Exit strategy: the value of responsible Withdrawal from the market.

Leaving the market as an issue of Corporate Social Responsibility

In a speech at the American Chamber of Commerce in Japan in August, Brackett Denniston III, General Counsel for GE spoke about how he has tried to bring "society into strategy." Denniston, a firm believer that companies can provide social values and benefits, as well as employment and income, sees Corporate Social Responsibility (CSR) as a moral obligation as well as having a positive financial outcome for the company. In particular the "reputational capital" gained by behaving in a way that treats human beings and the environment with respect is highly valuable for the company's brand image.

In part, Denniston's inspiration comes from a strategy generated by the management consultants, McKinsey & Company. Writing in the Stanford Social Innovation Review this summer, a trio of McKinsey consultants suggest that, "The challenge that business leaders face is to find ways to incorporate an awareness of sociopolitical issues more explicitly into the their strategic decision-making processes." According to their research, the most worried about social issue for consumers is the environment--thus we see a lot of companies attempting to win consumer approval by emphasizing their green credentials. However, the most worried about issue among executives is off shoring/layoffs. And it's understandable why. For a company such as GE, which has multiple divisions across the world, leaving the market is a common if regrettable occurrence. Denniston argues that although it is always hard to leave a market, in the long run, it is always fairer to cease operations than it is to keep on going without making a profit, which would ultimately result in much bigger problems. However, he and many other multinationals in similar situations agree that companies have a responsibility to their workers, and also see long-term financial benefits in making sure that laid off employees are well treated. It is GE's policy to assist employees in finding new placements, offer relocation counseling services, as well as to provide financial assistance for retraining and education.

Although Westerners often claim that Japan is doing well, or is "not far behind" in terms of CSR, when it comes to closing down operations, Japan is in many ways ahead of the game in this regard, even if Japanese companies' marketing teams haven't got the message out in ways that Western media would readily understand as CSR. For example, in the US and Europe, insolvent companies (defined as companies whose liabilities exceed assets and income), are encouraged to declare bankruptcy as soon as possible and in fact, it is often illegal not to do so. However, in Japan, companies are allowed to limp along for a while to see if the situation improves, and in certain respects they are structurally encouraged to keep trading. For instance, when it comes to tax, most Japanese corporations will at some point deal with the local office, and then once they get larger, they encounter the national tax office. For those companies dealing with local offices, the charge on unpaid taxes is only 14.6% interest, which is cheaper than a consumer loan. This makes it much easier for insolvent companies to go on trading through hard times and this is considered socially responsible as it buys time for the company and employees to plan for the worst.

President of the strategy consultancy and outsourcing company Japan Third Party (JTP), Kazuaki Mori, relates the origins of Japanese consumer preference for CSR practices to Japan's agrarian social origins. "At harvest time the value of every individual harvester became easily visible and the loss of any one team member translated directly to substantial physical losses for everyone. Social values are created from the collective memory and in modern Japan this translates into a high respect for human resources. Seeing trained workers and their skill sets going to waste is something Japanese individuals and corporations are averse to." Part of the reason for people caring about each other is that one less body means one less person to bring in the harvest.

Beyond the responsibility towards employees, Japanese corporations also have an obligation to their customers. Particularly for companies who sell products that require a high level of maintenance (including the ordering of parts) and technical support, they should ensure that the customer is able to go on using their product after they have left the market. Nobody wants to ring up the helpline number on the back of their computer or toaster only to find that the number has been taken out of service and the company from whom they bought it has disappeared from the face of the earth.

The following two case studies illustrate companies that were forced to close down their operations in Japan. The different ways in which they dealt with leaving the market had significant impact on their brand image, in the minds of the Japanese consumer.

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Gateway 2000 Japan

Imagine the bustling scene at the Gateway 2000 Japan computer company's headquarters in Yokohama in early March 2001. Salesmen on the phone, 24/7 customer support staff taking calls, technicians testing circuitry, accountants doing the books. Just two months later and the scene at the same location is remarkably different--phones ring unanswered, lights are off, and the photocopier is silent. Gateway's senior management had taken an axe to the Japanese subsidiary and made over 90% of its 700 staff in Yokohama redundant in that short interval.

Gateway started their business in Japan in 1994, selling personal computers. Their timing was impeccable. As the IT boom exploded into the consumer market, Gateway's sales figures climbed and climbed: in 1996 they released their P5-200 (200mhz) Multimedia computer with a Pentium processor, 2GB hard disk and recordable CD drive at a retail price of [yen] 643,800 (almost US$6000)--and it sold well. However, when the IT bubble burst in the late 1990s things began to look less rosy. Claiming poor growth in a number of markets worldwide, Gateway pulled the plug on their Japan operations and exited the market in haste. In hindsight it is possible to say that the way Gateway left irrevocably damaged their brand and reputation.

A former senior executive at Gateway, who wished to remain anonymous, told us that when things started going bad, despite a number of offers from potential buyers, the head office were greedy and held out for a high price. Consequently, instead of being able to continue their operations to go on trading under a different name, they were forced to shut down and lose everything. Although, to their credit, they did give very generous severance packages, they didn't really attempt to find new placements for existing employees and the speed at which they collapsed their enterprise left many bewildered and angry. A trawl through Japanese online media, on sites such as www.itmedia.co.jp, reveals that there were a lot of disgruntled staff. Critically, Gateway told their staff that they would be made redundant on the same day as they announced publicly that they were leaving Japan.

However, one former Gateway employee told us that Gateway's greatest sin was actually against the consumer; they closed down much of their support services that had been very good up until they left. The lack of continued customer care meant that many users were left without any assistance for their technical difficulties and unable to get necessary spare parts. Gateway did outsource some of their service operations, but the company did a relatively poor job of keeping up standards--their promise of 24-hour telephone support was one of the first to be broken. This alienated consumers who lost trust in the brand, making Gateway's slogan of "we're your friend in business" sound hollow.

The same anonymous senior executive told us that in not making good enough provision for existing users, Gateway did untold damage to their brand name which he believes has affected their more recent attempts to re-enter the market.

In illustration of his point, Gateway's recent return to Japan with eMachines has stumbled to some extent, as a result of their previous betrayal. Not using the Gateway name has helped a great deal but online noticeboards and chat sites reveal a number of negative posts about eMachines' Japan launch. One user writes, "You don't treat your customers like that and expect to get away with it."

Agfa Japan

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Agfa-Gavaert have had their fair share of trouble in the global marketplace but their range of activities is diverse enough to have enabled them to keep doing business. A large multinational, they have divisions in photographic film, cameras, printing, imaging, and healthcare. After many years of struggling with competitors in the camera and photographic equipment industry--largely Japanese rivals--in 2001 they launched a major restructuring program across the board in order to focus on the imaging and healthcare businesses. It was at this time that Agfa decided to close down several major film and photo divisions in Japan.

Wanting to limit the fall-out from the closures damaging other divisions that they intended to continue, Agfa executives thought long-term and looked after there brand image and customer continuity by passing the discontinued business on to a trusted third party--in this case, Tokyo based outsourcing company JTP.