Summer vacation is almost over. How did you spend it? Some of you probably spent a relaxing time for your body and mind at a resort with your family, and isn’t that a wonderful way to spend vacations? I always read a few books during my summer vacation, and I read about five books this year. One that was particularly interesting is Lights Out. This book was published in the United States in 2020 and translated into Japanese this year. The book was written by two business reporters about the recent 40-year history of the rise and fall of GE (General Electric), an American business giant. It is also famous for being highly praised by Bill Gates as a book that answered the long-lingering question: why do excellent companies like GE face a downfall?
In the United States, two electrical equipment manufacturers, GE and Westinghouse Electric (WH), started their businesses at the end of the 19th century, and both dominated the world industry as giant conglomerates after World War II. However, since the 1970s, both companies became unable to compete globally in several business areas. WH quickly narrowed its field of enterprise by selling some of its businesses to other companies, and in 2000 WH survived only as CBS, the broadcast television and radio network it had acquired. By the way, the nuclear power generation division of WH was acquired by Toshiba, a Japanese conglomerate, and it is still fresh in my mind how Toshiba itself was nearly driven to bankruptcy due to the huge debts of this division.
GE, on the other hand, led since the 1980s by Jack Welch, who was said to be the best manager of the 20th century, recovered to become one of the leading companies, with a market capitalization of $600 billion in 2000. On the way to this success, the company changed its business portfolio and introduced a management quality improvement activity called Six Sigma. I still remember the rumors spreading back in those days, saying that the fall of WH happened simply because they couldn't get a talented manager like Welch.
I graduated from university in 1980 and started on my professional path in a Japanese conglomerate, Hitachi. I had always been taught that the ideas and activities of Welch are a great example to learn from, and I was constantly thinking about what we should do to become an excellent company as well. However, 20 years later, GE has lost its former shine, and is expected to be divided into three companies next year.
In the early 2000s, it was said that, from now on, businesses would grow based not on the superiority of their products, but based on services and finance, which would be the key growth areas. In fact, companies like GE and GM were actually increasing their value at this time based on success in those areas. However, the 2008 Lehman Shock caused significant problems in the financial sector, including excessive loans. In the end, GE and GM were burdened with huge debts to deal with from their financial portfolios, which was extremely harmful to their corporate value. According to the book, since the Welch era, GE had been issuing bonds at low interest rates based on high corporate valuation of GE Capital, and these funds were used to make the product business look highly profitable. As for the service business, the book says that, for the long-term service contracts such as aircraft engines and power plants, the future profit was overstated by underestimating the future cost, while the future profit was booked when the service contracts were signed. The book goes on to tell how, after the Lehman Shock and in the change in public opinion against nuclear power after the Fukushima nuclear disaster, Welch's successor Jeff Immelt expanded such near-fraudulent profit manipulations to make the struggling business look better.
In this way, the management of Welch, which was praised in the 2000s, lost its gloss, and I had to admit that what I had believed at the time was an illusion. That was a great shock.
In my opinion, the reasons for the GE fall were:
One charismatic manager arbitrarily ran the entire business, and no one in the company could correct his mistakes.
Decisions were made based on the wrong management philosophy that a huge conglomerate containing many different businesses should be maintained.
The company promised share buybacks and high dividends to investors to gain a high corporate valuation but failed to manage the company according to the real situation.
Erroneous management judged the superiority of a business based solely on profitability, while neglecting to improve the competitiveness of products in each business.
The Rigaku Group keeps its main focus on X-ray applied analysis, but also owns various business lines such as thermal analysis and Raman spectroscopy, and I believe that each of these business lines should be market-competitive, and that management should place the highest priority on being able to provide our customers with firmly differentiated solutions. I also believe that each group company should have its own board of directors, which makes decisions most appropriate to each company, and that when reviewing those decisions at the board of directors of Rigaku Holdings, we should always incorporate diverse management ideas. Each company needs to constantly listen to customers and steadily enhance its technical and organizational capabilities to satisfy the customers’ needs. The strengthening of the service business is a big goal in the MMP (mid-term management plan). However, we should build that by providing the support necessary for our customers so they can use our products for a long time, not just be a means of incorporating future profits, as it was for GE.
As you can see, the book I introduced here was very thought-provoking for me. Especially when I think of how something once recognized as an example of excellence throughout the world turned out to be unreliable and deceitful, I strongly feel that we should once again focus all our efforts on performing our corporate activities from the customer's point of view. Drucker said that the company's purpose is, in a nutshell, “to create customer value.” I would like to return to this original point and work together with all of you to facilitate further development of the Rigaku Group.
Anyway, this summer vacation will stay in my memory as a summer when something I have believed in for over 40 years changed in the blink of an eye.
