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Interviews with experts and opinion leaders from our research network
Achieving higher growth and innovation levels are challenges that all companies face in the modern marketplace. The new-value creating companies are those that can (1) enhance the organic growth of existing products, (2) gain further market share, (3) enter new market segments, (4) develop completely new markets, and (5) shift resources to markets where the growth is naturally higher. The key to doing this is creating a culture of innovation. In this issue we ask Sir George Buckley, Outside Director of Hitachi, Ltd., and Chairman of Arle Capital Partners Limited (UK), about how to create a culture of growth and innovation.
He graduated with a Ph.D. in Engineering from the University of Huddersfield in West Yorkshire, UK. Sir George joined 3M Company as Chairman of the Board, President and Chief Executive Officer in December 2005. As the top executive of this global manufacturer, he led the company in achieving 11% growth in sales to $29.6 billion in 2012, and achieved 20.9% operating margin for the company. He believes his principal contribution at 3M was in revitalizing growth and innovation. After his retirement from 3M in February 2012, Sir George joined the Board of Directors of Hitachi where he is actively involved in the development of new growth strategies.
Mr. Kawamura：Ten months have passed since you were appointed as a director of Hitachi last June. First of all, could you please tell me about your impression of Hitachi when you first joined our board of directors? Is there any change in your impression of the company after attending the board of directors’ meetings? How do you feel about the similarities and differences between the two companies?
Dr. Buckley：First, to me Hitachi is without question, a world-class engineering company. In my view it is one of the great iconic companies in the world. I have known the company at a distance throughout my career and I was always impressed by the technology that Hitachi has in its possession and the quality of its products. So when I was offered the opportunity to join the board of the company, I was full of anticipation at serving this great company. I think it is a great honor for me and a very positive step in my career. Next, how has my opinion changed in the intervening months? The folklore in the non-Japanese world is that Japanese company Boards are very formal and sometimes avoid difficult topics in their communication. In an American company, the board members are often very involved in detailed questioning about the strategy and operations of a company and they are very used to digging deep into the topics which interest them. So initially, I wasn’t very sure as to how this more enquiring approach would work in a Japanese company. Due to the formality and wonderful respectfulness of the Japanese culture, sometimes a question, if not asked sensitively, can be viewed as negative. But my fear of this turned out to be misplaced and I have been very pleasantly surprised in two or three different respects. First, your personal willingness as Chairman to allow detailed questions about the company’s results and its strategy is excellent. This is very similar to what we see on an American company board. Second, there is deep engagement and questioning from the Japanese board members and that is not something which I had expected. I imagined that they would be much gentler with the company, but it isn’t that way at all. They are very firm and sometimes quite tough. So I’m very pleased to observe that my Japanese board colleagues do not put off asking quite difficult questions. They ask excellent detailed questions and it is very impressive to see. It is much more like an American board than what I imagined it would be. So I am very encouraged by this.
Mr. Kawamura：Japanese board meetings are very formal and we keep the time. In your case, it may take a very long time to discuss detailed matters.
Dr. Buckley：American boards obviously have a deadline too, but they don’t seem to mind if the board meeting goes a little longer than the allotted time if it means getting a proper understanding of an important issue. They are very interested in digging into the topics thoroughly. But I don’t think at Hitachi that we’ve lost much this way. We have clearly found a good balance between the two extremes of enough time and enough discipline. There is, however, one example of a difference between the Hitachi board and a typical American company board that I’ve come across so far. It was when discussing the future of the power generation business. When it was presented to the board, it was as if the decision had already been made by the management. A fait accompli if you like. In the USA, there would have been a much longer period of discussion between the company and the Board of Directors before a decision was made. There would have been a several meetings to discuss the competitive and economic challenges which that business faced. So the company’s management would have sought the board’s advice on this topic over several meetings and gradually built support. Before taking a decision, we would have discussed in great detail the strategic choices which were open to us. For example, we would have explored the economic and competitive challenges which the business faced, complemented by an analysis of the pricing environment, their product quality or technology problems, liability problems etc. We would have discussed in detail ways to improve the business and the quality of leadership we had in that business. There would have been a gradual build-up of support from the board for a particular direction before a final decision was taken. Then the board, along with the company, would likely have come to the conclusion of finding a strategic partner in order to make ourselves stronger. But in this case, it happened the other way around at Hitachi. Because of the urgency of the matter, it was almost as if the company had already made a decision beforehand and only informed the board, instead of involving the board in the decision itself. Looking back, I think it is very likely that we would have reached the same conclusion as the company’s management anyway. But the process would have been very different, with the board being much more involved in the ultimate decision making. But overall I think our board runs very well and, on balance, my thoughts about our decision-making processes are quite positive. There is another difference between an American company and a Japanese company, which is a cultural one. In an American company the CEO is expected to be much more forceful than they would be in Japan and perhaps sometimes even becoming visibly impatient. It’s a much more gentle approach than this in Japan and it is much more about consensus building than what we would see in America. But it is clear that there are merits in both approaches. Especially in a crisis situation, the decisions cannot always be popular or even consensus oriented, regardless of which culture we are speaking about. So overall, my impression is very positive and I am very glad to have had the chance to join the Hitachi board. I have also made good friends on the board. Your idea of involving people from outside of Japan on the board will gradually bring a different perspective and richness to the discussion and decision making that perhaps we didn’t have before.
