Management Science:

 

Analyzing the Robustness of 7-Eleven Japan

According to Personality and Organization

 

By Professor Akira Ishikawa

Graduate School of International Politics, Economics and Business
Aoyama Gakuin University

The following paper is the second of a series of chapters from Dr. Ishikawa's highly acclaimed treatise on management, "The Miracle of Seven-Eleven Japan" which will be featured in the Journal over the next several issues (to review the previous chapter, see "The Information Industry: Converting the 'Change' into a 'Chance'" in the November-December 2002 issue of this Journal).  Professor Ishikawa received his Ph.D. from the Graduate School of Business Administration of the University of Texas at Austin in 1972, and undertook his postdoctoral studies at the Massachusetts Institute of Technology in 1973. He was awarded a Cultural Doctorate from the University of the World in 1985, and a Doctor Honors Causal in recognition of his outstanding accomplishments and distinguished service to mankind from the International Institute for Advanced Studies in Systems Research and Cybernetics in 1999. Professor Ishikawa is a member of the BWW Editorial Advisory Board and is the driving force behind The Intellectual Olympics, a feature article on which appeared in the September-October 2001 issue of this Journal.

 

 

The Management Philosophy of Hirofumi Suzuki, the Virtual Founder of 7-Eleven Japan

 

When we talk about the “personality” of 7-Eleven Japan, we should not forget Hirofumi Suzuki, who is virtually a founder of 7-Eleven Japan, and still an acting commander of the company as its Chairman. Suzuki graduated from Chuo University and worked at

Tohan Corp. for a while before taking up employment at Ito-Yokado Co., Ltd. in 1963. He was assigned to the management department despite not having any sales experience. This is perhaps the reason why his career is seen as quite unique. Suzuki negotiated with

Southland Ltd., USA to realize the tie-up with Ito-Yokado and then took the lead in the management of 7-Eleven Japan from its establishment to the present day.

 

We will find the essence of the management philosophy of 7-Eleven Japan in a collection of his sayings. He repeatedly says that the basis of the management is a “response to change” and “self-reformation”. It is very interesting that he insists upon a top-down

decision-making system, while the efficiency of a flat organization is strongly advocated.

 

1. My management idea is quick response to change under any circumstances.

 

2. It is important to have the ability to change your way of thinking in order to respond to change.

 

3. Only through self-reformation can stores and companies conduct their business successfully and in the surest way.

 

4. To create new business it is important to succeed where others have given up because of lack of business opportunities and thus to break with practical wisdom.

 

5. Successful experience in the past will not be of any help in the present when the abolishment of the status quo is required.

 

6. In business it is necessary to think of what the customer is looking for and what we must do now, without even mentioning the response to change.

 

7. At the time when so much response to change is required, things could not change without top-down quick decisions.

 

8. A leader should be self-aware and be able to objectively view his or her own conduct.

 

9. Forecasting years ahead and making plans based on it only makes one inflexible to change.

 

Suzuki considers the concept of a correct order placement based on item-by-item management should be the foundation of the retail business, and understands that POS is the tool to fulfill this function.

 

1. For the retail business, the most significant thing is to place orders with self-direction.

 

2. It is always required to formulate a hypothesis, carry out, and inspect the outcome.

 

3. POS is simply a tool for inspecting the hypothesis formulated.

 

4. Grasping trends in the sales of single items and inspection with deep analysis of the relation of cause and effect and the background must be carried out.

 

5. Measures on how to avoid the loss of business opportunities will be directly linked to the business performance.

 

 

Suzuki considers the development of differentiation from others, even in the buyer’s market, which eliminates unnecessary competition. In addition, he poses a question to the idea of “increasing the assortment of products in compliance with the diversification of consumption” and insists that the narrowing down of products with regard to value is very important.

 

1. In a buyer’s market it is necessary to operate the business from a customer’s standpoint.

 

2. It is very important to be near the customers and feel what they need to be able to fulfill self-differentiation.

 

3. Much diversification was the product of prejudice by the selfish imagination of manufacturers and sellers.

 

4. In times of diversification, it is important to narrow down the range to the most sellable products.

 

5. Inclinations in consumption trends are moving to value-oriented products from price-oriented ones.

 

6. Without pursuing quality, the attainment of quantitative results cannot be expected.

 

Suzuki attaches great importance to the utilization of external resources rather than management resources such as employees, facilities, and money. In addition, he considers that management know-how of retail business could not be used unless it is developed in accordance with the climate of the country.

 

It is quite interesting to see the sharp contrast in the stance between Lawson, who are developing chains all over Japan and that of Suzuki, who believes in the dominant strategy.

 

1. It is sometimes better and more effective not to hold ownership.

 

2. The Japanese keiretsu does not necessarily mean the predominance of ownership and holdings but it is very often the case of only the network types with a partial capital participation or no capital relationship at all.

