Using “The Cycle of Goodness” Philosophy for Corporate Success: The Case of YKK

Philip Kotler

American corporations are on a constant search for new business success models. The technological, economic, social and political worlds have been changing so fast that many companies are in danger of being left behind. They would prefer to carry on business as usual but they know that this would be courting suicide. Kodak ran a high profit film business for 50 years but failed to adjust fast enough to the new digital world and it went bankrupt. At the same time, Sears, K-Mart and other great businesses are now “has-beens.”

Companies are experiencing the disruptive forces caused by digitalization, globalization, new energy sources, new regulations, climate change, and the green revolution. Companies in the future will no longer be allowed to neglect the damage that they do to the environment or health of citizens. They will be required to start “internalizing” their negative externalities.

Main Directions for Corporate Growth

Companies are reacting in a number of ways to determine how to grow in what otherwise may be a long period of slow world economic growth.

· Some companies are pursuing growth through mergers and acquisitions. Currently the Brazilian AB InBev beer company has approached SABMiller’s board to consider merging its Budweiser, Stella Artois and Corona beers with SABMiller brands like Peroni, Grolsch and Pilsner Urquell, into one giant beer company.

· Some companies are pursuing growth through reorganizing their brand portfolio. CEO A.G. Lafley recently stated that Procter & Gamble will sell or exit 90 to 100 mostly minor brands in a bold attempt to refocus the business behind its 70 to 80 remaining best-selling brands. Lafley said “less will be much more…we’re going to be much more agile and adaptable.”

. Some companies are pursuing growth by setting sales growth goals, sustainability goals, and social issue commitments. Unilever does an excellent job rewarding all its stakeholders and balancing multiple-purpose goals.

· Some companies are pursuing growth by increasing their exports. Many Japanese companies are facing a shrinking and aging domestic market and know that their future lies in expanding their international activity. Toyota intends to stay on top of all developments in the auto industry — electric cars, driverless cars, cheaper cars, Uber, etc. — to make sure that they maintain their world lead in car sales.

· Some companies are pursuing growth through never stop innovation. FujiFilm, although it lost its entire photo film market, found a whole set of new businesses on which to pursue prosperity. Although making small improvements all the time, these companies are looking to achieve a major innovation in either a physical product (robotics), or in a business process (drone deliveries) or in other ways.

· Some companies are pursuing growth through becoming a leader in full digitalization. They digitalize all of their manufacturing and financial operations. They digitalize and personalize their messages and content. They develop algorithms to automate their decision making on more routine decisions. All this results in the company being faster to detect changes in the environment and faster in responding to these changes.

Companies are changing in other ways. For years, MBA programs and financial officers would tell companies that their job is to maximize shareholder returns. Milton Friedman’s classic book Free to Choose convinced so many managers that the only purpose of a company is to maximize the profits of their shareholders. This led to the belief that costs must be constantly squeezed. This includes labor costs, material costs, equipment costs and other costs. Winning firms in an industry would be the low cost leaders.

More recently, this thesis has been challenged. Companies are beginning to ask whether they should define a higher purpose for their business. A food company might aim to produce the world’s best nutritious products that are tasty without overdoing salt, sugar and fats. An energy company might aim to replace coal and oil with more renewable energy sources such as solar and wind power. An engine manufacturer might design engines that minimize the carbon footprint.

Companies are learning that cost minimization might have negative consequences. Low paid employees see their jobs as endless drudgery making no demands on their minds or imagination. This contrasts to employees who are paid more and given more scope and incentives and who, feeling more purpose and passion, work harder and deliver more ideas.

Companies are also getting more careful in choosing the best suppliers rather than the lowest cost suppliers. Very often the higher cost suppliers deliver better quality and more ideas and are more loyal to their customers.

