Who Constructs the Path We Take? A Case Study of Nakatsuka Metal and Foil Company

Change Initiatives in the Refined Metal Businesses Japan

In fall 2013, a senior board member of the company, 3 days after being diagnosed with cancer, passed away. In Nakatsuka, he was the second eldest among the five brothers and ran the head office in Kyoto for decades. One day in June 2014, the chairman’s son Yuichi took over the reins of the company as the CEO from Etsuhiro who stepped down to become a senior member of the board. A graduate in liberal arts, Yuichi entered the company as a new employee bringing with him some years of experience of working in few other firms. He joined the sales office at Osaka. After couple of years of working in sales, he got the opportunity to supervise manufacturing plants located at Shiga areas and ended up becoming the CEO. Yuichi learned a lot about the metal, gold leaf and foil business from Etsuhiro when he worked for Osaka office. (Some of the key actors at Nakatsuka and their roles are given in Table A1.)

The CEO Yuichi tells about the situation as a new employee:

I had heard great stories about entrepreneurship qualities of my grandfather. I admire him as a founder of the company and as a superb innovator in the metal powder field. Because, post World War II days, science of metal manufacturing was not as advanced as it is in the present. Even though my commitment to the company was not very strong, because I had other options for employment, I decided to enter the company when I was 28.

Surprisingly, Etsuhiro, the former CEO, seldom came to the head office in Kyoto until the sales office in Osaka was closed in June 2015. For decades, the second elder brother, as a senior board member, had practically managed the head office in Kyoto, following the orders of Etsuhiro in Osaka.

Aoki, who was a sales person in the company from the 1960s, tells us about that:

I think among five brothers, the new CEO Yuichi enjoyed maximum trust of his father Shinya. The third eldest brother Etsuhiro also felt a strong social tie with them. I think the second eldest brother was psychologically different from them. For instance, he was not responsible for what he said and did; it was palpable for many employees at the plants or sales teams. If he had recovered from cancer treatment, he would not have acknowledged Yuichi as a CEO.

The company mainly deals with the gold-foil residues, which comes from the gold-leaf manufacturers after they cut it out of the gold sheet. It may be a by-product for them, but it is a key input material for the company.

Gold-leaf business has remained dominated by loose relationships between manufacturers, retailers and brokers. They interact with one another as independent entities. Since the value chain is strongly influenced by the quality of gold used by goal-leaf manufacturers, they have maintained their stranglehold on the entire business stream. These manufacturers are mostly located in Kanazawa city far away from Kyoto. Over decades, the network has evolved robust transaction procedures to make the whole thriving. Accordingly, each player has followed the specified procedures and enjoyed mutually beneficial rewards.

After purchasing the residues from manufacturer, the company breaks those into fine particles at the plants and sells to the retailers and the third-party manufacturers for diverse applications. Nakatsuka as an intermediary and manufacturer was satisfied working with the buyers in the consumer market. The company’s approach to co-create values buyers for the end consumers boosted their product sales.

During high economic growth era of the 1970s, the company hired 100 employees for five plants. According to some interviewees, the total revenue then was almost four times the present revenue. The founder always inspired sales force to add new customers throughout Japan, and they travelled around to co-create new products with customers and to work together for improving the quality and the productivity.

However, during the 1980s, the highly appreciated Yen squeezed out domestic manufacturers and forced them to shift base to foreign countries in search of low cost of operations. Subsequently, to meet the massive offshore investment, the company chose to sell off the plants, to finance operating cash and maintain sufficient productivity. A head office in Kyoto, a branch in Osaka and two plants in Shiga were eventually left. Even worse was not yet over. Just after the bubble economy in Japan in the early 1990s, serious strikes hit the entire company forcing it to make a significant settlement with unionized employees.

Aoki tells about those days:

When I came to work for this company, it was a large company, a potential candidate for IPO. However, the founder always talked about his business policy. According to him, all sales expenses are indispensable. Cost control should be done in other areas: wages, travel, sundry operations expenses. Taking advantage of ‘pensioners’ income ceiling,’ some twenty years ago, the company decided to hire retirees of over 60 years. (Pensioners’ income ceiling restricts a retired person’s monthly wage to US$ 1000 upon re-employment.) Nevertheless, extended family members were exempted from this rule.

