Solutions in the Age of Globalization:
By Professor Akira Ishikawa
Graduate School of International
Politics, Economics and Business
“The era of dynamic change is now upon us.” In this new age, consumer tastes have become evermore whimsical, demanding and diverse. Only the companies that can positively incorporate “change” as a major business and strategic ally will have the capabilities to survive the ruthlessness of this new high competition era. In practice however performing this feat is much easier said than done. How can “change” itself be made the key ingredient in the recipe of success? The core objective of this book is to find possible answers to this question through the exploration of the knowledge and insights generated by our detailed case-study analysis of 7-Eleven Japan.
As a standard bearer of revolution in logistics systems, 7-Eleven Japan has consistently been confronted with various business upheavals and uncertainties since her foundation in 1973. Indeed many upheavals have required 7-Eleven Japan to conduct some challenging reformations of her operations. Yet through these experiences, 7-Eleven Japan has clearly been able to establish a unique management concept. It has developed new management techniques and has created unique management systems that have enabled her to cope with the tumultuous changes of the time. Illustrations of these abilities are quite numerous.
It is said that the highly evaluated “item-by-item sale management system” as developed by 7-Eleven Japan was in fact the principal reason why such gigantic logistic groups such as Wall Mart in the US and Metro in Europe made the decision to tie-up with the Ito-Yokado group. It is also cited as the motivating factor as to why the usually reticent Chinese government openly granted 7-Eleven Japan a full retail license to operate in the Chinese market.
Apart from this particular management skill, 7-Eleven Japan has also been developing new epoch making methods to be discussed later such as “joint distribution” and “co-development” well ahead of her competitors. Also the existence of the “integrated information systems” must not be overlooked when talking about 7-Eleven Japan’s innovative and advanced management style. Integrated information systems play a key role not only in the strategy of all 7-Eleven Japan companies but also in the individual strategy for headquarters logistic support of individual stores and in turn the individual products on the shelves.
In this book, although we will spend many pages analyzing the integrated information systems of 7-Eleven stores, it would be a little one-sided to claim the source of the company’s strong competitive power lies exclusively in the hardware used. It is very obviously the human elements who utilize the “integrated information system” and actually run the organization helping it adapt to change. Therefore we will importantly focus on the management concepts of Hirofumi Suzuki, the charismatic owner of 7-Eleven Japan and pursue the reasons why 7-Eleven Japan has established herself as such a successful and particularly robust organization.
As there are so many valuable things to be learned from the management systems employed at 7-Eleven Japan, there already exists an absolute plethora of books praising and illustrating the company as the perfect enterprise. This is certainly not the purpose of this book. By using the business structural analysis model developed by Michael Porter, we are aiming for a very objective analysis and in addition to the excellence of the company, we will also look at some of the current problems and difficulties facing 7-Eleven Japan.
It is not only the inclinations of customers that have been rapidly changing in this industry. Several major external environmental factor transformations have occurred, such as industry deregulation and the emergence of the use of electric money. These are central issues that could potentially dominate the future of 7-Eleven Japan. How can 7-Eleven Japan cope with these changes? In November 1997, 7-Eleven Japan adopted what is termed the “Fifth integrated information system” for her stores as a measure to deal with the demands of this new era. We will clearly explain the features of this system that has allowed for such further progress and success.
So when you have finished reading this book, you will be aware of the reasons why in spite of the tough economic conditions, only 7-Eleven Japan has:
1. Achieved profits levels of over \111,000,000,000. The first time such enormous profits have been achieved among retailers
2. Exceeded her parent company in turnover and ordinary profits.
3. Managed to consistently surpass competitors for nearly 20 years since her foundation.
In addition to the above, you will get a clear idea on how the convenience store industry will continue to change and evolve in the 21st Century. If this book could provide readers with a law for success in this “time of dynamic change”, it would be a source of boundless joy for the author.
Finally, I would like to express my sincerest gratitude to Mr. Yoshio Nemoto, the publisher of Sanno University Press who has been a constant source of valuable ideas and suggestions during the entire writing process of this book.