Mr. Kawamura：We would like to take a similar approach towards executive meetings, but it’s not easy. We would like to change the system, but it takes time.
Dr. Buckley：In my former position, every quarter, I would review every 3M’s businesses in detail. We would spend four or five days, beginning early in the morning at 6 or 7 o’clock and continuing well into the evening reviewing the performance of each business. This would not only include a review of the financial performance, but also the progress a particular division is making toward achieving its five-year plan and strategic goals. This would include new product development, their changing manufacturing footprint, target acquisitions and an analysis of the external economic conditions and the progress of our competitors in the marketplace, small or large. It would be a very free and comprehensive discussion and analysis as we attempt to drive the company to better performance.
Mr. Kawamura：That’s almost the same with Hitachi. We take four or five days to review our businesses.
Dr. Buckley：So it’s very similar. That’s good. So just to emphasize, we would not only review the short-term financials of the business but we would be very interested in the long-term future of the business and making sure we drove towards that. So these reviews were always a very interesting mix of short-term and long-term issues. Evidently it seems that Hitachi follows a very similar thought process to my old company. While I am not privy to the detailed internal workings of Hitachi, it appears that the right things are being done. In our case at 3M, if the performance of the division we were reviewing was declining, we would have a deep sense of urgency to reverse that trend quickly and we would expect absolute commitment from the local management to engage in that mission. Nothing half-hearted would be allowed and discussions would be very direct. If the management did not make the improvements we need quickly, they would often be replaced relatively soon. It is always important to be calm and thoughtful, but also passionate. But I think it’s certain that in the Western world we would be much more aggressive and less patient with weak performance of a business.
Mr. Kawamura：You may say Japanese people are perhaps too calm, not aggressive. Is it a very big difference?
Dr. Buckley：It’s a big and important difference in the two cultures. But I am not a believer in being overly aggressive, rather very passionate. We must always be respectful of each other even in difficult times. At 3M, there are three things which are very important in their corporate culture. First, although we might openly disagree with each other, we should never be disagreeable. So at the individual level, interchanges are almost always very respectful though they can also be very intense. Second, it’s a contest of ideas not of people and we’re not afraid to explore all the ideas, regardless of where or who they come from. It’s not about who is right, it’s about what is right. As a team, we would search for what is right. So it doesn’t matter at 3M whose idea it was and there is no loss of dignity or authority in the team if the best idea comes from a more junior person than you. Thirdly, there is a deep personal expectation of and commitment to the delivery of good results. Throughout our lives each of us builds upon our own ideas with those we get from others or those we see or experience in other industries. But there is definite relentlessness in an American company about expecting progress and the management team would probably be much less patient with circumstances than you are in Japan. One of the negative byproducts of a mainly consensus culture is that everybody seems to be in charge. But when everybody is in charge, in reality, nobody is in charge. What can happen is that it weakens the resolve to find a solution to a problem quickly and the deep sense of personal responsibility needed to deliver positive financial numbers can be lost. I could be wrong, but that’s the impression I have formed. So regardless, we need a much deeper sense of urgency to the improvements we need to make. There is not a moment to lose.
Mr. Kawamura： 3M has achieved 20% or higher operating profit in all business segments for many years. Could you explain to me the background to achieving high-profitable management?
Dr. Buckley： In 3M, the scientists and development engineers work directly for the business units and most of them are not centralized. They come to the same management review meetings we spoke about earlier as the operating people do. They can witness firsthand the financial performance of the company and they identify with it very closely. They can also see how various product lines are being successful or perhaps not being successful and where technology or process improvement might be used to fix the underlying problem. So they are much more closely involved in the day-to-day management of the business than I perceive is the case at Hitachi. At 3M, no technology is considered successful by a scientist unless it can meet the test of achieving high profitability. So 3M’s Chief Technology Officer and the head of R&D for that business come to the business review meetings. In almost every meeting, there is a short presentation on new technology ideas and new product ideas, plus a review of the marketing plan for upcoming product launches. As a scientist or engineer, you get a full and up to date picture of the flow of business right from the birth of ideas through to procurement, on manufacturing, sales and distribution, plus the financial issues and the launch of new products. Plus of course, we discuss topical customer satisfaction or service challenges. The scientists and engineers see this on a regular basis and feel part of it. Thus, over a long period of time, the importance of good profits to the long term sustainability of R&D investment is gradually understood and internalized by the engineers and scientists. They feel as connected to it as the business oriented people. So it’s not just about getting better technology at 3M, but about getting a technology that can sustain an acceptable profit level and therefore enhance the competitiveness of the company. I have said many times in speeches that “prosperity for a company must come before job security, because it is the prosperity which brings job security, not the other way around.” This is a psychological idea that has been in place at 3M for many years, generations even. But we do many things well at Hitachi; even if there are some things we can improve on and learn from others. There are so many good things in the Japanese business culture which I admire. Among them are the attention to detail, the discipline, the mutual respectfulness and many others. As long as we can add a deep sense of urgency and personal responsibility for the success of the company to these other wonderful qualities, we will have achieved a great balance.