Call for Help

At first, the new CEO asked a tax lawyer, who had an advisory contract with him to undertake the change initiative, even though his consulting experience was limited. It turned out that a surprisingly old handwritten bookkeeping system, which has been processed by an aged employee Ota, was a primary target to be changed. Many in the office acknowledged her to be the obstacle to the change initiatives. However, they did not speak out anything in the meeting.

The tax lawyer tried hard to help them engage in change initiatives; however, inevitable norms like a manual bookkeeping system swallowed all efforts he tried, and things were running as they were. Finally, he gave up his consulting contract and went back to his original role as a tax lawyer.

Around the same time, Yukari, an OD consultant with experience of 7 years and a lead member of OD community in Japan since 2010, received a call from Yasuda of Nakatsuka. In addition, she had even formed diverse professional networks about training and development mostly in the human resource (HR) and accounting fields, due to her contacts developed while working at a Japanese local bank as a teller and manager. One of the reasons to look for supplementary income was the challenge faced by her to bring up her children as a ‘single mother’. Luckily, such hardship broadened her capacity to manage varied situations which she frequently faced.

Although Yukari had already started preliminary interviews with some employees and new CEO, her formal consulting process started in July 2014. Surprisingly, the company was in a bizarre situation where everybody in the company knew manual bookkeeping was the problem they need to change. Nevertheless, the system remained intact ever since it started. Moreover, a machine to issue invoices, receipts and financial statement of transactions was perceived to be slow to process and difficult to use it. Yasuda was hired as an accounting staff with the skills of personal computer (PC) software; however, the company realized he did not have adequate skills to use PC.

As Yukari was getting deeper into the organization, she realized that the company’s situation was enigmatic. For instance, the financial closing process ought to have been over in April. But the company officials were not at all embarrassed to find that it is not yet finished even in late July. Ota, who was responsible to the accounting system, and most others said that an idea for changing the system was ridiculous. While there were lots of complaints about accounting errors in everyday business transactions, all employees resisted to any change initiative, and they kept on being reticent in bringing a difference. When an accounting mistake was detected the other day, employees started blaming one another. After some time, all of them sneaked back into their designated jobs, such as ‘cocoons’ and close the door.

The data she collected showed that there was a strong tendency to make them dubious and the result of small but accumulative miscommunication fortified their disbeliefs. Moreover, a distorted frame of reference, brought miseries for almost all employees. Yukari acknowledged that the situation was far worse than she expected and asked a person from her professional network to help understand the problem and suggest ways to get out of such vicious cycle.

Yukari identified Yuki, who had a successful run as training manager for new employees at 7-Eleven Convenience, Japan. After her stint at 7-Eleven, she joined an apparel high school to get the professional diploma, moved into apparel and design business and ended up as a consultant linked with diverse fields. Yukari expected Yuki had the knowledge, skill sets and relevant expertise to restructure Nakatsuka, starting with the top leadership.

Consulting team of Yukari and Yuki decided to get involved in the process and joined the company as full-time employees. Seeing some mismatch between inventory record in the ledger and physical inventory, Yukari and Yuki decided to join as full-time employee. Even worse, nobody knew the inventory correctly when the team asked them about it because arbitrary decisions were taken to trade raw materials and finished products without maintaining proper records were rampant. The team worked to devise systems and process for the company to become fair and rational. Yuki started to check all items in the inventory room on the fourth floor of the same building.

Avoidance of the Feedback

From July to September in 2014, Yukari held a series of long meetings with the CEO and employees, including part-time workers. During the meeting, most of them were heavily influenced by their emotionally biased intuition; therefore, quite often meetings did go silent. Indeed, everybody came to the office to work for the company, but the situation in the office was stuck in the standstill. They did their tasks as if they repeated the same task in a way that they did.

One day in July, Yukari came to know from a new part-time female recruit for the accounting job that she was not given any assigned work from Ota. She was recruited through an agent after ensuring that she knew computer and could use it for accounting work.

