Management that drives continuous growth
Proper management is essential for improving performance
Next, we review management. We have progressed from environmental analysis to formulating the philosophy, business strategy and marketing design. From here, the task is building the organization that makes the various strategies formulated so far actually work. No matter how good the philosophy or strategy, you cannot move on to operations without the people and money in place. And no matter how profitable a company is, it cannot last long as a business unless it is a place where its employees can properly demonstrate their abilities. The same is true of executives. If I mention stories of founders who achieved remarkable results, only for the second or third generation who inherited the company to ruin it entirely, you can probably think of several companies. Local shops rooted in their communities survive because they have a solid base of customers who buy from them. For listed companies with many stakeholders, that responsibility is weighty.
Management, including know-how in developing people and financial management, is an “asset” that money cannot buy. What a company must do differs entirely by industry and type of work. Even so, building systems that make the most of people's capabilities is something you must keep in mind as part of strategy. Below are management checklist items.
1. Organizational structure design
There is no organizational structure that is always the best for a company. However, it is possible to assemble the best structure for a given time and situation. To design such a structure, it is essential to properly share corporate goals, that is, the vision, philosophy and objectives, as well as corporate strategy, business strategy, technology and so on. If you visualize the corporate strategy and share it with all employees, the intent will be properly communicated and everyone can aim for the same goal. Nothing could be more reassuring. This is what is needed first in putting the organization in order.
The meaning of organizational structure design
What matters is whether the organizational structure is consistent with the company-wide corporate strategy. On that basis, you must clarify
- the functions performed by subordinate units such as divisions and departments
- the chain of command, allocation of human resources and authority.
Basic patterns of organizational structure
There are several representative styles of organizational structure, which I will introduce.
1. Functional organization
An organization in which individual functions are formed into units, for example manufacturing, sales, R&D, finance, accounting and HR. Setting up such departments clarifies the division of roles, and employees can aim to become specialists in each area of work. Decision-making authority can simply be concentrated in department heads. However, problems can arise, such as excessive hierarchy as layers increase, or a lack of coordination between departments due to poor communication. For these reasons, a functional organization suits companies that have reached a certain size and operate in a stable environment with few sudden changes.
2. Divisional organization
A target-conscious organizational structure classified by perspectives such as market or customer segment, region or product group. Because it is structured like a collection of multiple companies, work is completed within each division, and each division is given its own decision-making authority. Its drawbacks are that work content and responsibilities may partially overlap, it can be difficult to align the company-wide direction, and in some cases friction may arise between divisions. However, it suits companies that want to run businesses in several different fields efficiently.
3. Matrix organization
An organizational structure that aims to simultaneously achieve the greater specialization of a functional organization and the decentralized management of a divisional organization. However, because employees belong to two organizations with different roles, the chain of command is duplicated, which often makes the decision-making mechanism unclear and business processes complex, so decision-making and strategy execution tend to be slow. Even before that, it has the disadvantage of placing a heavy burden on employees.
4. In-house company system
An organizational structure created to speed up the development of multiple businesses and properly allocate management resources. As with the divisional system, each unit is spun off as an internal company, with more authority delegated to increase financial independence and even profit responsibility. In Japan, Sony was the first to introduce the in-house company system, in 1994. Its distinctive feature is the clear separation between the strategy-planning department, which decides overall company strategy, and the business-execution departments.
Key points of organizational structure design
Regarding organizational design, Canadian management scholar Henry Mintzberg refers to the following four aspects.
1. Design of positions
What expertise, job content and skills are required, etc.
2. Design of the superstructure
How to group each position. Interdependencies such as workflow are important.
3. Design of lateral linkages
How to connect the groups that have been formed.
4. Design of the decision-making system
Top-down / bottom-up, etc.
Based on these four points, and while paying attention to the external and internal environments, you need to conduct internal interviews and hold regular meetings with management and others to build the optimal organizational structure.
2. Human resource management
The people you need can sometimes become clear from your management philosophy and business plan. Once you decide that “accomplishing this work requires this type of person,” one option is to secure talent through headhunting. Another necessary approach is, at the new-graduate recruitment stage, to work backward from new business developments and hire young people who fit. The concept of human resource management is an important element that must be properly understood in order to secure the optimal human resources for the company.
As an executive, you must also not forget to strengthen leadership and create an environment for learning, by developing candidates for leadership positions to draw the maximum ability from the people you have secured, honing skills such as coaching, and enhancing training. The executive's own learning is also important. Talented people should naturally gather around attractive goals and attractive executives.
Key points of HR strategy
Matching individual abilities with the current business environment and the future vision of the organization is an important point in building an HR and training strategy.
(1) Putting the right people in the right places
Individuals perform at their best when they are in “the right place.” Achieving this requires considering not only skills but also compatibility with personal interests, preferences and personality. The “brain dominance survey” developed at GE in the U.S. reportedly analyzes an individual's aptitudes in connection with areas of brain function and helps put the right people in the right places. Such experimental trial and error may also be necessary.
(2) Making employees professionals
Since employees are working responsibly for the company, the ultimate form of “professionalization” is developing each employee's abilities to the point where they could become independent as a professional. It would be ideal to have a training system capable of developing people of this “intrapreneur” caliber. To that end, discussing with employees and deciding work assignments by mutual agreement is also a way to learn who belongs where. For this, if employees hold some goals or expectations of the company and voluntarily set personal goals consistent with company-wide goals, you can expect maximum performance.