Mr. Kawamura： Then the scientists are interested in profit as well?
Dr. Buckley：Absolutely, because they know the best way to get more investment money for product research and development is to have more profit. I suspect that this is a big cultural difference between Hitachi and 3M.
Mr. Kawamura： In our case, research and development and production are usually different. There is a big gap between the two. How does 3M bridge the gap?
Dr. Buckley： FF1AThere are some structural and some cultural answers to this question. The structural answer is that, apart from the business oriented laboratories we spoke of earlier, there are two laboratories at the center of 3M. This is perhaps similar to Hitachi. The first is a basic science laboratory and the second is a process laboratory. 3M sees the invention of ideas and manufacturing processes as a mutually reinforcing pair. About 10% of the company’s total R&D staff is employed in these two central laboratories and they are charged with protecting the long-term technological future of the company. But they are also deeply connected with the balance of the research and business community too. These are the labs where most basic new technologies and processes are invented. But the invention of these ideas is not random or accidental. There is a governing body called the Central Technical Operating Committee or CTOC, made up of the senior scientists and engineers from all the businesses of 3M, that allocates the strategic priorities which these labs work on. They determine the research priorities each year, though obviously they don’t change every year. So the scientists get a firm general direction from this oversight body. These central scientists work on technologies or products that will come to market in 5 to 10 years. 3M has one unique idea which several other companies have emulated. In addition to the general direction given by the CTOC, all 3M researchers and product developers with a central laboratory or business are given 15% of their time free to work on whatever ideas they like, outside the general direction given by the CTOC or local managers. It is a recognition that innovation and breakthrough ideas almost always come from the bottom of the company, not the top. The leadership of the company needs to make its product and technology development people free enough to allow their creative juices to flow freely. It is an important psychological advantage which 3M has because it gives every employee an opportunity to feel like they have their hand on the steering wheel of the company in some small way. 3M also has monetary grants that are made to its scientists to purchase equipment or test time in furthering these individual “15%” ideas. Many of the original product or science breakthroughs at 3M have come through this 15% free time idea. It’s very powerful. 3M also believes very strongly in the importance of high-quality and high-yield manufacturing. It’s one thing to have a breakthrough idea about technology, but to be competitive we must also develop an effective manufacturing process for it. In many cases, 3M manufactures quite simple but innovative products in very high volumes. A manufacturing process that produces very high quality, very high consistency, very high-yield products at very low cost is important to 3M’s success. So there is a very close and trusting relationship between engineering, science, and the management of a business at 3M. They see each other as part of a mutually supportive and necessary team. One recommendation I would make to you is to think about how R&D people can be more deeply involved in the business review meetings and how they can be drawn much closer to the business and end-markets. This will help them understand the need for strong profitability and good cash management. We must never conclude in our conversation here that Hitachi doesn’t do many things in R&D or manufacturing very well. It does many things extraordinarily well. Hitachi is one of the very best companies in the world and has some very advanced technologies in its portfolio. In the basic technology areas, I don’t think 3M is any better than Hitachi. But Hitachi doesn’t seem to have quite the same attitude towards effective commercialization, or profit making and speed that 3M does. So this is an area we can try to improve upon.
Mr. Kawamura： We heard one example about how surgical masks are produced. At first, the cost was $1+. You ordered them to bring it down to a small fraction of this, and the final result was achieved. Can you elaborate on this?
Dr. Buckley： In many end markets we serve, they have several different levels of product sophistication and capability. We often call these levels “good”, “better” or “best” segments in a market pyramid. 3M has historically produced products only at the top of the market pyramid, which are those in the “best” category of products only, those with the highest level of performance. But my fear was that all products ultimately are visited by low-cost competition, which traditionally enters the market at the bottom and competes on costs. Over time these new market entrants work their way up the market pyramid one small piece at a time, perhaps eventually displacing the incumbent at the top of the market, in this case 3M. So my view is a paradoxical one that, in order to defend ourselves at the top of the pyramid, we also had to have a strong product at the bottom of the market pyramid. This means it was always going to be principally about getting the right cost and becoming the low cost producer everywhere in the market pyramid. This was the origin of my huge target cost reduction for a NIOSH approved mask. The people in the respirator business were initially very resistive to my challenge. They said, “It’s not possible to do this because we already have more than that amount of money in purchased material content in the product.” But I insisted that this is what we needed and said that we had to make a breakthrough. I believed that the Chinese competition would make them for about this same amount. They may not have been as good quality, but it didn’t matter, because so often customers buy only on price, not on performance. To beat them, you have to be like them in some ways and learn how to compete with them on equal terms. The trick was that we needed to use some of our creative and innovative capability to drive cost out of the product. Innovation is often much harder at the bottom of the pyramid than it is at the top because you cannot afford to add anything to the cost. As business leaders, I think we must sometimes ask for what seems to be an unreasonable cost target to force everyone to think differently. Out-of-the-box thinking, as we would say in America. If you ask only for small changes in cost, we all naturally tend to think incrementally, but real breakouts are never about incremental changes, they are achieving radical change. When you’re facing commoditization, you must force yourself to think about radical ways to reduce costs. In these sorts of cases, to get to the results you need, it is almost always about what to take out, not what to put in the product. I always recommend my colleagues focus on achieving simplicity, both in manufacturing and in the product. You must leave nothing in the product which is not essential to its performance. And if you are successful at this, simplicity simultaneously produces elegance, low cost, and reliability. And the same principle works no matter how expensive or how complicated the product is. Simplicity can produce really breakout results. 3M’s people almost met the target I set them (which was hypothetical anyway) and now they sell hundreds of millions of these units without having damaged the product at top of the market. And it means they are now much more able to defend themselves against low-cost competition.