Yukari tells about her determination:

Everybody could feel the frozen situation and knew the problem. I decided to take actions. However, I promised myself that, before taking actions, I would pay attention carefully to everything as much as I could notice. What I was conscious of was to be an OD consultant who could practice OD values. For that purpose, I set up many meetings with employees and took much time to listen to them about the company’s situation. After having done things responsibly, I decided to get the letter about accounting system change issued. The reality backfired on me! Though, I was thrilled at that time.

Soon after that, the team set up the meeting with the CEO, and they agreed with issuing a formal letter to all employees on 16 September 2014. What all of them had to understand was to be summarized into six points:

Finalizing accounting statements of May, June, July and August by the end of September;

This letter was supposed to be delivered to all employees on the day as a printed formal letter from the CEO. However, the CEO passed it on to some close people immediately. Unfortunately, Ota did not receive the letter. On the day, when Yukari came to work, she was perplexed at seeing it and rushed to ask the CEO what was going on. Eventually, she nudged the CEO into delivering the letter to the rest of the people in the company, and he did it.

When Ota received it, she yelled at all around her and went home with sick leave for 3 days. She thought that due to her absence all other business functions will get hampered due to unavailability of data. During her absence, Yukari and the CEO decided to open the book to hand over all the work in accounting to the new part-time employee. That was the first time Ota’s work was shared with any other person. The part-timer was a qualified person to process all data better than ever. Moreover, she could transfer old handwritten accounting data into a new computerized system. Ota came to know of the new development when she rejoined after her sick leave.

Yukari tells her feelings:

I suspected the inventory management because the company dealt with gold and other rare metal products which are very costly. I did not know the gravity of the problem at hand. Having checked a part of the inventory, Yuki reported to me that the level of the current inventory went far beyond the expected demand even months away. Taking advantage of absence of Ota during her two paid leaves, we could completely transfer all transactions into the new accounting system. Ota was terribly upset. Eventually, she chose the voluntary retirement after availing her third paid leave.

Yuki tells her impression about the incident:

To my knowledge, it is all about a series of the systematic infection process in the human nature. When we struggled with Ota’s handwritten bookkeeping, I decided to corner her to resign. I am sure we took sufficient time to listen to her voice again and again. Her attitude to work was tolerated by the company because nobody told her that if she did not have enough skills to operate, she would lose her job. Otherwise, if she intended to improve her skills to adjust to new environment, she would be given opportunity to learn those. However, the company was ready to inform her of a resolution, and I enforced it on her to accept…it was a pity.

Lack of Concern for the Assigned Tasks

Every morning all employees came together for receiving briefing and tasks to be performed by the end of the day. In such meetings, the team of Yukari and Yuki collected diverse data through observations and group interviews. The team gradually focused attention on the sales team because of the suspicious inventory record of gold leaf and derivatives.

Few days later, the CEO called for a meeting of the team with Ida, who had a responsibility for the entire sales activities.

Ida had an interesting background. He joined the company as an extended family member of the Nakatsukas at the age of 28 years. Prior to joining Nakatsuka, Ida had worked elsewhere as a truck driver. He did not possess experience of sales. Due to his poor handling, people in the sales started quitting. A situation came when he was the only person who worked for a series of merchandise, but he never felt the need of going through training to acquire new skills. Even worse, he frequently expressed his victimized feelings to defend his actions and attributed mistakes to the rest of the world. Whatever be the reason, the CEO and the team decided to give him credit and his job as head of sales continued.

During the meeting, Ida shared similar trend of stock pileup as revealed by the accounting system. Later, Ida told the team that a cosmetic company wanted to buy gold powder from Nakatsuka. That is the reason he kept on building inventory.

Finally, the cosmetic company did not buy from Ida because it changed its marketing strategy into another one, which did not use the gold material. In other words, Ida was not fully aware of his customer’s needs, made wrong forecast, kept on asking for the inventory of gold expecting that it will ultimately get sold. Ida made his company suffer losses.

Yukari and the CEO talked on the way to avoid doing the same thing anymore. It was decided in the meeting that the sales function will be bifurcated into two: sales and marketing function and distributing function. The CEO and the team felt that Ida can look after sales and marketing.