“The information industry converting
the “change” into a “chance”
Dealing with changing times, and 7-Eleven Japan’s continuing self-reformations.
A central business creed of 7-Eleven Japan is concerned with “dealing with the change of the times.” 7-Eleven Japan by making a friend of “change” has often managed to convert the change and uncertainty into a lucrative business chance. Perhaps it is more accurate to say that 7-Eleven Japan by taking on the change of the times before others, she has been able to better adapt due to a process of conducting rapid reformations of herself. “Change and reformation” are the key words when analyzing 7-Eleven Japan. Since the establishment of operations in 1973, 7-Eleven Japan has performed several of these major reformations.
Firstly, we must look at out the distribution system of the retail industry prior to the establishment of 7-Eleven Japan. The system was dominated by the major manufacturers and by their appointed wholesale stores. These appointed wholesale stores in turn handled goods made exclusively by those certain manufacturers. This did not match the requirements of 7-Eleven Japan who needed a flexible system with the ability to deliver products rapidly and whenever necessary. Therefore, 7-Eleven Japan created a wholesale store for every major area and established a distribution system called “intensive delivery”. In this way, it became possible that products from multiple manufacturers were delivered quickly and efficiently to stores. This had the ancillary benefit of reducing the number of delivery vans required which also contributed importantly to cost savings. This intensive delivery method has since developed into a system called “joint delivery” which became even more effective. This is the major first reformation/transformation performed by 7-Eleven Japan.
In the 1970’s, 7-Eleven Japan was constantly expanding the overall numbers of stores. However in the 1980’s, a chronic situation of over-supply was apparent in the market. In addition, an increasingly diverse pattern of individualization among consumers had developed in the market and competition within the industry itself had greatly intensified. In order to cope with these changing external factors, 7-Eleven Japan pursued a core strategy of getting rid of non-selling products from the store shelves. To this particular end, 7-Eleven Japan developed the skill of “item by item management” and introduced POS (Point of Sale) technology, which was utilized as the primary tool for handling this management process. POS information was also directly used for new product development with the result that 7-Eleven Japan’s ability to develop new products made very substantial progress. The introduction of “item by item management” by 7-Eleven Japan is worthy of being described as the second major reformation/transformation. It moved the competition of the convenience store industry from a “quantitative expansion” ideal to a more “quality improvement” type concept.
In 1990, 7-Eleven Japan established the “fourth integrated information system” which connected all chain stores using ISDN lines. As the transmission of large volumes of information became possible, other new services such as that of acting as the intermediary for payment acceptance were rapidly developed one after another. This meant the store was not only a place where products were sold but also a place that offered consumers several useful services. This change is the third major reformation achieved by 7-Eleven Japan. In 1997, the “fifth integrated information system” which connects all chain stores with a multimedia function started operation. As on-line image data transmission to member stores became possible, 7-Eleven Japan could pay even closer attention to the education and information provision of her stores. One of the key features of this system is the ability it possesses to deal with the emergence of electronic money and business expansion. This fourth reformation has just begun and aims to assist 7-Eleven Japan’s fortunes well into the 21st Century. So in conclusion, it cannot be denied that 7-Eleven Japan indeed has a rich history of reformations.
Establishment of a business creed to meet social change.
In the early 1970’s, the competition among small to medium sized retailers, department stores and supermarkets in the retail industry had greatly intensified. At this particular time, after experiencing the oil shock in 1973, the Japanese economy was at the turning point of moving from a period of high economic growth to a much slower rate of growth. It is worth pondering how 7-Eleven Japan accomplished such a successful entry to the retail industry under such unfavorable economic conditions?
