Chapter 3: The Conglomerate Discount and How to Deal with “Gaps”

Introduction

In the previous article, we wrote that in order to eliminate the Conglomerate and Japanese Discounts, Japanese companies should begin with resolving the countless “Gap” issues that exist from a business, regional, or functional perspective.

Deloitte analyzed six global companies – Hitachi Ltd., Siemens, Schneider, GE, Sony and Panasonic – to see how they dealt with the “Gap” issues found within their conglomerates.

The following hypothesis was derived from this analysis:

“It is always tough for everyone to increase sales in these uncertain times. However, we believe that companies that were successful in transforming their businesses adhered to a certain set of principles with a strong conviction.”

We believe that these three principles are:

1: Slimming down the body

2: Connecting nerves from head to toes

3: Continue transforming

１: Slimming down the body

Companies should be consistent in how businesses are divested to streamline and optimize business portfolios

Nothing is off limits when it comes to transformation. Clinging to founding products or past signature businesses risks creating the impression within a company that certain areas are off-limits or exempt from these changes, and will reduce the momentum for change.

Taro Shimada, formerly of Siemens Japan and current president of Toshiba, wrote in his book "Scale-Free Networks,”

“The CTO of Siemens often talked about 'shortening the value chain.' If you just go digital without shortening the value chain, everyone will get exhausted.”

Undertaking a variety of transformation projects while out of shape will only serve to weaken their impact. Companies should undertake these business transformations once they have a more lean and fit body.

Conversely, companies that try to transform themselves prior to slimming down have yet to see results. Continuing medication to an overweight body will only have a limited result.

In addition to Siemens, Hitachi Ltd. has also divested a number of their listed subsidiaries as part of their group restructuring during their transformations.

２: Connecting nerves from head to toes

Do you have a simple and clear company’s policy and message in your company’s Purpose/Vision? Does it well recognize amongst both its internal and external stakeholders?

It goes without saying that guiding principles for transformation is important. This can take the form of a simple statement of purpose, or even a well thought out Vision. What this should do is provide guidance to all employees, serving as a constant focal point that ensures the company’s survival over the next 10- to 20-year span.

Whether it be Sony’s Group Vision, Hitachi’s Lumada, Siemens' MindSphere or Schneider's EcoStruxure, all of these are extremely important cornerstones that tie together the nerves of these groups.

３: Continue transforming

Successful companies continue transforming patiently over a span of five years

If only temporary changes are put in place, these will not produce significant results. Furthermore, if the company’s leadership attempts to make changes and put their own unique spin, and act in opposition to their predecessors, which will only serve to waste time.

In any case, it is important for your projects to convert internal opposition and generate momentum in support of company-wide transformation. Both Siemens and Hitachi have been pushing forward with their own digital transformations since around 2015. Siemens has continued to work on reorganizations ever since declaring their intent to become a software company. Under the name of “Smart Transformation,” Hitachi has continued the projects since 2010 to implement cost reduction programs and has also been engaged in corporate structure reorganizations, which has included the sale of listed subsidiaries.

After five years, these companies have now just begun to reap the fruits of their transformations in recent years.

Replacing “Gap” with the word “wound” makes this concept more easily understood.

Reducing the absolute number of wounds by “slimming down the body,” and then “connecting the nerves” of the entire group will allow companies to discover small wounds that are bleeding despite not hurting. Furthermore, “continue transforming” will sharpen a company’s senses, allowing them to detect even the smallest of wounds wherever they may be located. 

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Conclusions

Companies that are able to implement transformation with the above three principles are likely to see better profitability and a gradual shift towards a business model that is better equipped to deal with this new era.

When a company goes to implement all these principles (slimming down the body, connecting the nerves from head to toes, and continue transforming) the following will undoubtedly serve as a cornerstone in how groups are managed in the future:

• Sustainability
• Digital

When “slimming down,” or in other words, examining how to optimize one’s business portfolio, holding discussions based on sustainability and digital technologies will be an important way of measuring how to optimize your company’s business portfolio. “This is a business we should withdraw from as soon as possible from a sustainability perspective” or “This business could double its existing strength through the use of digital technologies” are potential discussions that could be held.

In addition, Japan’s manufacturing industry is engaged in a struggle for survival in the digital world. These companies must optimize their management and businesses by “connecting their nerves from head to toes,” while also improving transparency by visualizing information from sources which include supply chains, demand chains, and all business partners. More specifically, if a company is unable to visualize its multi-layered supply network in response to its regulations to report and disclose its carbon footprint, including Scope 3, the company will suffer damage due to unexpected risks from unknown supply chain companies.

And finally, there is "continue transformation.”

The transformations that will need to be undertaken to resolve these “Gap” issues and incorporate sustainability and digital technologies into management platform as given necessities will not be achieved overnight.

The global companies that have begun to see positive outcomes from transforming their businesses in recent years have all made significant digital shifts between 2014 and 2016, and have done so over a five- to ten-year timeframe.

The revival from the Conglomerate and Japanese Discounts must serve as our rematch for what was lost over these last twenty years. For that reason, any short-term transformations implemented over a single fiscal year will only be able to reverse these losses and return companies to their starting positions.

The top management of companies is being asked whether they have the energy, passion and fortitude to brave the coming storm of rapid change over these next five to ten years.