Mr. Kawamura： Before that, you have to educate people that competition is very important. And that it is important to be strong and cost competitive. Who does that job?
Dr. Buckley： The competitive environment is becoming increasingly difficult in the world. The emerging Chinese and Indian manufacturers are now becoming highly capable. But in addition, the traditional Western European and American competitors to Hitachi also remain strong. So competition is getting much more intense and we have to continuously think of new ways to become ever more competitive. There is low market growth in Japan, and for the moment, we have weak economies almost everywhere in the world. Hitachi will need to adapt quickly to this new competitive reality because the situation is likely to persist for many years. Regarding your question of who educates our colleagues on competitiveness, the answer is that every one of the senior management leaders does the job of educating the employees about being competitive. It begins with the chairman, the CEO, and all the executive vice presidents. But ultimately, understanding the need to be competitive and how to do it becomes everybody’s job. This must become top of mind for all of us. I wished engineering schools taught a competitiveness class. Achieving true world-class competitiveness is about the relentless year after year improvement in productivity. And like product quality, safety and compliance, striving for higher levels of competitiveness is a job which is never finished. It’s something we must do every day. Moreover, competitiveness is not just the job of R&D, or of manufacturing, nor even just the CEO’s job. It’s everyone’s job and it is just as tough as it is relentless. There is a gigantic competitive Darwinian struggle taking place in the world today and the winner gets to have our job. We have no choice but to figure out how to become ever more competitive or Hitachi may suffer greatly. This is a matter of great urgency for every mature company in the world if they want to survive.
Mr. Kawamura： We may also need some key persons in the business to support these ideas.
Dr. Buckley： You are absolutely correct. I call these key persons “disciples” of the chairman and the CEO’s mission to improve Hitachi and make it more globally competitive. So we need to find more of these “disciples”, or supporters, shall we call them, and sprinkle them all the way throughout the management ranks of Hitachi. This needs to be at every level of the company and in every country. Provided that they are capable and insightful people, we should not be afraid of taking risks in appointing them to key positions in the Corporation, even if they are young or not Japanese. We need to turn for help to the very best talent available everywhere in the Corporation. Hitachi has some great people all across the world and we need to use all of their talents. We must all become strong supporters of what the CEO wants to achieve in terms of progress for the company. He has a very tough job and we all need to help him as much as we can to achieve the goals he has set out. If we do not follow what the chief executive officer wants to achieve, then the alternative is that the competition from China and India could well beat us. He is absolutely correct on this. We must all become engaged in this mission; otherwise the story may not have a happy ending.
Mr. Kawamura： 3M is known worldwide for its innovative technology, products and ideas. I have read that 3M was ranked No.3 in the top 10 most innovative companies during 2010-2012. What do you think is the reason for 3M sustaining such a high ranking?