Sometimes in early June 2014, it was decided to shut down the Tokyo office. Based on the recommendation of Komura (who ran the Tokyo office where Ida was located), the CEO and the team offered Ida two options to choose from: to go through a sales training programme or get transferred to another function. After initial reluctance, Ida chose the training course and took a week-long programme outside the company.

One morning in late November 2014, a shocking call woke Yukari up. Chairman of the company had died and his body was found at the stairs of the company just below the top floor. In the morning, the CEO, who is the son of the chairman, went up to the stairs and found it there. After retirement from the company, the chairman stayed at the top of the building at his will, and he was believed to be happy with his retired life. After extensive probe and autopsy the police and detectives ruled out any foul play and confirmed that the death was caused due to massive heart attack. The company and family held a formal funeral ceremony.

On 6 January 2015, the company started its business after New Year holidays. The day before, the CEO, the team and Komura met to review the change progress in 2014 and talked about plans what they will do in 2015. Ida was absent on the first day of the year; however, it was common for them to think that he caught flu and would recover and join soon. Few days later, the team called his home to enquire about his situation.

His wife replied to them with gloomy messages. The wife said that her husband had disappeared and been missing for past few days. The wife also said that a missing case had been registered with police and the family too, had been looking for him. Yukari and the CEO discussed but were clueless about finding a way to handle the situation. Three weeks later, the police spotted Ida at a place far away from his home. Yukari asked the CEO how to manage this incident, and both of them decided to fire him because of his unusual behaviours displayed–not once but twice.

The team called his home and informed him of the decision. His wife at first begged special consideration for forgiving him as a sort of sick leave. However, the team declined to revise the decision taken. Few days later, the CEO received a summon from an officer in the Labor Standard Supervision Office. After a series of hearings and defending, the office recommended the CEO to enact clear work rules, including this type of disappearances and share it with all concerned.

Yukari tells her impression about this series of the incidents:

I think the incidents about Ida were a part of the core problem in the company. If the CEO and stakeholders had managed their business good enough, things like these would have never happened. In fact, they have been postponing taking tough calls until now. I can’t stand such a situation. It is true that the company’s market was small, and a restricted number of the players in the market have lived with an implicit balance among them to take a fair share. I cannot figure out the reasons why people did not care about making a profit at Nakatsuka to get their paychecks. Long lasting red-ink and shrinking market share indicate inevitable facts of closure. Everybody told me that we were right when we pointed this lack of commitment. However, I did not see any urgency from them. It is a conundrum for me.

Yuki also tells her impression about the same things:

About Ida, I was thrilled because we initially guessed that he might have stockpiled some undue benefits through his scrupulous inventory management. However, he was innocent and honest to the core like a child. Meanwhile, it was clear that he did not possess any skills of sales and does not desire growth in his career. Following long hours of interviews, I understood that he was nothing but a sort of parasite for the family members. In addition, the company did not give him any opportunity to get trained and become a matured person. He enjoyed driving a truck to deliver. All a sudden, the company imposed a take-it-or-leave-it option on him, and so, he disappeared. In that sense, I saw him look for a safe cocoon to hide.

The Path That We Are Creating

All of a sudden, another incident happened in the company. While working in the backyard of the Kyoto office, Etsuhiro met with an accident in the elevator that left him completely shaken. Eventually, Etsuhiro could not help accepting the fact that Osaka office had to be shut down.

All full-time employees, except the CEO and Etsuhiro, were gone. From somewhere, a bright prospect appeared at the scene. The new computer-based accounting system began to indicate the total cost radically plummeted, and the profit in May 2015 would go black. As if in procrastination on the change initiatives, sudden death of the chairman, disappearance of the sales manager and reconciliation with the authority, all about, everything was inevitable to reach out this small win.

Etsuhiro narrates an anecdote behind the change initiatives:

For many years, I believed that financial performance of the company had been better than what I had heard from other brothers. One of the reasons why I guessed was that the chairperson had lots of financial conduits to financial partners in Kyoto, and he was a genius person to save the money all the time. I believed that the information about a cash-crunch meant to raise our awareness of the efficiency. Honestly, I was wrong.

Yuki shares her feelings that emerged from the entire consulting:

From a retrospective point of view, one of the things I could take away from this case is the true meaning of an old proverb that success breeds failures.