According to the late Royal Dutch Shell executive, scenario planner and business theorist Arie de Geus, businesses respond to external and internal forces just like a living being. In the best-case scenario, a company learns, evolves and thrives.

Like most people, though, corporations are full of weaknesses and inconsistencies, and both vulnerable to and resistant to change—even when they need a serious overhaul. Not surprisingly, a January 2024 story by Reuters reported that nearly half of Japanese firms are looking to either review their business or to restructure, and are intent on boosting performance and corporate value, enhancing M&A, and even upgrading their corporate governance.

Few in the world are better at navigating the shifting shoals of corporate restructuring than Kazuhiko Toyama. After passing the bar exam in Japan at the University of Tokyo, he joined the Boston Consulting Group, and later launched a consulting firm called Corporate Directions, Inc. He also found the time to earn an MBA at Stanford Business School.

“Since then, I’ve been working as a strategic consultant,” he reports. “Because of my legal and consulting backgrounds, and the bubble crash in the 1990s, we’ve had a lot to do.”

In 2002, with nonperforming loan problems and bank bankruptcies seriously wounding Japan’s economic system, the country decided to set up a government-backed restructuring fund called the IRCJ—the Industrial Revitalization Corporation of Japan.

“They went looking for somebody to lead it,” Toyama notes, “and I was a rare person with a background in several relevant professional areas.” The government made him the IRCJ’s COO, and the IRCJ brilliantly turned around forty-one companies in Japan.

“After we very successfully finished our work in 2007, me and my IRCJ colleagues decided to set up a new company,” he says, “Industrial Growth Platform, Inc., or IGPI. I naturally became the ‘top runner’ in turnaround matters.”

The IRCJ, by the way, was a precursor to the Troubled Asset Relief Program (TARP) in the U.S., which sought to repair the damage from the Lehman shock and resulting global financial crisis. TARP took quite a few cues from what Toyama and the IRCJ accomplished.

IGPI started out with 25 people, and now has 250 at its headquarters and around 8,000 employees as a group. “We have an advisory consulting function and an investment function, and we’re experienced at advising, investing in and acquiring companies,” Toyama says.

Toyama has been involved in both turnarounds of existing firms as well as the startup of new Japanese companies for nearly two decades. “We also have overseas startup investments and a vehicle in Nordic countries, the UK and Poland,” he notes. “They are all Japanese VCs, but they’re based in those countries.”

The Shape of It

What form does a corporate turnaround generally take in Japan?

“Typically, a turnaround happens when the company has too much debt and the business is weakening, so basically they’re not profitable and are dependent on loans to survive,” Toyama responds. “Sometimes they ask the banks to cut their debt, and need some kind of equity injection to strengthen their equity base, so that’s one of the typical things we have to go through.”

In some cases, he adds, that’s accomplished via private resolution through discussions between the banks and other financial institutions and the company. “If the situation is worse, though, we have to expand the scope of the financial restructuring, not just with the financial institution but also other general debt holders and lenders.”

In that case, he adds, it’s usually time to go to court. “Like in the case of Japan Airlines, they had to fight the bankruptcy and the court. [JAL had the largest debt of any company since WWII ended: 2.3 trillion yen/$25 billion.] We also have to restructure the business—change your lifestyle, your strategy, the business model and organizational structures. And most crucially, you have to change management.”

Pressure Cooker

The pressure to restructure and reform comes from several sources.

“One is clearly from when the Abe Cabinet decided to strongly push Japanese corporations to enhance themselves,” Toyama states, “such as on corporate governance. That is basically strengthening the capital market pressure to support such government reforms.

“Of course, capital market players, meaning institutional investors, are basically activists,” he continues. “Many players are coming from overseas, and they’re putting pressure on Japanese companies to improve their business portfolios, business models and earning capability.”

Recently, Toyama adds, a lot of labor market pressure stems from Japan’s low birth rate—now at 1.2—and the weight of an aging society. “In 2012 or 2013, baby boomers started retiring,” he says. “Having fewer workers unbalances labor supply and demand. It’s had a huge impact on the labor market here. Human capital is also a crucial issue.”

Japan was in deflation for around three decades, and cutting prices, costs and wages were once de rigueur as corporate survival tools. “It’s completely opposite now,” Toyama observes.

Deploying the Specialists

Toyama’s IGPI has an operational platform geared to securing what it calls “true management personnel” who can carry their corporations. To do that, the organisation deploys a crew selected for the fragile situation at hand—and sometimes does much more.

“Some people are good at more surgical operations, maybe with a legal background and a financial background,” Toyama states. “Some are more long-term management types who can upgrade manufacturing procedures, drives mindset change and handle human resource issues.

“Some people are good at being advisors, staying on the sidelines and giving advice to the players,” he continues. “In the end, if we acquire the company, we send people to the company as COOs or CEOs or whatever.”

The IGPI Group has also acquired several firms with sales of from US$2 or 3 million up to a few with sales of $100 million.

According to Toyama, management capability is always a challenge. “Most Japanese companies—startups, old companies, small companies and large companies—typically have strengths or core competencies such as operational excellence. Like the Japanese public transport industry—trains run on time. They are typically consensus-based and group-oriented. If the company faces a drastic strategic pivot by disruptive innovation coming from DX, it’s not easy to react so quickly because of the consensus-based bottom-up procedure.

“So they have to secure those strengths and motivate the people on the frontlines,” he adds. “Eventually, the conclusion is we need more and more talented management. That’s what our platform is for—generating the future management leaders of this country.”

The Pandemic Divide

What effect has the coronavirus pandemic had on the way businesses are structured and run in Japan?

“One clear aspect is that the pandemic accelerated DX,” Toyama responds. “So many, many companies are adding more new DX technology. DX can enhance delivery productivity. The slowdown was a big chance to change many systems and DX and so on. Companies like ours took advantage of the situation.”

Smart companies, he adds, leveraged the pandemic to transform their companies and business models. “The not-so-smart ones just stopped and waited for the pandemic to be over. So now you can see big discrepancies between good companies and bad companies in the same industries.”

Toyama says there are two ways that DX can support restructuring. “One is on the cost side, focussing on efficiency and enhancing labor productivity, since we have fewer and fewer people,” he points out. “DX and robotics and those technologies help a lot. Generative AI is very, very helpful technology tools to enhance labor productivity. And the cost of those technologies is going down dramatically. That helps many, many companies as long as managers are smart. On the other side, we have to consider value side innovation, leveraging DX. For instance, during the current pandemic, many people in Japan realized the great services of Netflix and Amazon Prime.”

What do firms need to learn before they attempt to restructure and revitalise themselves?

“Given that this is kind of disruptive innovation, you have to think about whether the company can rebuild a sustainable competitive edge for the long run,” Toyama responds. “You have to consider two things: turnaround in the short run, and sustainable growth in the long run. That’s a real challenge today for any company restructuring itself.”