Dr. Buckley： This culture at 3M began many years ago and has been maintained. But I should also point out that so it was at Hitachi. To be innovative and creative, you must be optimistic, brave and curious. The modern strength of the Japanese industrial culture, however, is one of great process discipline, conformance, and standardization, so it may not be quite so easy to release and display the natural creativity of our people. This is one of the problems many companies have to overcome. In former times, Japan was very adaptable because it had to be to succeed and many of the great manufacturing process ideas were developed in Japan. But process takes us only so far and it is not a substitute for creativity. Process is a necessary but not sufficient condition for success. It is hard to use discipline, conformity, and standardization alone when you are trying to innovate your way out of a problem. Innovation is always about creating something new and it is always associated with a certain amount of risk and so conformance and process discipline alone isn’t enough. To be innovative, you fundamentally have to believe in a degree of non-conformance. After all, something new is not conforming. You also have to become more comfortable with risk and the occasional non-conformance to be an innovative company. But it is clear that buried deep in Hitachi’s foundation was a process of risk-taking and innovation. Our founder Odaira-san was very much that way and he took many risks to start and build the company and he was very innovative, always pushing back the frontier. He was also very creative. So somewhere back in our company’s genetic code, we already have the “innovation gene.” We could not have become what we are today without it. So the question we need to answer is, how do we free and stimulate that it again, this innovation gene I mean? We must keep innovation and strict process discipline in the right balance. So often when the leaders and individuals in a company don’t know how to create a more imaginative product, they resort to process as a kind of mental crutch. In many cases, we need to throw the crutch away and rely at least as much on creativity as process to further the company’s interests. So I believe we need to give our employees the freedom and time to innovate, particularly by creating an environment in the Corporation where the invention and then the cross-fertilization of ideas is expected again and becomes a core attribute of the Hitachi corporate culture again. In this way, technology can be repurposed and reused across different sectors and business lines. Perhaps we could adopt 3M’s 15% free time idea which I will describe shortly. A company can never get great innovation going simply by ordering it from above or by forming committees or relying just on strict process. Instead, it is vital to engage everyone and delegate responsibility for innovation down to the lowest level in the Corporation we can, perhaps even to the individual level. And to foster it, the CEO and other leaders must encourage it everywhere they go and in every speech they make. They must become the chief promoters of the idea or it doesn’t work. As I mentioned earlier, at 3M we allowed our R&D employees to spend 15% of their working time on developing their own new ideas and develop innovative products which had not been selected by the Corporation. It seems a bit scary to do this, but it beats the alternative of not being innovative because that just results in a slow but gradual loss of competitiveness over time, which ultimately guarantees that we will become only a commodity product company. That is certainly not what we want to be at Hitachi. We have too great a history of innovation to believe that is the right way. So I believe that it is important to allow all our colleagues the facility of having a creative hand in changing the outcome for Hitachi. In fact we should require it. We should most certainly give them general strategic direction, but if we always tell them what to do in detail, they will never get used to completely thinking for themselves and grow to their full capability. Innovation comes from the bottom of the company, and only in rare circumstances, usually with founders of companies like Steve Jobs or Odaira-san, does it come from the top. The “process” of innovation is one that allows people to make mistakes as well as to create successes. People need to become increasingly comfortable with this approach and it takes time to adjust to this new way of life. But success in this approach will breed confidence and that confidence will in turn, breed competence. We need to make our colleagues more comfortable with the concept of technical or business risk so that they recognize the power that comes from taking personal responsibility for innovation.
Always with empowerment to act comes personal accountability. Hitachi has thousands of different products. We could establish a system where each business is not just encouraged, but expected to deliver new ideas, to make breakouts, to be creative. Like other companies, we should measure it by a New Product Vitality Index. But this takes time to get traction of course. That’s what happened in 3M 60 years ago, and when it had slowed in the 1990s, it was my job to reinvigorate it again. And we were very successful at this, regenerating innovation at 3M. This concept of innovation being the bedrock of the company was not discovered 5 or 10 years ago. This basic cultural foundation has existed at 3M for many years and it is the same at Hitachi. That is why I am convinced we can do it again here. As a beginning, my recommendation to you is to form a small council of advisors charged with the topic of stimulating even more cost-effective innovation at Hitachi. I would select six to ten of the most creative people in Hitachi and ask them for their advice on how to enhance creativity and innovation in the company. They are not the people to drive innovation, just initially advise us on the methodology. In asking for advice, we are giving them an opportunity to be involved in the process. You are rebuilding part of the culture by engaging with these people in the creation of new ideas.
Mr. Kawamura： There certainly is a role in accessing new ideas and technologies through various channels. How are new ideas developed, and what is the impact on the speed of innovation? And, how are ideas cross-pollinated in 3M?