 

3. Power should not be distributed but should be concentrated.

 

4. It should be remembered that the retail business is basically a domestic business.

 

5. The way of thinking that everything should follow the U.S. model has been prevailing in the distribution industry and does not make any sense.

 

6. Invest positively in information.

 

7. Management should be carried out in harmony with balance and adjustment without prejudice.

 

8. What is most required at the present time is to build up a strategy based on new ways of thinking. Management should not be driven by conventional operations.

 

(This collection of his quotes were extracted from the books and magazines listed in the Bibliography.)

 

 

Another Information Route — Direct Communications

 

We have repeatedly discussed the superiority of the information system of 7-Eleven Japan in this book. However, the information system is not the only tool of communication to connect the stores and headquarters. 7-Eleven Japan posts operation field counselors at the rate of 1 to 7 persons to eight of its member stores. The OFC

notifies stores of the headquarters’ policy and is responsible for playing a very important role in reporting market and member stores’ trends back to the headquarters.

 

The OFC belongs to the district management office with the District Manager (DM) as the head. The Zone Manager (ZM) commanding seven to eight DMs is posted at the headquarters.

 

Every Monday the managerial meeting is attended by HQ management, the directory managers, the zone managers and every Tuesday the OFC meeting is held with attendance of the HQ management and the OFCs from all over Japan. At the OFC meeting, the headquarters policy, new product information, and guidance plans for stores are discussed. Successful cases are reported as all participants share information from the headquarters and stores. Headquarters use the information collected directly from the

OFCs to help build up a coherent strategy. The OFCs in turn quickly pass on HQ policy to member stores. The OFCs conduct ceaseless efforts in providing guidance to member stores on how to make each store more attractive to customers.

 

7-Eleven Japan holds two management meetings every week as it attaches great importance and value to the direct person-to-person communication method. In fact, estimates are that it spends over 20 billion yen per year on these meetings. Without careful personal guidance, the information system alone is not enough to generate

 

 

 

 

 

Table 5-1. Information route by a “person” of 7-Eleven Japan

 

 

 

 

a sense of unity within the organization. 7-Eleven Japan recognizes that it would not be able to conduct a smooth administration of the organization with just this type of information, no matter how excellent the information systems. Therefore, during times of rapid change, it is possible to respond in an appropriate and timely way when combining knowledge provided by the “information system” and from “communication with people”.

 

Basic Concept of Independent Order Placement

 

When we look at 7-Eleven Japan which is such a strong technological information-oriented organization, many people would assume that it would install an automatic ordering system in each store to make the system even more efficient. However, 7-Eleven Japan strongly rejected this idea. So what is 7-Eleven Japan’s future concept of the order placement process? Needless to say, a key factor leading to growth in sales and profits concerns the right assortment of hot-selling products in the store. Therefore, 7-Eleven Japan considers order placement the most important area in retailing. The first thing member stores must do is to formulate a “hypothesis” of which product, how many and at what time, they should sell the following day? Based on this hypothesis, they fulfill their order placement. Thereafter, they compare actual sales performance with their hypothesis, in order to “inspect” whether their order has been accurate or not. So, 7-Eleven Japan’s basic concept of order placement is to help enhance the accuracy of order placement by repeating a process of “hypothesis, fulfillment, and inspection”.

 

Graphic order terminals (GOT) used in the fourth integrated information system are key tools for fulfilling this enhanced accurate ordering goal. As GOT is a handy (A4-size) type terminal, the operator can carry order input work at the place where products are shelved. It is very convenient for operators as they can also see the various POS data such as inventory information, new merchandise information and weather information on the screen of the GOT. However, POS information is past data and it cannot forecast definitely how many and what product would be sellable the next day. Therefore, member store staff need to carry out the management of order placement. It is a “person”, not a machine, that can best judge and formulate this self-hypothesis. Obviously customers’ needs vary across different member stores. Also member stores, besides the general POS information, can also gather the latest information on events in their surrounding areas and the trends of local rival stores. They utilize this highly relevant information as a useful reference in order placement. 7-Eleven Japan is not interested in issues such as the similar assortment of merchandise for all its chain stores or the introduction of an automatic ordering system. No matter how technically excellent the POS and GOT systems are, they are simply non-reasoning machines. Under steadily changing external surroundings, the decision-making ability of “people” is still the most valued. Therefore 7-Eleven Japan will continue to build its order placement system based on this concept.

 

Idea of “Co-existence and Co-prosperity” Brings About Robustness

 

“Co-existence and co-prosperity” with other small- and medium-sized local retailers was one of the central concepts of 7-Eleven Japan during the time of its business establishment. Convenience chains consist of stores under direct management (called training stores) of the headquarters and franchise stores. 7-Eleven Japan focused mainly on the opening of franchise stores in order to avoid misunderstanding with local retailers.

