This time we would like to discuss the value of the capital expenditure: is that worth doing or not?
Edward, the CEO and the owner of a hotel, asked Mr. Inamori* whether or not Edward should conduct the renovation by spending a large amount of capital expenditure by arranging debt. The hotel had already had a debt amount of 19 and Capex was estimated as 5. The hotel annual sales is 8. Mr. Inamori considered well and told Edward. “If I were you, I would not spend 5 but conduct renovation works at smaller scales than you expect. ”
The reason why he suggested above are as follows;
1 Sales are uncertain (there are unforeseeable risks in the optimistic scenarios)
2 Discard preconceptions (patchwork is good enough)
3 Clean up with all employees (the most important thing is to change the minds of employees)
4 Don’t rely on vendors more than necessary (vendors may propose plans to exploit clients)
5 Hospitality mind is the core value of the hotel business (how to get repeaters)
6 Reduce daily expenses with everyone (accumulation of small details is most effective)
Let me explain one by one. The words mentioned by Mr. Inamori are quoted with “”.
1 Sales are uncertain (there are unforeseeable risks in the optimistic scenarios)
.”. .. .. .. I think that if we refurbish with 5, sales will increase from the current 8 to 12, 13, that is nothing but the assumption. Debt will definitely increase, but sales is just likely to increase, and if you are not good at the operation, it may remain at the current level of 8. I always say to my staff that sales are not guaranteed, so revise your expenses more carefully. If I were you, I wouldn’t use a full amount of 5.”
2 Discard preconceptions (patchwork is good enough)
“(I don’t use 5) because you and I have different backgrounds. You have graduated from the top university, entered a top financial institution, and worked through risk management. Then, you got married with a lady, a daughter of a hotel owner, adopted as a son-in-law, and became the owner of the hotel. Perhaps refurbishing at 5 is the estimated price that is proposed by shareholders and professionals among your network. I was originally raised in a humble family and I had a hard time in developing my career. At the same time, as an engineer, I can do by myself anything about mechanical works. Therefore, if I were you, I would take a look around the old and obsolete facilities which customers are not happy with. I would fix them by appointing cheaper local vendors. You said that spending 0.05, 0.1 and (finely) money on each part of patchwork wouldn’t help, but I guess I’ll do everything with patchworks.”
I would fix the existing inadequacies and not make a major renovation. That’s why I will renew it. In other words, I think that there is no choice but to make the facility beautiful by continuous patchwork. Even if you fix it with patchworks, you believe them to be a waste because you will have to make a major renovation over the long term anyway. But it is strange because you ‘ve obsessed with the premise of a major renovation. I think we can deal with renovation with as little money as possible.
3 Clean up with all employees (the most important thing is to change the minds of employees)
“The factory of former collapsed Mita, which is now Kyocera Mita, was cleaned under the leadership of the president appointed by Kyocera. He was talking to all employees every day. They bought some paint and painted all the outer walls. There is no dust on the factory internal paths. The flower gardens are in good condition and no weeds. It was really clean. The factory handles soot, which makes the raw material for printing toner, but the factory is beautiful enough to walk around with slippers. When the company collapsed, the factory was so dirty that there was no foothold, and even if I walked a little, it was so dirty that my shoes turned black all at once. All the workers were cleaning up the factory without spending any money. And now it’s a factory that produces about 25% pre-tax profit. In other words, all the employees cleaned up with a volunteer-like mind. With that in their mind, they immediately started to make great profits.
To do all this, it would have cost tens of millions if they had asked a professional painter for paint and a machine maker to repair equipment. But they successfully saved the cost and made it a great company. Not only did it change its appearance, but it also changed the mindset of employees who work there. So, first people’s mindset changes, then the performance improves a lot.
Further queries or doubts, please email to ytomizuka@abrilsjp.com
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