Dr. Buckley： We must ask our people for ideas. They know the answer, but may be afraid to offer it unless we ask and encourage. Ask them to submit their ten best new product and new business ideas with a simplified business plan. Rank those ideas by payback period and allocate a certain amount of money each year to fund them. It doesn’t matter if they are all accurate; it’s the concept which counts. The speed of innovation is important and this requires us to be decisive. Imagine being able to introduce a breakout product into a market, one which the competition reels from. Then imagine a whole series of these being introduced, year after year, relentlessly. It’s demoralizing for competitors. This is how Apple has done, it, how Sony used to do it and how 3M does it. This is the kind of company we want to create, an idea and growth company which is growing faster, which makes more money, which engages in innovation on a very broad front. We want faster turnover of new ideas and much faster introduction of new products. If you truly believe in innovation like I do, then I think that you can reasonably assume that it can be applied and made to work in every business unit. It’s an important philosophy in creating an innovative culture. We should all be in the creativity and innovation business pretty much full-time. Encouraging people to share their ideas and cross-fertilize them is one of the things that 3M does very well. Intellectual property is communal property at 3M. In sharing ideas and solutions, 3M has a system where, if a department or product team has a challenging technological or process problem, there is a system where they can post the question on the company intranet, “We have this problem; does anyone have an idea for a solution?” The solution, when it comes, may come from a completely different place in the company than you might expect. In addition to posting the problem to an intranet, employees engage in what is called “Tech Forum.” It’s an employee organization which majors in co-mingling of technical experts of similar disciplines, but it is organized solely by the employees without the intervention of the management. So in this sense it is voluntary. This is one of the places where researchers will ask other employees for ideas to help find a solution to a challenging problem. This will often lead to other departments not only helping to find a solution, but it sometimes leads to new ideas being generated. Open communication and trust is a very important part of cross-fertilization. In this way cross-pollination of ideas leads to situations where an idea could be used in a completely different product than expected, or repurposed to be used in a new way. But new ideas do not only come from inside the company. One of the things that we did at 3M was to invest between $20 million to $40 million a year in a small new venture business. This is designed to make investments in emerging technologies and in small companies to learn about new ideas we would not otherwise have come across in our normal course of business. We used this as part of the idea input to the R&D function because without it, you are likely to recirculate many of the same ideas you had before. You need a way to bring a new source of ideas into the company and provide an additional catalyst for growth. These small equity investments are helpful in strengthening the new technology base of the company, create an opportunity to enter into new markets, and most importantly, they also bring speed and freshness of ideas to the company. I think a big difference between 3M and Hitachi is the close involvement of R&D in driving the overall profitability of the company. From the 3M employees’ point of view, technology is only successful if you can make money at it. We all know that small startup programs almost always lose money initially. But 3M is relentless in monitoring the financial performance of new products and forcing them towards profitability. It has some products which achieve 80% profit margin. Please allow me to share a couple of examples of how innovation leads to large profit margins. The first example involves industrial abrasives. This was a 106-year-old business for 3M and in this product area it was assumed to be impossible to innovate. But if you look around you, pretty much everything we see is finished directly or indirectly by abrasives—the desks, the chairs, the drinking glasses, my eyeglasses and the floor on which we stand. The process of making abrasives involves casting and firing a ceramic, shattering it and then separating the tiny shards of abrasive material into a variety of sizes that are then adhered to a backing. In a conversation with our researchers, we explored whether, instead of being random sizes and shapes, could these shards be developed into a predetermined shape, something the shape of a shark’s tooth. If we imbued then with fractal properties, which all granular structures are to a degree, could we make them self-sharpening? The 3M researchers took this idea, and with other proprietary 3M technologies, did just this and created an entirely new abrasive product we called Cubitron II™. Prior to this innovation, the profit margin of the abrasives was in the low teens percent. Now the profit margin is double that. And the growth rate in the business has multiplied by 25 times. It is a superb accomplishment by 3M scientists in what many thought to be an old and moribund business. It’s also an example that even old businesses and products can be reinvented. The second example involves Scotch Tape™. This product is 80 years old and is still very profitable and the company still finds regular ways to innovate with this product. In the US, when individuals gift wrap presents for birthdays, parties, or the Christmas holiday we observed that they would often lay out conventional adhesive tape in small pre-cut sections on the edge of a table. They could then pull them off one by one to wrap the present. I used to do this myself. So 3M invented a product which mimicked this behavior and delivered small pre-cut pieces of tape in a handy dispenser that could be worn like a wristwatch or used in a countertop dispenser. We called this new product Scotch Pop-Up Tape. However simple it might sound, the manufacturing challenge of getting these alternating layers of this new product to pop-up was quite complex. But it has been a huge success. This approach is very typical of 3M, which is, finding ways for new applications for existing products and ways of improving on the original idea. Sometimes you have a problem looking for a solution and sometimes a technology looking for a problem to solve.
Mr. Kawamura：The US economy is being revitalized by the so called Shale Revolution and it is recovering its competitiveness in the global market. How do you view the impact of Shale Gas and Oil on the US economy as well as on the world economy?
Dr. Buckley： I think that Shale oil and gas will be the next great industrial transformation for America. Because of the shale gas revolution, America now has the prospect of becoming energy independent within about 10 years. With this as a backdrop, many industries which are heavily energy-dependent can be repatriated back to the United States. I’ll give you one small idea of how this revolution might work. Today the natural gas spot market price in the US is about $4 per million BTUs. In Japan, LNG is about $15 per million BTUs at the point of import, almost 4 times the US price. In Germany natural gas is about $12-$14. It will interest you to know that 70% of the energy required to produce a car is spent in the painting process. You can imagine this cheap source of energy becoming a catalyst for major resurgence of automotive and other manufacturing in America, in fact for any industry which uses a lot of energy. I can certainly imagine the fast transfer of marginal automotive manufacturing capacity from Japan to America and also Germany to America. Later, as new capital is invested, perhaps much more will be transferred. So the shale revolution is going to transform many parts of the US economy, including anything which has high energy consumption as part of its process. Power plants, automotive production, chemical production or the production of proppants for hydraulic fracturing (fracking) will be part of this. There will be a surge of new industries which use cheap energy for competitive manufacturing. The impacts of the shale oil and gas revolution will be seen in many corners of American industry. For example, the fuel economy of a heat engine is mainly dependent on the compression ratio. Today, the maximum compression ratio in an Otto (gasoline) cycle engine is about 10 because of the low octane rating of gasoline. The octane rating of raw gasoline is only about 70, but can be elevated to about 90-93 by using additives such as ethanol. In contrast, the octane rating of natural gas is about 130 so we open up the possibility of manufacturing high compression ratio, and therefore high-efficiency, Otto cycle engines (normally powered with gasoline).
