Hearing the phrase of “maximum discount” for the first time

In June 2002, I was preparing to apply for a project to construct a document management system for a certain central government agency. At that time, the e-Japan Strategy had been formulated and architects of information systems at government agencies were being selected through open application. However, a newspaper article was published bearing the headline “Contract price for overall document management system of Tokyo Metropolis set at 750 yen”^[1] and the extremely low bidding price became a social issue. As a result, a comprehensive evaluation formula of “technical merit + price merit + α” was implemented for bids. Although my group had never been selected by that government agency for a project, we believed that we could be competitive in terms of technical merit included in the comprehensive evaluation formula.

When using labor cost and goods cost as a basis for calculating the system construction cost for the aforementioned project, we realized that the cost would be nearly 1.5 times the forecasted contract price. In response, we negotiated with affiliated subsidiaries to arrange for subcontracting at cost which would produce almost no profit. This enabled us to submit a bid which just met the forecasted contract price. I was confident of our technical ability and believed that we would receive the order. However, we ultimately failed to receive the order. The cost proposed by the selected company was one-third of our submitted bid.

Afterwards, details of the selected low-cost bid were disclosed. The details included the phrase of “maximum discount”. This maximum discount made the low-cost proposal possible. However, how would this cost be recovered

It took our group approximately one month to gather information and create materials for submitting our bid. Since we failed to receive the order, the labor costs incurred during this period were a complete waste. Ultimately, I didn’t have to become a leader of an unprofitable project or place subsidiaries in a difficult position. Nevertheless, even in the case of subsequent projects, we continuously failed to obtain orders when submitting bids at prices which included cost.

When engaging in cost competition, reduction of labor cost and decrease of profit are essential. If subcontracting corporations and corporations supplying parts do not possess special skills or features, they face increasingly strong pressure to reduce cost and are placed in a severe labor environment. Bid-rigging is an evil act. However, stricter regulations and enhanced moral education are not sufficient to resolve problems arising from the shifting of burdens onto subcontractors. As a manager who was unable to receive orders, while witnessing the difficulty of maintaining quality in the face of excessive price competition, I continued to feel that something was wrong.

Leadership of top executives

Nonaka, Toyama and Hirata (2010) discuss the ideal form of leaders when performing organizational reform by quoting the behavior of President Shoei Utsuda after the discovery of the Mitsui & Co. DPF incident in November 2004^[2]. President Utsuda was the successor to former President Shinjiro Shimizu, who resigned after taking responsibility for the Kunashiri incident which was discovered in 2002^[3]. Immediately after becoming a president, Utsuda released a message entitled “Aspirations of Mitsui & Co.” Furthermore, in April 2003, Utsuda conveyed a message entitled “Vision for Business Reform” to all employees. Nevertheless, the DPF incident was discovered in November 2004. Following discovery of the incident, a DPF Incident Committee was established consisting of outside members. A report issued by the committee contained statements such as “although Mitsui & Co. had worked to heighten the compliance awareness of employees ever since the Kunashiri incident, such measures failed to reach all the areas of the genba (a Japanese term meaning the place where actual work is done),” “genba conditions did not always match the Business Conduct Guidelines for Employees and Officers,” and “sufficient awareness was not created regarding the existence of an anonymous whistleblowing system” (excerpts quoted from Nonaka, Toyama, Hirata, 2010, p. 338). President Utsuda returned to the management principles which had been left by Mitsui & Co. founder Takashi Masuda, diligently preached the concept of good work, awakened employees to the value of their own work, and continued to implement organizational reform.

This example of President Utsuda of Mitsui & Co. illustrates how it is necessary for corporate leaders to propose a vision for meaningful social existence and to act persistently in order to realize that vision.

The effect on employee morale

In order to avoid being sucked into price competition, it is necessary to develop new products or services which are recognized by customers. Furthermore, in order to create new research or business, it is essential for leaders to motivate organizational constituents while recognizing the freedom of responsible staff.

In order to develop new products which will prevent the company from being embroiled in price competition, Kewpie Corporation established corporate R&D which was clearly separated from its business line. At the time of establishment, for the stages of research, development, and commercialization, a stage-gate method^[4] was used to judge whether or not to use results generated up until that particular stage. However, when controls were strengthened, researchers’ morale lowered and the speed of R&D decreased. In response, in 2009, Kewpie incorporated a control method designed to heighten researchers’ morale. Specifically, a boost-gate method was implemented in which results that were not adopted at each stage received recommendations for appropriate revisions and projects were continued. This method provided a clear opportunity for management to participate in each stage and share the corporation mission with employees (Wada, Kameyama, 2013). As a result, employee morale was boosted and business results improved (Wada, Y., et al., 2015).

