Cutting even a 20%-margin business: concentrating on high value (1989)

The discipline of cutting a business that is in the black

What makes this decision unusual is that it cut not a loss-making business but a profitable one — and that a small company on the verge of listing gave up, of its own accord, a tenth and then a third of its sales. Most firms keep a low-return division precisely on the grounds that it still turns a profit. When Takizaki later remarked that big companies are full of executives who cannot bring themselves to cut an unprofitable division loose because of personal ties, he was describing the mirror image of his own choice. Carrying out, in its tenth year, the discipline of cutting a line that is in the black whenever its margin is low became the backbone of the high returns that followed.

That said, a management that makes profit rate its one absolute yardstick carries a cost. Choosing to hold down one’s own sales growth pushes economies of scale and diversification into the background. That Keyence went on to own no equipment and to hold to standard products and direct sales, guarding a high margin, is a straight-line extension of this 1982 selection. A discipline that will not tolerate low returns produces high profit, yet it is back-to-back with a conservatism that finds it hard to step into new businesses whose margins cannot be seen — a tension that remains today, now that the company is a high-earner.