In 1974, the “Large Scale Retail Store Law” regulating the set-up of a large-scale retail stores and new rules on business hours was introduced. This law was primarily designed to protect existing small to medium sized retail stores. Essentially, it aimed to restrict the set-up of large-scale retail stores in prime shopping districts and other favorable locations such as train station squares. As a consequence, large-scale mass-market retail stores were forced to set up stores in less favorable locations in the outskirts of the city center and suburbs. However the small to medium sized retail stores despite being under the protection of this new law began to lose their competitiveness due to inefficiency, lack of effort and the difficulty in finding successors to take over the business when they retired. As a result of this, many such shopping districts lost their customers and set off on the road to decline. Customers were instead attracted to the bigger stores in the suburbs. At this time, Ito-Yokado Co. Ltd. looked at the possibility of setting up small sized stores that would not be in conflict with the “Large Scale Retail Store Law”. However they would be located in the prime shopping districts and other restricted key locations including train station squares. The exploitation of this legal loophole so to speak was also the reason why many other small sized chain stores in the name of convenience stores were born.
Also at the same time big social changes were taking place in Japan. The expression “workaholic” became very common at this time, as many working men and women had become bound by very long working hours. There was a large element of personal sacrifice for the benefit and loyalty of the company to which they belonged. Some workers were even transferred away from their families to a new company working locations. Other social changes included the increased amount of part-time work by housewives, and even young people tending to go to bed later than before was another factor. People’s daily schedules became increasingly busier and this left people with insufficient time to do shopping at their leisure. Convenience became the new buzzword. People tended to look for “time convenience” which would enable them to do their shopping at night. “Convenience of being just around the corner” which allowed them to do shopping near home or at least in the station square. “One stop shopping” which gave shoppers the chance to purchase all the necessary things they wanted in one place. However on the other side of the fence, the medium and small sized stores were not able to cope with these new demands from customers. It was the convenience stores who were able to bridge the gap. The concept of “offering convenience” simply could not be found in the convention retail industry. Therefore we must commend 7-Eleven Japan’s foresight in spotting this change ahead of the pack and committing to the tie-up with Southland USA in order to launch the first group of full-scale convenience stores in Japan. So we can see that the business creed of 7-Eleven Japan of a “quick response to change” was already well practiced even at the time of her establishment.
Converting “problems” into “ opportunities”
At the time of rapid economic growth in the 1960’s, supermarkets also enjoyed a period of rapid growth. However this clearly posed a large threat to the management of medium and small sized retail stores of this time. As previously described the “Large Scale Retail Store Law” was supposed to protect the medium and small retailers by enforcing very strong regulation in the setting up of large scale retail stores in the shopping districts. A key management philosophy of Ito-Yokado Co., Ltd., a parent company of 7-Eleven Japan was “co-existence and co-prosperity.” For Ito-Yokado Co., Ltd., not only “co-existence and co-prosperity” with suppliers but also “co-existence and co-prosperity” with the local community is very important.
Under the auspices of the “Large Scale Retail Store Law”, Ito-Yokado Co., Ltd. judged that it was not possible to avoid opposition from the small to medium sized retail stores simply by the setting up convenience stores. Therefore she tried to minimize the amount of stores under her direct management and deployed the strategy of the franchise system. The purpose of this strategy was to give local stores the opportunity to become convenience stores. This was considered a major contribution to the local community. Many small-sized stores lagged behind the times and have since been obliged to stop business completely or totally change their method of business. Therefore the franchise stores of 7-Eleven Japan offered good opportunities for the local stores to change to a method with a better chance of survival into the future. Generally speaking, franchised stores run by self-employed owners have much better results than stores that are run by salaried employees acting as the manager. Due to the franchise system, the burden of providing funds on the part of the headquarters could be minimized and the headquarters was able to obtain stores in the best locations. The higher ratio of franchised stores contributed to the high gains of 7-Eleven Japan. Therefore 7-Eleven Japan converted problems of “co-existence” and “co-prosperity” to a “structure with high gains.”
7-Eleven Japan becomes an “information industry”
7-Eleven Japan could be viewed as an “information industry” in two ways. The first is due to the dependence of the headquarters on her satellite income sources and the second is the information system employed throughout the entire chain. Basically 7-Eleven Japan consists of the headquarters and her member stores dotted all around the country. All member stores except those stores under direct management of HQ are franchised stores run by self-employed managers. The headquarters connect all member stores online and furnish them sales results, inventory information, new product information, weather information and general information and know-how on store management. Member stores pay 40% to 45% of their total gross margin to headquarters as a royalty for their membership. Approximately 85% of headquarters total operating profit is composed of these royalties received from member stores. Therefore it seems quite appropriate to label 7-Eleven Japan as an “information industry” as most of the income is reward for offering information and know-how.