Cultivating corporate culture

In 2010, in regards to the Toyota recall crisis which occurred in the US, President Akio Toyoda of Toyota Motor Corporation testified at a public hearing of the United States House Committee on Oversight and Government Reform^[5]. The following is an excerpt from his testimony:

(Beginning omitted) “Toyota has, for the past few years, been expanding its business rapidly. Quite frankly, I fear the pace at which we have grown may have been too quick. I would like to point out here that Toyota’s priority has traditionally been the following: First; Safety, Second; Quality, and Third; Volume. These priorities became confused, and we were not able to stop, think, and make improvements as much as we were able to before, and our basic stance to listen to customers’ voices to make better products has weakened somewhat.” (ending omitted)

This testimony by President Toyoda indicates the importance of making time for sufficient dialog between leadership and the genba in order to instill culture into a corporation and to link that culture to the improvement of corporate value.

A variety of dilemmas exist in corporate management^[6] (Mintzberg, 2011). At large organizations which are gatherings of personnel possessing diverse values, there is extreme importance in the role of middle management who has received the intention of leadership. Middle management understands the desires and troubles of employees at the genba and creates an environment which facilitates new ideas. Furthermore, instead of dichotomous judgment, there is the need for a creative thinking method which permits diversity for recognizing a myriad of ideas and values.

At the Chuo Business School, I will continue to focus on research and education in human resources development which enables sharing of organizational visions with employees in the genba and makes it possible to guide the organization in the proper direction

References

• Ikujiro Nonaka, Ryoko Toyama, Toru Hirata, “Managing Flow,” Toyo Keizai Inc., 2010, pp. 331-348.
• Yoshiaki Wada, Hideo Kameyama, “An Idea for R&D Process Methodologies in Corporates,” International Association of Project and Program Management Journal, Vol. 7, No. 2, pp. 75-85 (2013).
• Wada, Y., et al., A Proposal for a Boost Gate Methodology to Evaluate Corporate R&D, Journal of Chemical Engineering of Japan, 48 (7), pp. 600-606, 2015.
• Henry Mintzberg (translated by Chiaki Ikemura), “Managing,” Nikkei Business Publications, Inc., 2011, pp. 241-302.

Footnotes

Hideo Yamamoto
Professor, Chuo Business School (Chuo Graduate School of Strategic Management)
Areas of Specialization: Program Management, ICT System Investment Evaluation

Hideo Yamamoto was born in Aomori Prefecture in 1952. He graduated from the Electrical Department of the School of Engineering, Tohoku University in 1975, and completed the Master’s Program in the Electrical and Communications Engineering Department of the Graduate School of Engineering at Tohoku University in 1977. In 1988, he received his doctoral degree in engineering from Hokkaido University. From 1977 until 2004, he was employed at the NTT Electrical Communications Laboratories, NTT America, NTT Communications Corporation, and NTT DATA Corporation. In 2004, he became a Professor in the Graduate School of Commerce and Management, Hitotsubashi University. In 2008, he assumed his current position. From 2011 to 2015, he served as Dean of the Chuo Graduate School of Strategic Management (Chuo Business School), Chuo University, Vice-Chairman of the International Association of Project and Program Management, Director of the International Academy of Strategic Management, and Senior Member of the IEEE.
His main published theses and works include: Kunio Yoshida and Hideo Yamamoto, “Project and Program Management,” (Nikkan Kogyo Shimbun: 2014), Hideo Yamamoto, “Reflections about the Management of Innovation Programs,” International Association of Project and Program Management Journal, Vol. 8, No. 2, pp. 123-133 (2014), Hideo Yamamoto, “Program Management in Context,” The 4th Asian Conference on Innovative Energy & Environmental Chemical Engineering (ASCON-IEEChE) November 9-12, 2014, Proceedings, pp. 548-553, Hideo Yamamoto, Atsushi Yoshikawa, Mikako Ogawa, Akiko Orita and Takao Terano, “Narrative Approach Education using MANGA for Management,” Journal of Strategic Management Studies, Vol. 2, No. 2, pp. 31-42 (2011).