UK: Heller on Management - Grow better in concentric circles.

UK: Heller on Management - Grow better in concentric circles. - The traditional forms of Japanese management such as keiretsu can still teach western companies a great deal about creating organic growth, says Robert Heller.

Last Updated: 31 Aug 2010

The traditional forms of Japanese management such as keiretsu can still teach western companies a great deal about creating organic growth, says Robert Heller.

When Sony's chairman, Norio Ogha, recently expressed dire fears about Japanese economic collapse, nobody in the West or East shouted him down. The definitive post-war economic miracle is being scorned as a basket case for the millennium. Yet, as recently as 1995, a well-informed book boasted the sub-title, Why Japan is still on track to overtake the US by the year 2000.

What inspired Eamonn Fingleton to make this unlucky plunge into soothsaying was enthusiasm for Japan's economic model, with its marriage of state-of-the-art management with traditional forms such as the keiretsu. These family groups of connected companies, of which Mitsubishi is the most famous, embody a deep difference between western and eastern management philosophy.

Put crudely, in the West, companies are for buying and selling. In the East, they are for keeping and managing. The fate of Courtaulds - a striking example - is all but unthinkable in Japan. Once, under the formidable Lord Kearton, Courtaulds seemed like an embryonic keiretsu: a large collection of companies in several industrial sectors sheltered under the one corporate umbrella, some trading heavily with each other.

That was Kearton's rationale for buying clothing manufacturers to complement his cotton mills and synthetic fibres. This has keiretsu equivalents in Japan. Toyota Motor skilfully commands a four-tiered structure of suppliers, ranging from the Koito headlamp giant to thousands of tiny firms. The structure is decentralised in the extreme, while that of Courtaulds in its expansive era was dominated by an all-powerful centre.

When textile recession torpedoed the Grand Plan, Courtaulds literally came apart: under Sir Christopher Hogg, 30% of its businesses vanished along the road to splendid recovery, first, and bifurcation next. The textile and industrial chunks into which Courtaulds was divided prospered initially: but now another dismemberment (cutting the industrial side into three) has been overtaken by takeover.

In this, Courtaulds exemplifies a powerful recurrent trend, which was sanctified years ago as the Boston Matrix. Bostonians dispose of 'dogs' and milk 'cows', putting their money - or their shareholders' money - on 'stars' and businesses that may achieve stardom.

Warren Buffett, the Sage of Omaha, observes that two of his plummiest investments, Coca-Cola and Gillette, had to shed diversified duds before they could embark on amazing periods of concentrated organic growth.

Concentration on very strong core businesses is the highest common factor of today's other great growth stars - not only Coke but also drugs firms such as Merck and Glaxo Wellcome, or Microsoft and Intel in electronics.

The last two have diversified hugely but, like other major US companies that have sustained 35% per annum growth or more, they have spread in concentric circles round the core.

Concentric acquisitions in Silicon Valley can't be controlled in the tight, centralised western manner because the acquired talent and value would promptly quit the premises.

This potential mobility enforces keiretsu behaviour, Mitsubishi-style: its ultimate bosses don't even try to manage family members such as Nikon, Kirin (beer) or Asahi (glass). The keiretsu makes very sure, however, that the companies are run by the right managers in the right direction and the right way.

The way includes a clear division between strategy and operations, which the western model generally confuses. Top managers meddle in operational matters, for which they lack time and detailed knowledge, and impose self-fulfilling strategies on operations. If you starve a supposed cash cow of investment, it will sooner or later cease to deliver milk, let alone cream. By definition, the cow's business economics must be sound; organic development must therefore be feasible.

Many a successful leveraged buy-out has proved this point. The success of ABB, for example, demonstrates that effective management of a corporate family, bestowing high autonomy on operating companies can work well in the West. ABB units are expected to help each other in keiretsu fashion.

That's not the only way in which the West is moving eastwards. Supplier partnerships seek to duplicate the intimate collaboration that is the Japanese norm.

Electronics and automotive firms, cutting back to fewer but much closer suppliers, are conspicuous examples of a general trend. PC champion Michael Dell calls it 'virtual integration'. This trendiness is old hat to a keiretsu.

Although much of the Japanese model is written off as an obsolete failure, the persisting strengths of Japanese companies make a potent millennial recipe for Westerners.

If the latter are persuaded, by eastern financial gloom and western euphoria, that their deal-mad model has won, they will err fatally. Buying and selling can easily ruin businesses but cannot create organic growth. That demands long-term management and, there, the keiretsu model can still produce miracles.

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