How Can a Company Continue an Unprofitable Business?: Case Study of a Japanese Functional Chemical Company

Why do companies continue to invest in projects in the red and in areas from which competitors exit successively? Many companies have exited the two-layered copper clad laminate (CCL) market, which is part of the greater electronics material market. Among companies in that market, Nippon Steel Chemical continued to operate and became successful despite running a deficit for more than 10 years. Like the company’s competitors, Nippon Steel Chemical has considered halting investment in research and development of two-layered CCLs. However, the company decided to continue investing because it implemented a system for making decisions that emphasizes assessments of potential major customers, in addition to its own standard internal assessments. a) Graduate School of Economics, University of Tokyo, 7-3-1 Hongo, Bunkyo-ku, Tokyo, Japan, kuwa@e.u-tokyo.ac.jp A part of this paper was originally published as Kuwashima (2007) in Japanese. © 2017 Kenichi Kuwashima. This is an Open Access article distributed under the terms of the Creative Commons Attribution License, which permits unrestricted reuse, distribution, and reproduction in any medium, provided the original work is properly cited. Annals of Business Administrative Science 16 (2017) 125–135 http://doi.org/10.7880/abas.0170227a Received: February 27, 2017; accepted: March 31, 2017 Published in advance on J-STAGE: April 13, 2017


Introduction
Development of new products and businesses is a time-consuming process (Afuah, 2003;Crawford & Di Benedetto, 2014;Ulrich & Eppinger, 2003). For example, Toray Industries, Inc.'s carbon fiber business took 10 years from the start of research through commercialization and took another 30 years to generate profits (Miyaki, 2015). 1 Business resources and research and development resources are limited (Tidd, Bessant, & Pavitt, 2013;Trott, 2011). As such, companies wish to avoid continuing investments in technologies that are not promising (Cooper & Kleinschmidt, 1995;Wheelwright & Clark, 1992) and go or no-go decisions for projects and businesses are important issues for companies (Cooper, 2008(Cooper, , 2011Kuwashima, 2003Kuwashima, , 2004. This paper uses a case analysis of Nippon Steel Chemical Co., Ltd.'s 2 two-layered copper clad laminate (CCL) product called "Espanex" to explore this issue. Espanex is a material in flexible printed circuits (FPCs). It is one of the functional chemicals where Japanese companies have shown a high degree of international competitive advantage in recent years. Being the first to introduce a product such as Espanex to the market, Nippon Steel Chemical maintains the top market share in the two-layered CCL market globally (approximately 30%) till date. In 2016, Espanex won the 62nd Okochi Prize from the Okochi Memorial Foundation due to its 1 Pharmaceuticals are also famous for requiring much research and development time (Kuwashima, 2003(Kuwashima, , 2016Pisano, 1996Pisano, , 1997

Commercialization process
At the time it began its research, despite the two-layered CCL being higher priced than the existing three-layered CCLs, Nippon Steel Chemical forecasted a certain level of demand for a two-layered CCL (Espanex) in the aerospace and military markets that demanded high precision. Moreover, in private markets, including those for electronics material, the company anticipated a shift from three-layered CCLs to two-layered CCLs in conjunction with higher-quality, higher-functional products. However, when the company began selling Espanex, while the company found the aerospace and military markets as expected, the electronics material market did not generate much in the way of sales.

Reason for the Continuation of Espanex Business
As shown in the previous section, research on Espanex (a two-layered CCL) began in 1985, with a prototype completed approximately two years later. However, there were practically no sales for more than 10 years thereafter. Normally, companies would shut down this type of business or research. In fact, companies involved in research and development of a two-layered CCL realized that the market would not easily shift from three-layered to two-layered CCLs and, therefore, withdrew from that market. Nippon Steel Chemical determined to continue the business and became successful. How was Nippon Steel Chemical able to succeed in this business?
In reality, Nippon Steel Chemical had continual internal pressure to halt or withdraw from the Espanex business over the 10-year period. In particular, the finance division was of the opinion in mid-term business planning meetings in 1994 and 1997 that "Even with high quality, a high-priced product would not turn into a real business, and investment should be stopped." In response, the research division made an appeal to continue investment. Amid these arguments, Nippon Steel Chemical's technology evaluation system provided the impetus for continued investment in Espanex.
Nippon Steel Chemical uses criteria constituting two evaluations: internal evaluations and external (or customer) evaluations. Internal evaluation is a method common to many companies. Some companies make go or no-go decisions for businesses and projects based on these evaluations. However, there is a strong likelihood that researchers will overvalue their own research projects; thus, the results of researchers' assessments of their own technologies are not trustworthy, while projects with high potential may sometimes be halted. In the case of Espanex, the assessments of the finance and research divisions differed greatly, as has already been noted, and the project was almost stopped.
In contrast, the other method, which uses evaluations by customers, is often more objective and convincing because it is external. Moreover, Nippon Steel Chemical placed greater weight on the evaluations of major customers in the industry and not just the evaluations of any customer. In making investment decisions, when the results of "internal evaluations" differed from "customer evaluations," the latter was given preference. When evaluating Espanex, potential major customers, among them the largest companies in the FPC industry, highly praised the performance of Espanex. This caused the finance division and management team to believe in the high potential for massive growth in the Espanex business, as long as customers demanded specifications that could only be achieved by a two-layered CCL and which were impossible with a three-layered CCL. The judgment system that emphasized assessments of potential major customers was the key factor for Nippon Steel Chemical to continue Espanex business despite running a deficit for more than a decade.

Discussion and Conclusion
This the project continually ran in the red (Endo, 2011). 7 During that time, many western companies that entered the carbon fiber market exited one after the other though Toray stayed the course (Inoue, Sato, & Kuno, 2011). Koichi Abe, Vice President at Toray, explained the reason why it was possible for Toray to make that determination: "most important for us was our ability to comprehend the value of a material (or technology  9 When evaluating functional chemicals, companies sometimes place importance on the evaluations of their customers' customers in addition to those of their direct customers (Kuwashima, 2013).
company from a long-term perspective, as was the case with Toray, the company is more likely to continue investing in deficit-generating projects that are deemed to be important to the management team. 10 Toray actually had five successive presidents who were involved in the carbon fiber business and allowed it to run in the red. 11 In contrast, the presidents of Nippon Steel Chemical were primarily seconded from Nippon Steel Corporation for short-term engagements and, thus, had a short-term orientation in their management. This can be seen in the actions of the finance division, which strongly argued to halt the Espanex business in the mid-1990s, when company performance turned downward. In situations where a company has a weak long-term management perspective, one way to succeed was to place greater weight on the evaluations of major potential customers, as in the case of Nippon Steel Chemical.