Conditions for Leaving Room to “Turn Back” in Structural Reforms

Conditions for Leaving Room to “Turn Back” in Structural Reforms

Hitachi’s dramatic structural reforms, carried out in the 2010s, are still a talking point for many business leaders. The insights shared by Kazuhiko Toyama in JBpress are rich with lessons. Around the same time, Japan’s copper industry saw an interesting move as four major companies joined forces.

What these stories have in common isn’t a tale of “once decided, there’s no turning back,” but rather a perspective on “how to design room to turn back.” This article explores the conditions for ensuring reversibility in structural reforms and business reorganizations.

The “Reversible” Design Hidden in Hitachi’s Reforms

Hitachi transformed from a giant with over 10 trillion yen (approx. $70 billion) in sales into a digital company by shedding unprofitable businesses one after another. The success of this reform is often attributed to “strong leadership” and “decisive action.”

However, I want to focus on a different aspect: Hitachi’s reforms set exit conditions in advance. For example, one business division had a clear evaluation period: “Sell if not profitable within three years.” This is a practical application of the basic principle of “reversible management”—designing for failure.

Many SME owners charge ahead with the determination, “This business must succeed,” without setting exit conditions. As a result, even as losses mount, they find themselves unable to turn back, thinking, “Just a little more” or “We’ve come this far.” Hitachi’s case shows that it wasn’t because they were a large company; it was because they designed reversibility into their decisions that they could undertake such bold reforms.

The “Reversible” Collaboration Shown by Copper Industry Reorganization

On the other hand, the domestic copper industry reorganization, where competitors joined forces, seems at first glance like an “irreversible” choice. However, this reorganization also has a “reversible” design hidden within it.

The copper business requires massive capital investment in the smelting process, making re-entry extremely difficult once you exit. So, the four major companies chose to share the smelting process while keeping upstream mining and downstream processing and sales independent for each company.

This is a decision that prioritizes observation over fixation. They shared only the “irreversible” part—smelting—while leaving the “reversible” parts that can adapt to market fluctuations with each company. If copper demand suddenly drops, each company can simply wind down its share of the joint smelting venture while maintaining its own sales network. The design minimizes the cost of exit.

The Three True Causes of Irreversible Decisions and Their Solutions

So why do so many managers make “irreversible” decisions? Let’s consider this in light of the “three true causes that make decisions irreversible,” as defined by this site.

Fixing People to Roles and Expectations

A common failure in structural reforms is “fixing” talented people to specific businesses. When you decide, “This business is in A’s hands,” even if the business underperforms, the psychology of “we can’t remove A” kicks in, delaying exit decisions. In Hitachi’s reforms, they separated the evaluation of the business from the evaluation of the person, creating a system where people could thrive in other divisions even if their business was shut down.

Blurring Responsibility Through Contracts and Systems

When multiple companies collaborate, as in the copper industry reorganization, contract terms can be a cause of “irreversibility.” Clauses like “no cancellation for three years” or excessively high penalties for withdrawal can rob you of realistic exit options. When entering a contract, you should prioritize the conditions for leaving over the conditions for joining.

Proceeding Without Understanding the Reality

Structural reform begins with accurately understanding your current business portfolio. However, many companies proceed with reforms without even knowing “the profit and loss by division” or “which businesses are truly profitable.” Hitachi thoroughly classified all its businesses on two axes—”Is it profitable?” and “Is it growing?”—and made decisions based on data.

How SMEs Should Implement “Reversible” Reforms

While large company cases are instructive, SMEs have their own “reversible” designs. Here is a specific framework.

Set the Evaluation Period in Advance

When starting a new business, decide in advance, “We’ll evaluate in six months.” At that point, prepare three options: continue, scale down, or exit, and clarify the conditions for each. For example, a specific criterion like “Exit if sales are less than 30% of the target.”

Include Exit Conditions in Contracts

In collaboration or outsourcing contracts, always clarify the “cancellation conditions” and “costs upon cancellation.” Negotiate realistic terms, such as “cancellable with three months’ notice” or “the buyout price for equipment upon exit will be at market value.” This is the foundation of “reversible” collaboration.

Separate People from the Business in Your Thinking

When winding down a business, what do you do with the people involved? If they are talented, have them contribute to another business. If not, design the terms of severance packages in advance. The decision to “keep the business going because of the people” is the most common source of irreversible failure.

Conclusion: Designing for Failure Leads to Successful Reforms

Both Hitachi’s structural reforms and the copper industry reorganization may appear, at first glance, to be stories of “strong leadership” and “bold decisions.” However, behind them was a calm design that allowed for “turning back even if you fail.”

Management decisions are not “determinations” but “experiments.” Experiments require hypotheses, evaluation periods, and exit conditions. Charging ahead with the determination to “succeed at all costs” without designing these elements is the most irreversible path of all.

Does your company’s structural reform or business reorganization leave room to “turn back”? Why not start today by setting your exit conditions?