So you can imagine designing natural gas powered car engines where the compression ratio is 20:1. Instead of gasoline powered cars being 25% or so efficient, you can now have engines that are nearly 40% efficient, almost as good as diesel engines. What it might also mean is a move to much smaller and more efficient engines, but most importantly, there will gradually be much less dependence on gasoline. This could reduce the demand for ethanol and impact a whole new series of industries such as foodstuffs and animal feed, also making them cheaper. So you can see with just a few examples that this cheap natural gas could change whole industries, automotive, the production of electrical energy, petrochemicals processing, food and corn production, engine designs, the size of automobiles among many others. The potential geo-political impacts on the United States will also be profound since the United States will no longer be so heavily dependent on Middle East oil. Within 10 years, it could completely transform the outlook for American industry. The question we need to ask ourselves is how can we participate in this revolution at Hitachi?
Mr. Kawamura：President Obama was re-elected in the presidential election last year. He said that he would try to attract manufacturing to the United States in his State of the Union address. How do you think he will realize his policies in the face of challenges such as the fiscal cliff and the Republican led House? Dr. Buckley：First, I’m glad that the president has made this statement, but doing it will be a lot harder than saying it. There are only three ways in the world to create new wealth (in the Adam Smith sense of the word) and therefore create new jobs. They are (1) manufacturing, (2) mining and minerals extraction, and (3) agriculture. I include software is a subset of manufacturing. Service businesses don’t actually create new wealth, though they can help lubricate it. So if I was President Obama, I would ask my staff how we could encourage the growth of these three job creating ideas in the United States. They would be a new source of employment and a new source of economic power for the United States. But to be good at manufacturing, agriculture or minerals extraction, a country needs to be good at engineering and science. Unfortunately engineering and science education has become much less popular these days in America and without it the US could still miss some of the great economic opportunities being presented to it. So I believe that in the long term, we should encourage the education of more engineers in the United States and that we should adopt a more flexible immigration policy, particularly for people with technical training such as engineers and scientists. I would recommend to President Obama that he encourage the development of highly efficient agriculture, stimulate more mining and exploration of the natural resources of America, and encourage more US-based manufacturing. One way to do this is to gradually reduce the rate of corporate income tax to zero. Far more revenue can be raised by payroll taxes than are raised by corporate income tax. So we should encourage job creation in small businesses and large corporations alike. Revenue problems for the government can be solved more easily by encouraging strong job creation than by increases in tax rates, whether these are corporation taxes or personal ones.
Mr. Kawamura： The Japanese government made a decision to join the TPP negotiations on March 15th, 2013. This means participating in the major economic regions of Asia. Could you tell me what you think about TPP and its impact?
Dr. Buckley： Generally speaking these partnerships involve lowering or eliminating tariff barriers and encourage free trade among nations. Experience proves that they generally enhance economic growth, so I am very positive about these initiatives overall. But it can also produce localized problems temporarily and could be a negative for some Japanese industries if they are not efficient or competitive. I confess that I see a lot of bureaucratic jobs in Japan that wouldn’t exist in America. While this isn’t necessarily a bad thing, the internal economy of Japan will probably need to become more competitive for it to seize the opportunities of the TPP, and a greater focus on efficiency will need to be made. It may be a bigger threat than opportunity initially.
Mr. Kawamura： TPP affects the Japanese agriculture, so they are opposing it. But Prime Minister Abe thinks we have to open up our country more.
Dr. Buckley： At face value, I can imagine this is going to have a big impact on the viability of some Japanese farms. We can imagine that with the possibility of low cost food imports, that it might be a challenge for Japanese agriculture to compete. If the imports happen, people will spend less of their income on food and perhaps have more disposable income that could drive other forms of economic growth. So while it might put pressure on one part of the economy, it could possibly stimulate growth in other parts of the consumer economy.
Mr. Kawamura： TPP can be a trigger to improve our agriculture.
Dr. Buckley： Yes it could, but the other possibility is that it could reduce some parts of Japan’s agricultural industry. We both know that as a general rule, if an industry is not competitive, it will face increasing penetration of the home markets by imports. At its worst, lower cost food products from overseas will flood into Japan and I can see why this would cause great anxiety in the Japanese agricultural business. But I think this extreme is unlikely to happen. The very high quality of locally produced Japanese food is very attractive to Japanese people and that will probably restrict the impact, at least in the short term. And the Japanese agricultural industry will adapt and adjust to these new competitive situations. I observe in life that extremes rarely seem to happen because there are always mitigating factors we don’t think about initially. So while there will be an impact, I think there will perhaps be some as yet unanticipated ways that will reduce this theoretical flood of agricultural imports into Japan. This may be caused by quality inspections of some kind, food safety or other regulatory barriers to the free flow of trade. But ultimately, TPP can have a profound long-term impact on the Japanese agricultural economy.
