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Continuity and innovation of a family firm, Otsuka Kagu
Governance is not an issue

Shigeru Asaba
Professor, Faculty of Commerce, Waseda University

One of Japan's best-known furniture stores Otsuka Kagu has been in the spotlight since late last year due to a dispute over management between the founder of the company and his daughter, the company president. The end result was the approval of the president's proposal and the removal of founder Katsuhisa Otsuka from the board of directors. While the dispute has been presented amusingly as a family feud, I believe it encompasses a fundamental issue for not only family business, but for any company pursuing long-term growth.

Researchers started showing interest in family run businesses in the 1990s due to their exceptional performance. According to Danny Miller and Isabelle Le Breton-Miller, one strength of family businesses is their long-term perspective, or continuity (Managing for the Long Run: Lessons in Competitive Advantage from Great Family Businesses, Random House Kodansha, 2005). However, if companies do not alter their approach they cannot adapt to a changing environment. I believe the resilience of time-honored family businesses is attributed to an appropriate balance of continuity and innovation.

In Figure 1, you can see Otsuka Kagu’s declining sales and shift toward low profit margins from the mid-2000s onward. The company has reached a point where it needs to change its strategy and business model to survive—in other words, the company needs to innovate.

A dispute arose within the company over its survival strategy. Mr. Otsuka was apparently planning to continue its membership system and return to a prior business model of attracting customers through mass advertising. The business model he created was based on the organically connected aspects of dealing directly with manufactures, high-volume bulk orders, mid to high end products, large showrooms, display of prices, a membership system and advisors, and customer value in the form of a wide selection of goods, reasonable prices, and high-quality customer service. (see Figure 2; for further information, refer to my book Business System Revolution, NTT Publishing, 2004).

 

In contrast, it appears President Kumiko Otsuka plans to transition the retailer into a more casual “walk-in” atmosphere. Nitori, a "walk-in" style retailer has performed well while Otsuka Kagu has faltered (see Figure 1). Therefore, it's reasonable for Ms. Otsuka's to want to shift towards a similar style.

This alone, however, is a poor argument for changing the company’s strategy and business model. Business models work effectively when various elements are organically implemented into the strategy the model was designed for. Thus, if Ms. Otsuka wants to transform Otsuka Kagu into a “walk-in” furniture store, she must remove the current business model and create one similar that of Nitori's.

Furthermore, growing markets for this business will always have powerful competitors. If Otsuka Kagu switches to a “walk-in” model, it must directly compete with Nitori and similar retailers. As Waseda University Associate Professor Akie Iriyama has pointed out, this market is a “red ocean” (Nikkei Business Online: http://business.nikkeibp.co.jp/article/opinion/20150329/279327/).

Of course, I am not suggesting that the company should just return to its old business model. However, adopting a “walk-in” model simply because it is used by high performing companies is equally short-sighted. One must work out a way to beat powerful rivals like Nitori in an arena where they excel.

One way is to take advantage of Otsuka Kagu's original strengths. Otsuka Kagu had various strengths that supported its previous business model—its discerning eye for quality products, its ability to predict customer demand, inventory management, and logistical expertise. Ms. Otsuka clearly explained this to me herself in an interview I conducted more than ten years ago. The company must think about what to eliminate, what to keep, and what kind of value to offer by drawing on its strengths—in other words, its competitive strategy—to beat out the competition in a new arena.

I understood how smart of an individual Ms. Otsuka is when I spoke with her. I’m sure she has worked out a concrete competitive strategy. However, newspapers have recently described her policy simply as a way to “make a fresh start with an emphasis on a more casual shopping experience.” There is no need to publicly announce details of a company's strategy, but the competitive strategy should be communicated internally to persuade members including Mr. Otsuka. If Mr. Otsuka understood the strategy, there would never have been a feud like this. Some think that Ms. Otsuka's management may not have had a good enough strategy to win over Mr. Otsuka.