Information and know-how is primarily transmitted from the headquarters to member stores via an integrated information system that connects all chain stores. The information systems of 7-Eleven Japan connect some 7,000-member stores and over 1,000 other business connections making it the world’s largest network in the retail industry. The headquarters make full use of POS information in order to control the strategy in the distribution of products and the strategy of individual stores. For member stores this integrated information system is an indispensable tool especially for ordering procedures. Therefore 7-Eleven Japan is an enterprise with high dependence on information. It merits being classified as a “strategic information industry” judging from the features of her management style.
Using the improvement of information technology to conduct self-reformations.
Transaction volumes in the provision of the payment acceptance service of utility bills such as electricity and gas etc amounted to nearly \300 million in 1996. Also the service range now extends to the payment acceptance of mail-order sales organized by Senjukai Co., Ltd. Although this service does not produce big profits in itself, many customers are attracted to the store by this service. In addition, new sources of business using information systems such as payment by prepaid card etc have also been extended. Since adopting the interactive POS system in 1995, it enables a direct access to a host computer from a POS register. Before the store was a place for selling goods, but now it has become the place to offer many useful services by using the store information systems. It also contributes to a diversification of service. Therefore it can be confidently stated that 7-Eleven Japan has honed the ability of converting new information technology into a immediate business opportunities.
It seems quite natural to observe the ever widening differences in the level of business performance of 7-Eleven Japan, who relentlessly continues her self-reformations, and the department stores and supermarkets, who are still having difficulties in breaking away from the conventional business structure.
An affiliated company whose business performance has exceeded her two parent companies.
7-Eleven Japan actually has two parent companies. One is Ito-Yokado Co., Ltd. and the other is Southland Inc. USA, who offered their know-how and expertise at the time 7-Eleven Japan was established. When comparing the pretax profits and sales of 7-Eleven Japan with Ito-Yokado Co., Ltd. (As per table 1-2), the pretax profit of 7-Eleven Japan added up to \88.1 Billion in Feb 1994 and in doing so, the profits actually exceeded those of her parents for the first time. Since then the business performance of 7-Eleven Japan has exceeded her parent for 4 consecutive terms. In February 1997, the pretax profit of 7-Eleven Japan broke the \100 billion barrier. Also total sales of 7-Eleven Japan chain stores reached \1,609,007,000,000 which exceeded the sales of Ito-Yokado Co., Ltd. In fact the sales figures of Ito-Yokado Co., Ltd. have been stagnant while 7-Eleven Japan has consistently shown more than satisfactory returns. It is therefore almost certain that the affiliated company will remain ahead of parent company for the foreseeable future.
In 1973, Ito-Yokado Co., Ltd. had a tie-up with Southland Inc. that was to introduce the American concept of 7-Eleven stores to Japan. In contrast to her US parent, 7-Eleven Japan has enjoyed continuous growth since her establishment, while Southland Inc. USA faced a major financial crisis in the late 1980’s. The causes of Southland’s business insolvency were due to her failures in the sectors of gasoline sales, oil business, urban development business as well as being a result of intensified competition in the convenience industry. Upon requests from Southland Inc., 7-Eleven Japan established operations in Hawaii and conducted a complete reconstruction of the Hawaii division. In fact 7-Eleven Japan gained full control over Southland Inc. in 1991 and also started the reconstruction of Southland branches in Canada and mainland USA. Thanks to 7-Eleven Japan’s management efforts of liquidating unprofitable stores and in introducing systems like the practice of item by item management, it has succeeded in returning the Southland pretax profit to the black in 1994. Thereafter 7-Eleven Japan reconstruction schemes are satisfactorily proceeding. This case represents not only “children” who have outgrown “parents” but also “children” who have saved the life of “parents”. Therefore this attracts considerable attention as an excellent example of how the management know-how of 7-Eleven Japan could be used in the wider business world.