Mr. Kawamura： To globalize Hitachi completely, it is important also to globalize Hitachi’s human resources, not just at the Director level, but at the executive officer and top management levels too. We find that American companies have a lot of diversity in the management teams, that’s quite a big difference from Hitachi. Hitachi is implementing a human resource database and global personnel evaluation standards. Could you please tell me how you evaluate these efforts to enhance the globalization of Hitachi’s human resources?
Dr. Buckley： Yes, you are correct and I’ve spoken about this many times during my career. During my tenure at 3M, along with help from my successor Inge Thulin, and the human resources department, we made diversity of national background a big priority. Today, almost 80% of the 130 senior leaders at 3M were not born in the United States. This provides a richness of debate and business thinking which is impossible to get in a mono-cultural company. People are the most important resource any company has, so at Hitachi we need to focus on developing our people into the best possible resources they can be. This is true regardless of where they were born. No nation, not America, not Japan or Germany has a corner on the market for great people. So this means we need to develop people who are able to innovate and grow Hitachi’s business regardless of their national origin, religion or gender. It is not just a numerical exercise, it is a philosophical issue. We must embrace the rest of the world outside Japan as a viable source for able managers. To do otherwise would be shortsighted. If we want to be a truly global company, we would need to become global in our thinking about the sourcing and development of human resources. I know that you know and believe this very strongly. Additionally, for Hitachi managers to be successful in this rapidly changing world, they will need to globally mobile, be comfortable with a mindset of constant innovation and acting as thought leaders for the company. So it is my belief that we need to internationalize Hitachi in every way. To enable this, we need to harmonize our job grading systems and develop databases where we can identify the great people who are hidden everywhere in our company. To do this, we need to know what their skills sets are, their qualifications and backgrounds, otherwise it will be difficult to identify and encourage the free flow of able people across the company. One other recommendation I would like to make is for Hitachi to adopt a policy where English is the common business language of the company. I understand that this point could be seen as ethnocentric of me, given that my birthplace is England. But in practice, English has become the business, computer and communications language of the world and we need to recognize and accept that fact. Five hundred years ago it was French or Latin. Today it is English. Whatever technical or business competency a person may have, and regardless of where we were born, we should all learn to speak English to be an effective global company. Everyone who desires to move into senior leadership positions needs to have a common method of communicating. That common language probably has to be English, so that all the people of Hitachi from everywhere around the world can communicate via our language common platform. What this also does is to make our management team more mobile. We can then consider moving a German person to Japan, or a Japanese person to China, or an Englishman to Japan. So it helps in the mobility of the management team and opens up the possibility of Hitachi becoming a true meritocracy. Then, over a period of years, as we find ways to harmonize pay grades and benefits packages, we will come to have better databases, better standardization, and unification through a common language. Once this is done, and our best talent becomes mobile talent, I think we have laid the foundation for a very strong and powerful Hitachi for the future. I also believe that team building outside of the formal settings of the company is also an important activity. One activity that encourages more intra-company relationships is having some activities that from time to time include employees’ spouses. Friendships are formed and relationships develop, not just with the executives, but between the spouses and families. This helps to form deep and lasting personal bond. I have hosted many dinners at my home for 3M’s management and their spouses. Some of these events have been attended by over 200 people. Personally, I really enjoy these types of events where I can interact with a great group of employees and also some members of their family.
Mr. Kawamura：I believe that you are a global business traveler. However, do you have a personal hobby or a favorite activity outside of work? What do you do when you have some time to relax?
Dr. Buckley： My main hobby is fishing and I am a dedicated fly fisherman. I like to fish for trout or Grayling mostly. It is the one thing that I do in my life where I can completely relax and stop thinking about work. I only practice catch-and-release methods and never take fish away from the river. I catch the fish, make a record of their size and weight or take photographs and then release it. Usually in the places where trout live, the water is very clean, the environment is very good and it’s also very beautiful. Japan has very good trout fishing, with many alpine rivers and very clean streams. My vision of heaven is where there is a very large library with millions of books to read. In this library, they play baroque music, which is my favorite genre, and outside there is a raging trout river!
Mr. Kawamura：Thank you very much. I appreciate your candor and opinions.
Dr. Buckley served as Chairman for 3M, one of the world’s most innovative companies. It operates using an open structure which puts every experience, even failures, to good use by people sharing everything across sections and using them to inspire each other, resulting in the creation of innovative products such as Post-it®. The company’s vitality comes from encouraging each other and promoting communications across organizational barriers. Not only is its position as an innovative company well-established, but 3M realizes approximately 3 trillion yen in revenue annually, with an operating margin of approximately 20%. Our meeting left me impressed again by the many strengths of this company, from which we can learn a lot.