and therefore no mechanism for making decisions. Rather like the United States on 9/11—even when information was available in time to avert disaster, there was no system for moving this information, drawing conclusions from it, and making decisions. The company was just stumbling along. As we learned more, the fact that it still existed amazed us.
Adding to Matsushita’s vulnerability, the company was strung out across several major markets from consumer and professional electronics to white goods, factory automation, avionics, and telecommunications. The company also sold its products in component, product, and complete system form through a variety of divisions and partly owned subsidiaries all with different agendas. Branding and distribution were out of control.
What a small, agile Dell-like competitor could do to any one of these sectors, someone else could do to any of the others: Matsushita was being destroyed in detail. Copyright 2007 by Francis McInerney. All rights reserved.


Continues...

Excerpted from Panasonic by McInerney, Francis Copyright © 2007 by McInerney, Francis. Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

Customer Reviews

Most Helpful Customer Reviews

See All Customer Reviews