Definition of a convenience chain store.
There is no one fixed definition of a convenience store. Nikkei Ryuutsuu Shinbun categorizes chains satisfying the next three conditions as a convenience store.
1. The sales composition ratio of perishable foods should be less than 30% of total sales.
2. Business hours per day should be more than 16 hours.
3. The majority of the department area should be less than 200 square meters.
Another definition comes from the MCR (Manufacturer Convenience Researcher) who specializes in researching convenience chains defines stores satisfying the following standards as proper convenience stores.
1. Retail stores with department area of more than 50 square meters but smaller than 230 square meters.
2. Shares of counter sales for general foods (including liquor and confectioneries) should be more than 50% of total sales.
3. Shares of counter sales of liquor, perishable foods, confectioneries, FF (Fast food), lunch box, daily dishes and products other than foods should be less than 60% of total sales.
4. Business operations should be more than 14 hours a day and 340 days a year.
5. Store should handle more than 1,500 items of convenience products and services.
6. The lay-out of the store should be the convenience style provided with unique energy savings, friendly atmosphere and measures for crime prevention.
7. There is no necessity for an individual to be a member of a chain store group or to be tied up with another business to fit in with this definition of a convenience store.
8. Combined type convenience connected with a different category of business would be collectively regarded as a convenience store, provided it corresponds to the following conditions. However, no stores that have more than 50 square meters for convenience section will be included in the definition.
A. Department area of different categories of business (including eat-in corner) should be less than 50% of the entire department area.
B. Comings and goings between the department areas must be freely allowed in the store.
C. Regardless of decentralization of the cash register, the final accounting business should be unified.
Analyzing the robustness of 7-Eleven Japan according to personality and organization
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 about Hirofumi Suzuki, who is virtually a founder of 7 Eleven Japan, and still an acting commander of the company as the chairman. Suzuki graduated from Chuo University and worked at the 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 her 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 the 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 ideal management is quick response to change under any circumstances.
2.It is important to have the ability to change your way of thinking 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 opportunity and thus to break with practical wisdom.
5.Successful experience in the past will not be of any help in the present days when the abolishment of the status–quo is required.
6.In business it is necessary to think what the customer is looking for and what we must do now, without even mentioning the response to the change.
7.At the time when so much responding to change is required, things could not change without top-down quick decisions.
8.A leader should be self-aware and is be able to objectively view his own conduct.
9.Forcasting 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 on the buyer’s market, 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 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 customer 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 the times of diversification, it is important to narrow down the range to the most sellable products.
5.Inclinations in consumption are moving to times of value-oriented from the price-oriented.
6.Without pursuing quality, the attainment of quantitative results cannot be expected.
Suzuki attaches great importance on the utilization of external resources rather than management resources such as employee, facilities, and money. In addition he considers 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 that only the network types with a partial the capital participation or no capital relationship at all.
3. Powers should not be distributed but should be concentrated.
4. It should be remembered that retailing business is basically a domestic business.
5.The way of thinking that everything should follow after the USA 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 in the present time is to build up strategy based on new ways of thinking. Management should not be driven by conventional operation.
[This collection of his sayings were picked up from the books and magazines listed in the reference literature]
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 communications to connect stores and the headquarters. 7-Eleven Japan posts operation field counselors at the rate of one person to seven to eight of her 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 head Directory Manager (DM). The Zone Manager (ZM) commanding seven to eight DMs is posted at headquarters. Every Monday the manager meeting is attended by HQ management, the directory manager, the zone manager and every Tuesday the OFC meeting is held with attendance of the HQ management and the OFC 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 OFC to help build up a coherent strategy. The OFC in turn quickly pass on HQ policy to member stores. The OFC conduct ceaseless efforts in providing guidance to member stores on how to make each store more attractive to customers.