All this adds up to paying more to the key stakeholders so that they feel fairly-rewarded and that the business relationship is a win-win proposition for all stakeholders. The good news is that stakeholder-driven companies often produce a higher return for the shareholders than shareholder-driven companies! Consider the findings in the book Firms of Endearment. Raj Sidosia, David B. Wolfe, and Jag Sheth studied 25 companies that consumers describe as companies they love or would miss deeply if these companies disappeared. All these companies were stakeholder-driven, not shareholder driven. The authors found that these “firms of endearment” were highly profitable. They outperformed the overall market’s performance by a 9-to-1 ratio over a ten-year period. Furthermore these companies had more happy and motivated employees, happy and loyal customers, innovative and profitable suppliers, and environmentally healthy communities. These findings were expanded into a larger idea called Conscious Capitalism where authors John McKay (CEO of Whole Foods) and Raj Sisodia show how companies can win by aiming to improve the lives of all their business partners and customers.

We will now examine two companies that have created excellent models of socially directed profit models. One is the YKK corporation in Japan and the other is the Unilever Corporation in the Netherlands.

The “Cycle of Goodness” Model of YKK

Here we describe a company that illustrates more vividly the stakeholder orientation model of a successful business. YKK goes beyond just generating profits to making sure that it creates a “Cycle of Goodness” for all stakeholders including the communities and the planet.

YKK is a major Japanese multinational in the fasteners and architectural products industries. Zippers were YKK’s first product and YKK now holds the reputation for making the world’s best quality zippers, as well as other fastening products such as hook & loop fasteners, plastic buckles and notions, webbing, snaps, and buttons. Later YKK entered the architectural products industry by providing high quality windows and doors in newly constructed as well as existing buildings. Both of YKK’s major businesses sell components to other businesses. YKK’s business success results from its exceptional performance, design, and service to its business customers.

Most businesses start their business with a target customer group in mind. But in YKK’s business, all kinds of clothing companies buy all kinds of fasteners and all kinds of construction companies need windows and doors. YKK must be ready to serve all kinds of apparel manufacturers and construction companies.

The former CEO and Chairman of YKK, Tadahiro Yoshida, seeks to satisfy five stakeholder groups: employees, suppliers, customers, stockholders and society/community. YKK aims to run its businesses in a way that generates a “Cycle of Goodness” connecting all five groups. All its stakeholders have an input-output relation to each other in a larger “Cycle of Goodness.” Each stakeholder group receives rewards that are commensurate with its contribution. The company aims to create a fair reward for each stakeholder group. See Figure 1.

Figure 1 charts the YKK Philosophy of the “Cycle of Goodness.” The Cycle of Goodness starts with the employees (yellow box on the left). YKK pays salaries to its global employees and also gives bonuses to individual workers who come up with excellent new ideas. YKK also encourages its employees to consider buying some shares in YKK, entitling them to receive dividends as well as well as salary, so that employees will want the company to succeed. A YKK employee’s earnings can consist of salary, bonus, and dividends. By setting up a stock ownership plan for employees, the company hopes that employees might see themselves as “part-time” capitalists. The employees can appreciate the connection between their level of work “smarts” and their income.

The employees are urged to make improvements in their use of equipment and materials (lower blue box in the middle). The company hopes that its suppliers of material and machinery also make continuous improvements in their offers and quality (lower blue box at right).

YKK makes sure to serves its customers well (see green box). The company continuously seeks to be lean and reduce waste so that reduced costs can enable reduced prices. YKK seeks to continuously improve its quality and find more product applications, all to increase its service to its customers and enhance its competitiveness.

YKK works hard to satisfy its shareholders through regular dividend payments and by actively investing its retained profits (pink box).

Note also that YKK makes a commitment to enhancing the society/community through its tax payments and its philanthropy (upper blue box). The tax payments are required to support all the government benefits that companies and citizens enjoy. The philanthropy is a voluntary activity to improve the society and communities with which the company interacts.

YKK is also an active practitioner of sustainability. YKK uses its resources not only to yield profitable returns but also to conserve the planet’s resources in perpetuity. YKK practices recycling and reusing materials and continuously reducing its carbon footprint. YKK pursues the Triple Bottom Line goals of enhancing Profits, People and the Planet.

YKK is a company with purpose and passion. Deeply committed to “technology-orientated value creation,” YKK contributes to customers and society as it extends its “Cycle of Goodness” philosophy across international borders and to future generations. YKK uses the “Cycle of Goodness” in the belief that “No one prospers without rendering benefit to others.”