 

Via this method, 7-Eleven Japan could avoid friction with medium- and small-sized retailers and the opening of new stores was done without causing any major problems. Thus, stores under the franchise system played a major role as a means for small-sized retail stores with poor future prospects in their own business to change their style of business. Stores under the direct management of 7-Eleven Japan make up only 3.4% (231 stores) out of the total number of stores (6,922 stores). Although we cannot make a conclusive judgment as to whether franchise stores are better than stores under direct management, the business performance of franchise stores in general are better than stores under direct management. Since store managers of franchise store are self-employed people who have invested in the store at their own risk, no failure in the business is allowable. Also self-employed store managers often have an entrepreneurial spirit with a strong motivation towards the business. Thus, the higher ratio of franchise stores contribute to higher daily sales amount per store in average.

 

In addition, the composition of 7-Eleven Japan’s stores is characterized by its high ratio of ex-liquor store which converted their business into convenience stores. As selling liquor is possible in these stores, it is natural this adds to the total sales figures. Utilizing this extra profit as a motivating factor, 7-Eleven Japan had been proactively converting liquor stores with good locations into convenience stores prior to competitors. It could be said that generally 7-Eleven Japan is a chain organization composed of stores that produce higher profit margins. The robustness of 7-Eleven Japan does not only originate from the information system, the excellent capability of new product development or the distribution system, but also crucially from the concept of “co-existence and co-prosperity”.

 

This concept made it possible to expand the number of franchise stores and create stores that could handle liquor. It clearly shows that the most important elements in being a robust company comprise the “human” and “organization” elements.

 

Outsourcing Prevents Organization Stiffness

 

7-Eleven Japan has made positive business use of external sources. For example, when developing food products, it helped to create the “Japan Delicatessen Foods Cooperative Association” for the medium- and small-sized producers. With major manufacturers, 7-Eleven Japan has been positively developing “co-development” and “team merchandising”. With vendors, 7-Eleven Japan has organized the “joint delivery” system. Almost all stores are franchised entities run by self-employed persons. Many diverse business connections are united together to share their fate as one of the members of the 7-Eleven Japan family. Crucially the 7-Eleven Japan information system is the tool to link these business connections.

 

There are two main columns of power in this system. One being the software and information system and the other is the hardware which supports the “7-Eleven Japan’s family”. Stiffness still occurs very often when the organization expands. However, 7-Eleven Japan, by using skills of “outsourcing” has prevented its internal organization from suffering from stiffness and over-growth by thoroughly utilizing external sources as if they were internal. Enjoying combined synergistic power through its business connections, its organizational strategy, skillfully taking in external sources in accordance with changes in circumstances, has produced an excellent ability to cope with changes.

 

Sources of Strength Hidden in the Organization Chart

 

The organization of 7-Eleven Japan HQ consists of major areas such as: Finance, General Affairs, Sales Administration, Recruitment, Operations, Products, Logistic Management, Facilities Construction, Accounting, Information System, Secretarial Section, Audit Section, Owner Consulting Section, and the Planning and Development Section. In the headquarters department of Product Development, a section of “information management” is set up with the purpose of collecting information on product development in the areas of “team merchandise” etc. The Development Promotion Department in the Headquarters of Logistic Development takes care of the development of original products.

 

 

Table 5-2. Organization chart of 7-Eleven Japan

 

 

 

 

 

Currently, customer preferences are changing more rapidly than ever and the life span of products is getting shorter. The two departments mentioned above are very important in the search for new products to “respond to changes”. Of course many competitors have similar sections and people in charge, so it is not necessarily correct that only 7-Eleven Japan has this particular structure.

 

However, within this structure of 7-Eleven Japan is perhaps where some secrets are hidden?

 

The strength of 7-Eleven Japan does not exist in the organizational structure itself. It could be assumed that the source of this robustness resides in its endless efforts to develop “innovative business processes” such as “consistent production, distribution and sales systems”, “team merchandising” and “joint delivery”. The innovation of processes creates differentiation from others and builds up its advantageous position among its competitors. 7-Eleven Japan lavishly invests in the construction of the infrastructure supporting “innovative business processes”. Infrastructure both of the hardware and software type that is invisible on its organizational chart include “information systems” and “management meetings” help to connect departments organically and enhance the management efficiency of the whole organization.

 

Dr. Ishikawa's book will be continued in the upcoming March-April 2003 issue. Readers wishing to acquire copies of Dr. Ishikawa's complete book, The Miracle of Seven-Eleven Japan, may contact local bookstores or order direct from World Scientific Publishing Co., Inc., 1060 Main St., River Edge, NJ 07661; (800) 227-7562; Fax: (888) 977-2665; sales@wspc.com. More details regarding Dr. Ishikawa's book may be obtained via: http://www.wspc.com.sg/books/eastasianstudies/4981.html