7-Eleven Japan hold two management meetings every week as she attaches great importance and value to the direct person to person communication method. In fact estimates are that she spends over 20 billion yen per year on these meetings. Without careful personal guidance, the information system alone is not enough to generate a sense of unity within the organization. 7-Eleven Japan recognizes that she would not be able conduct a smooth administration of the organization with just this type of information, no matter how excellent the information system. 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, such a strong technological information–oriented organization, many people would assume that she intends to install an automatic ordering system in each store to make the system even more efficient. However 7-Eleven Japan strongly denies this idea. So what is the 7-Eleven Japan 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 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 used in the fourth integrated information system are key tools for fulfilling this enhanced accurate ordering goal. As GOT is a handy (A4 sized) 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 can’t tell 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 customer’s 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 area 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 her chain stores or the introduction 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 her order placing 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 her business establishment. Convenience chains consist of stores under direct management (called training stores) of the headquarters and franchised stores. 7-Eleven Japan focused mainly on the opening of franchised stores in order to avoid misunderstanding with local retailers.
By 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 method 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 can not make a conclusive judgment as to whether franchised stores are better than stores under direct management, the business performance of franchised stores in general are better than stores under direct management. Since store managers of franchised 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 franchised stores contribute to higher daily sales amount per store in average.
In addition, the composition of 7-Eleven Japan’s stores is characterized by her high ratio of ex-liquor store that converted their business into convenience stores. As selling liquor is possible in these stores, it is natural this adds to 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 profits 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 crucially also from the concept of “co-existence and co-prosperity”. This concept made it possible to expand the number of franchised 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 a positive business use of external sources. For example when developing food products, she helped 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 merchandise”. 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 connect those 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 her internal organization from suffering stiffness and over-growth by thoroughly utilizing external-sources as if they were internal. Enjoying combined synergistic power through her business connections. Her 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 organizational chart
The organization of the HQ of 7-Eleven Japan consists of major areas such as: Finance, General Affairs, the Sales Administration Department, Recruitment, Operations, Products, Logistic management, Facilities Construction, Accounting, Information System Department, Secretarial Section, Audit Section, Owner Consulting Section, and the Planning and Development Section. In the headquarters department of Product Development, the 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.
Currently customer preferences are changing more rapidly than ever, 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?
If 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 her 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 her advantageous position as regards the competition.
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 her organizational chart includes “information systems” and “manager meetings” help to connect departments organically and enhance the management efficiency of the whole organization.
The fifth integrated information system connecting chain stores utilizing satellite communications.
The general concept of the fifth integrated Information system
7-Eleven Japan introduced the fifth integrated information system in November 1997. This system was jointly developed by 12 companies such as Nomura Souken, NEC, Microsoft, and others in order to network 50,300 terminals of the headquarters, member stores, regional office, and customers, which comprise the following components.
1. Store system
2. System for order placement, distribution, and customer request
3. Network system
4. Group wear system
5. Transmission system of multimedia information
6. POS information system
7. POS store register system
All of these systems were operative by the summer of 1999. Total investment costs will amount to 60 billion yen and it will be the largest network of the distribution industry in the world. The biggest feature of this system is the introduction of satellite communications. Information from headquarters to stores and regional offices is transmitted by satellite links and information from stores to regional offices is transmitted by ISDN links. Those transmission speeds are 45 times quicker in comparison with the previous speed and consequently communication costs will be reduced by approx. 20%. An antenna for the game software demonstration machine produced by Dig Cube Corp is set up in the store and is also used as a reception antenna as well. Information received from the headquarters is indicated on the display of store controller or GTO.
Order information from the store and the POS information are sent to the Nomura Souken, Yokohama Center via ISDN links. The server for orders and the server for collecting and distribution information will be also set up at the Osaka center for the preparation for troubles and disasters. Portable personal computers are available for operation field counselor (OFC), this enables the regional offices and stores to be able to access information directly from the headquarters.
Due to the increase in the numbers of new stores, the business performance of the headquarters of 7-Eleven Japan has been increasing. However the sales performances of existing stores have been growing slowly. The biggest reason for introducing this new system is to provide an effective guidance system to stores. To fulfill this purpose, the transmission of multimedia information such as characters, still pictures, animations, and sound in order to create "the store with highly sellable merchandise and services" plays a very important role. In addition it is a system able to respond to the "the times of the change" such as deregulation and electronic money.