(3) Creating and sharing knowledge
Suppose an employee demonstrated tremendous ability and accomplished a major project: who holds that know-how? If only that employee does, then the next time a similar theme comes up, being helpless without that employee is pointless. An organization functions only when individual knowledge and creativity can be shared internally. In an era of increasing workforce mobility, it is important to create mechanisms that turn individual knowledge into company-wide knowledge. You should consider building mechanisms for creating and sharing knowledge (knowledge management).
(4) Supporting employees' sense of autonomy
What employees seek from a company is not just a living wage; a sense of purpose and accomplishment accounts for most of it. That makes it important to have a place where they can achieve self-fulfillment and make the most of their abilities.
However, when there simply is no such place, forcing someone to work not only fails to produce results but may even breed resentment toward the company. If there is truly no place within the company where an employee can use their abilities, staying benefits neither side. Once things have reached that point, rather than shouting at the employee, the company should actively support them so they can move to a new job on good terms.
(5) Employee satisfaction surveys
Giving employees reasons to want to stay in the organization is an important issue in HR strategy. What employees find attractive about a company varies, so it is also necessary to pay close attention as often as possible and survey what each person is satisfied with.
Generally, the following items are factors that increase employee satisfaction.
Working conditions (salary level, benefits, working hours) / rewarding work / fair and equal performance evaluation / trust in executives and supervisors / alignment of personal and organizational goals / sense of security about the future / well-developed career paths
(6) Conducting performance evaluations
Performance evaluation means setting some kind of criteria to quantify and evaluate things that are difficult to measure numerically, such as leadership development, employment and employee satisfaction.
Most companies' individual evaluation design is vague. Effective and appropriate evaluation criteria are needed as a motivator that keeps everyone engaged and helps them step up.
3. Financial strategy
To increase corporate value, it is not enough to achieve your corporate and business strategies; you also need to strengthen the financial foundation that supports the company. A failure like mine, where I raised funds and acquired a company only to run short of working capital, is something I can laugh about now, but at the time it was no laughing matter at all. That is how important financial management is.
But the economy does not turn if you only hoard money. It is also important to have the capacity to invest boldly at the right time. If you can achieve an optimal capital structure by planning and executing financial measures, the company will continue to grow. And once you earn financial credibility, negotiations for financing new business developments will also go smoothly. Building such a financial management strategy is one of the key pillars in executing corporate strategy.
Financial strategy methods
Here we look at the components of financial strategy in three categories: “guidelines for capital investment,” “investment management” and “funding management.”
(1) Guidelines for capital investment
Strict investment guidelines are indispensable for increasing shareholder value. Simply put, to keep increasing shareholder value, the return on investment must exceed the cost of capital (the weighted average of the cost of equity and the cost of debt).
The first thing to consider when setting guidelines is how to calculate the cost of capital, the evaluation criterion for investment. There are two types of funding: equity capital from shareholders and debt capital borrowed from third parties. Likewise, the cost of capital is calculated as the weighted average of the cost of equity and the cost of debt. The cost of debt is the interest rate on borrowings, so it is easy to determine, but the cost of equity includes investor expectations and is complicated to calculate. There are several formulas for calculating it, but because costs and risks fluctuate with the share price, if the stock is perceived as high-risk, the cost of equity rises and setting guidelines becomes difficult.
(2) Investment management
Investment management consists of three stages: “planning,” “implementation” and “monitoring and feedback.”
First, “planning.” When thinking about investment management, what you should take into account is ensuring consistency with the company's objectives and aligning short-term cash management, and it is important to consider the life cycle of the products you sell and plan in advance when, if necessary, to launch new products.
“Implementation” broadly consists of three parts: “working capital management,” “capital budgeting” and “M&A.”
Working capital is current assets minus current liabilities. Therefore, to properly secure working capital, you must always keep an eye on the current state of current assets and current liabilities. When deciding on things like increasing accounts receivable or inventory, the key point is whether the returns are enough to cover the cost of funds.
Capital budgeting refers to the execution plan for a company's long-term investment strategy. When a company's growth stalls, M&A is another option. Generally, attractive targets are companies that could greatly increase earnings through restructuring, or companies that would create synergies with your own business by being incorporated into existing operations, if they are available cheaply.
“Monitoring and feedback” is exactly the PDCA cycle. Even if you execute a plan, without verification and feedback the organization does not learn and you cannot expect further growth. Here too, the process of monitoring whether the plan is proceeding smoothly and, whatever the result, analyzing it and feeding it back is important. It is important to regularly grasp financial aspects such as the cash flow of divisions and projects and to constantly monitor the gap between plan and results.
(3) Funding management
To maintain shareholder value, it is important to raise the funds directed to capital expenditure and working capital investment. The most straightforward form of funding is raising money from third parties such as banks. In that case, however, certain conditions are set to establish creditworthiness. The main ones include maintaining a minimum level of equity, maintaining certain financial ratios, limiting capital expenditure, and providing some form of collateral.
When raising funds from shareholders, new shares are issued through methods such as capital increases or establishing new companies.
There are also methods such as earning trust by returning value to shareholders through cash dividends, or raising the share price through share buybacks to reassure shareholders.
In financial strategy, to put it in extreme terms, cash flow is everything. Corporate value is largely determined by future cash flows, so if you take on debt and the net result against corporate value turns negative, a decline in shareholder value is unavoidable and only dark clouds lie ahead. The only way to create an outlook that reassures shareholders is to examine financial strategy carefully.
To avoid misjudging the outlook here, you need to factor in in advance anything likely to become a liability and build a financial strategy that avoids major failures. To that end, the key points of funding are to accurately forecast the events that accompany results, make consistent estimates when launching any new project, and carry it out after judging when earnings can be secured.