Contents Ⅰ. Abstract 3 Ⅱ. Introduction



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New Challenges

for Management

Keisuke Kase


Keigo Matsumura
Fumiwaki Nishiwaki
Yuji Ogawa

August 2009


Contents
. Abstract 3

. Introduction    4-7

. Corporate Survival

  ・(A) Cost-cutting and creating commodities  8-9

・(B) Creating a new market: Kirin 9-11

・(C) M&A: GM 11

. New social responsibility

・A) Overview 12

・B) Case study              12-16

. The impact of state intervention   17-19

. Case study ( state intervention for producers)   20-24

. Case study (state intervention for consumers) 24-26

. Conclusion 27

. References 27

. 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.


. 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 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.

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 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.

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.


. 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.




  1. 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 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 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.

(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.


. New social responsibility

  1. 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, some companies are eager to fulfill their new social responsibilities. Here is the case of Fuji Xerox.


  1. 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

Target

Examples

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 for making ink cartridges

C) Maintain environmentally-friendly management infrastructure.

・Maintaining a system of green management.

・Constructing environment indicator management system

・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.


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).



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.

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.

Figure 3
http://www.fujixerox.co.jp/xdirect/magazine/rp0612/06121b.html
.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.


Figure 1

Governments helping major companies under the impact of the economic crisis

Enterprise

Type of assistance

Amount of assistance

Notes

GM (USA)

Bridge loan

$19.76 billion

US and Canadian governments and Ontario provincial government poured into GM a total of 39.5 billion dollars to establish a new GM.

Chrysler (USA)

Bridge loan

$500 million

Italian company Fiat purchased it.

US and Canadian governments poured into Chrysler a total of 10.5 billion dollars.



AIG (USA)

Loan

$85 billion

AIG handed over the acquisition right of 80 % of its issued stocks in exchange for a loan.

Opel (Germany)

Bridge loan

1.5 billion Euro

As its parent company GM went bankrupt, this was a bridge loan until a buyer could be found.

Elpida

(Japan)


Loan

contribution



100 billion yen

In addition, megabanks poured into Elpida a total of 100 billion yen.

Development Bank of Japan and Industrial Reform Mechanism poured into Elpida 30 billion yen +tens of billion yen.

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 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.


.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, 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 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 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, 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.
.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.



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

 

-38.3

An operating profit

412591

169477

-360551

-682528

-194,863

(%)

-38.9

-54.2

-88.2

 

 

A pretax profit (quarter)

453,054

183,433

-282,139

-914,729

-13508

(%)

-38.7

-53.3

-82.4

 

 










Making TOYOTA HP










Monetary unit: a million yen










%: to camper the preceding year










Accounting Standards:FAS

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.
.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.


.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/
8. TOYOTA MORTER CORPORATION

http://toyota.jp/


9. Ministry of Land, Infrastructure, Transport and Tourism

http://www.mlit.go.jp/index.html






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