Utilizing of “Animation” “Still Pictures” and “Sound” for the construction of an attractive store with heavy selling items and services.
TV commercials can have a big impact on the sale of merchandise. Until the new technological development brought by the 5th Information system, customers could not see commercials broadcast in the store. The new system was provided with a function to enable the display TV commercials with sound. At the same time 7-Eleven Japan urged chain stores to sell on a priority basis the specific products that receive strong support from the TV commercials. 7-Eleven Japan has received much favorable attention as a pioneer this new skill of "sales closely united with TV commercials".
The new information system can also furnish chain stores with on-screen images of a successful product display. Therefore it is possible to see by pictures of how products should be best displayed in the store. Previously, it was very difficult to communicate accurately the most attractive manner of display explaining in characters only. Thus, it has become easier to make more possible the ideal concept of "the attractive store with heavy selling items and services".
Sales of merchandise are strongly influenced by the weather. Therefore, the new information system is also provided with a function for making visual weather information displays. In addition, not only the weather information of the surrounding area is included but also weather information covering wider areas. Due to this, 7-Eleven Japan has often succeeded in attracting people who are planning to go to holiday resorts as they come to check the weather.
Using this new system for smooth communications with employees
The new system is also helpful as a communication tool between the store manager and employees. As the convenience store opens 24 hours, it very often happens that workers and managers do not meet each other due to differing shift times. In order to avoid this communication gap, a voice-input system is incorporated in the new system, so that all employees who come to the store can hear the store manager’s instruction by voice input. As part-timers with less experience also hear the store manager’s instruction by voice, it will be helpful for making order placements more accurate. Input of hand-written letters, illustrations are also possible, so that communication using both eyes and ears becomes possible using this system.
This new system can be used as a tool for communications from employees to the store manager, from the OFC to the store manager and from employee to employee. In general information sharing is thus made more effective and efficient in terms of store management. The fifth integrated information systems represents 7-Eleven Japan’s strong will to construct “an attractive store with heavy selling goods and services”.
Utilization of multimedia information for sales promotion.
At every chain store of 7-Eleven Japan, approx. 70% of merchandise will be replaced with new ones within a year. Since the preference of customers changes rapidly, the life cycle of merchandise is getting shorter year by year. Therefore new products come on the shelf one after another and poor selling items are quickly removed. Until the new information system was introduced, 7-Eleven Japan had distributed material on new merchandise in the form of printed matter to each member store. However, it takes a long time and means substantial costs to prepare and distribute the materials of new products that total over 2,000 items a year. There are also many unsuccessful products that are removed from the shelf after only two weeks. Therefore 7-Eleven Japan cannot expect this to be an effective way of sales promotion when it requires a week to prepare and distribute the material. The fifth integrated information system enables the online transmission of material as image information to the store all at once. It shortens the lead-time drastically and cut downs the cost of paper and distribution. The system with this function of sending multimedia information such as images will be indispensable for sales promotion during "the times of change".
An elaborate marketing plan using a “data warehouse”
The "POS information system" component of the fifth integrated information system is attracting much attention and was operative from spring 1998. A new POS information system called "data warehouse" has the capability to accumulate information of item-by-item management for about 400 days in the 6 terabyte of its parallel-processing super computer.
Before this system was developed, the conventional system was designed to grasp "what, how, when, and to whom merchandise was sold". Now this new system can analyze "what sorts of products are sold together". This method to further grasp the customer's shopping trends is called a "basket analysis" in the sense that the store can grasp the content of a customer's shopping basket. By utilizing this basket analysis, it is possible to develop an elaborate marketing design.
Further developments include, "data mining skills" to search for specific and necessary information from the huge mountain of information, and "push skills" which are used to update automatically information from the headquarters. 7-Eleven Japan aims at making order placement more accurate way by the further substantiation of POS information.
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 Honoris Causa 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. Dr.
Ishikawa is a member of the Editorial Advisory Board of BWW Publishers and the
BWW Society, and is a frequent contributor to this Journal
(see "The Intellectual Olympics", November-December
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