Given Ms. Otsuka’s remark that the dispute is “essentially about governance as we transition from the management style of a privately-run store to one more appropriate for a publicly-traded company,” it may be that Mr. Otsuka refused to consider any alternatives and stubbornly clung to his views. But there is merit in the argument that a company cannot compete with powerful rivals if it is not grounded in its strengths. In the end, governance is not an issue. Rather, we should attribute it to management’s failure to propose a convincing strategy that all members of the organization could get behind. If members of the management team propose conflicting strategies and cannot agree on their relative merits, one of the strategies must be chosen by a final decision-making body. The fact that Otsuka Kagu reached this point shows that a minimal level of governance was in place.

Governance problems in family businesses have been recognized before. A lack of effective check-balance systems have been seen as issues when owners make arbitrary decisions and mismanage the company or cause a scandal. Illegal acts are out of the question, and it is important that companies are transparent and have a system of checks and balances.

However, the concentration of power in the hands of the owner and the ability to make quick decisions are also strengths of family businesses. As pointed out by Kobe University Professor Kazuhiro Mishina, many Japanese companies change their top management at regular intervals and have been criticized for the resulting difficulty in determining important matters like changes in strategy (The Logic of Strategy Failure, Toyo Keizai, 2004). Shigetaka Komori, president of Fuji Film—a company that managed to rebuild itself and survive while facing the loss of its core business—has also said that class officer-type leaders who make decisions by majority vote are not effective in emergency situations (Management of the Soul [Tamashii no Keiei], Toyo Keizai, 2013). Emergencies require strong leadership.

With Otsuka Kagu’s need to change its strategy and business model for survival, the company is certainly facing an emergency. It’s natural that there are conflicts over the direction of the business. If the daughter-led management developed a logical strategy that was satisfactory to both parties and resolved the conflict, the family business could have leveraged its strength of quick decision-making. The chaos at Otsuka Kagu was not caused by a lack of effective governance. A minimal level of governance was in place. If the chaos of this dispute were considered to be attributed to governance issues and the checks and balance system became too strong, however, the family business's advantageous ability to make quick decisions thanks to a strong leadership would be impaired. This is a greater cause for concern.

Once again, the source of Otsuka Kagu’s problems is the difficulty of changing strategy and obtaining a balance of continuity and innovation. All companies—not just family businesses—need continuity and innovation for long-term growth. It is difficult for these two principles to co-exist, however, since they are essentially at odds with one another. Thorough discussion of the pros and cons of strategies and strong leadership are essential for overcoming the trade-off. Every company needs to remember that the problems Otsuka Kagu faces are fundamental issues of business growth.

Shigeru Asaba
Professor, Faculty of Commerce, Waseda University

[Profile]
Professor Asaba was born in 1961. He graduated from the University of Tokyo with a B.A. in Economics in 1985. He received his Ph.D. in Economics from the University of Tokyo in 1994 and a Ph.D. in Management from the University of California, Los Angeles (UCLA) in 1999. After serving as a professor on the Faculty of Economics, Gakushuin University, he assumed his current position in 2013.

[Major Publications]
Competitive and Collaborative Strategies [Kyōsō to Kyōryoku no Senryaku] (Yuhikaku Publishing, 1995)
Competitive Principles of Japanese Firms [Kigyō no Kyōsō Genri] (Toyo Keizai, 2002)
The Economics of Management Strategy [Keiei Senryaku no Keizaigaku] (Nippon Hyoron Sha, 2004)
“Why Do Firms Imitate Each Other?” (with M.B. Lieberman), Academy of Management Review 31 (2), 365-385, 2006
Working Out Your Corporate Strategy [Kigyō Senryaku o Kangaeru] (Nikkei Publishing, 2007)
The Economics of Firms [Kigyō no Keizaigaku] (Nikkei Publishing, 2008)
The Essentials of Management Strategy [Keiei Senryaku o Tsukamu] (Yuhikaku Publishing, 2010)
“Patient Investment of Family Firms in the Japanese Electric Machinery Industry,” Asia Pacific Journal of Management 30 (3), 697-715, 2013