Discussion Papers In Economics
And Business

Issue selection flexibility and strategic rigidity: Lessons from Sharp’s crisis

Koichi NAKAGAWA
Yoichi MATSUMOTO

Discussion Paper 15-24

Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANIssue selection flexibility and strategic rigidity: Lessons from Sharp’s crisis

Koichi NAKAGAWA
Yoichi MATSUMOTO

Discussion Paper 15-24

October 2015

Graduate School of Economics andOsaka School of International Public Policy (OSIPP)
Osaka University, Toyonaka, Osaka 560-0043, JAPANIssue selection flexibility and strategic rigidity: Lessons from Sharp’s crisis*
Koichi NAKAGAWA†
Yoichi MATSUMOTO††

Abstract
This study explores the relationship between attention to managerial issues and organizational
inertia. Past research shows that rigid cognition makes managers focus on specific issues
during strategy formulation, and such focus prevents from altering strategies. In this study weintroduce the idea from an attention based-view that issues move in and out of the focus.
Analyzing the case of the Sharp Corporation from this viewpoint, it was found that top
managers frequently changed peripheral issues and their answers while central issues andanswers remained unchanged. Managers used several issues flexibly for justifying their fixedanswers for their central issues. From this case, we get some new propositions that flexible
change of issues rather prevents from changing strategies, if the managers’ cognition is rigid.

JEL code: M10 Business Administration – General
Keywords: Cognition, attention, managerial issues, organizational inertia, Sharp
Corporation* This work was supported by JSPS KAKENHI Grant Number 25285116 (Japan

Society for the Promotion of Science, Grant-in-Aid for Scientific Research (B)).
† Associate professor, Graduate school of economics, Osaka University.
nakagawa@econ.osaka-u.ac.jp†† Associate professor, Research Institute for Economics and Business Administration,
Kobe University. ymatsumoto@rieb.kobe-u.ac.jp1Introduction
This study adds new understandings about how managers’ rigid cognition
prevents organizational change, by reconsidering the interfering effect of attention andissue selection in strategy formulation. It is well established that the decision-makers’
attention mediates between their cognition and organizational change (Ocasio, 1997,
Cho and Hambrick, 2006). Existing studies find, when managers have rigid cognition,
they attend to a small number of specific issues (Staw, Sandelands, and Dutton, 1981,
Hannan and Freeman, 1997), omit others outside of their focus of attention in decision
making (Cohen, March and Olsen, 1972, Heath and palenchar, 2008, Weick, 1995).
And those attitudes prevent managers from altering strategies (Tripsas and Gavetti,
2000, Gilbert, 2005). However, the other studies tell us that such dichotomous views
should be refined: Managerial issues moves in and out of attention as managers’interest changes over time (Barnett, 2008, Ocasio, 1997). In this study, we introduce
this viewpoint into the former research area: How do shifting attention and issues
attended work in formulating strategy, when managers have rigid cognition? This is themain question of this study.
To explore this, we undertake an inductive case study of the crisis of Sharp
Corporation (Sharp). Sharp, one of the most renowned Japanese consumer electronics
companies, had fallen into a crisis after 2009 mainly because they persisted in a Liquid
Crystal Display (LCD) focused strategy. Our choice to analyze Sharp’s strategic
inflexibility allows us to focus on the relationship between manager’s cognitive rigidity,
issue selection, and the ultimately realized strategy, as we could confirm that thecompany’s top management team and its basic cognition did not change during theperiod.
2

From the case we find that managers in Sharp frequently changed whichissues they were attending to and their solutions as the environment changed, in orderto justify their unchanged answers for central issues – namely continuously investingin the LCD panel development and production. It was also found that such flexible
changes in issues and answers rather intensified Sharp’s inflexibility to organizationalchange. From those considerations, we generate some new propositions about why
managers’ rigid cognition prevents them from altering strategies, that adhesive
managers exploit non-central issues flexibly in order to keep answers for central issues
unchanged.

Theory and Research Questions
Simon (1965) notes that individuals have limited rationality, so managers have to rely
on a simplified representation of the world, namely, cognition (Gavetti and Levinthal,
2000, Kiesler and Sproull, 1982). By using this cognition, managers focus theirattention on a small number of managerial issues (Simon, 1965, Ocasio, 1997), andinterpret them to generate answers (Smircich and Stubbart, 1985, Weick, 1995). In
other words, “what decision-makers do depends on what issues and answers they focus
their attention on.” (Ocasio, 1997, p.187) Such an attention-based view of the firm
(ABV) has been widely accepted in recent years (Ocasio, 1997, Barnett, 2008).
In studies on organizational change, the influence of cognition and attention is
one of the most important topics (Kaplan, 2008, Ocasio, 1997, Nigam and Ocasio,2010). While cognition and its resulting focus of attention help managers decidecourses of action with a certain degree of quality and speed (Barr, Stimpert, and Huff,
1992, Hoffman, 1999, March and Simon, 1958), they also prevent them from changing
3

organizations (Hannan and Freeman, 1977, Sull, 1999, Tripsas and Gavetti, 2000).
Managers’ cognition is based on their beliefs, knowledge, personalities, and interests.
As managers’ past experiences form those attributes, so their cognition tends to beinflexible, especially when their experiences were successful for a long time (Hannan
and Freeman, 1977, Leonard-Barton, 1992, Tripsas and Gavetti, 2000). Such rigid
cognition makes an adhesive attentional structure in managers’ mind, and it constraints
a number of strategic issues and answers they can take (Baron and Ensley, 2006, Garudand Rappa, 1994, Staw, 1981, Reger and Huff, 1993; Fredrickson and Iaquinto, 1989).
Past studies give us rich evidence that managers with rigid cognition do not takedifferent strategic options even in radical technological changes (Kaplan, Murray, andHenderson, 2003, Gilbert, 2005, Utterback, 1996), radical market changes (Barr et al.,
1992, Christensen and Bower, 1996), organizational capability restructuring(Leonard-Barton, 1992, Tripsas and Gavetti, 2000), and organizational identitychanges (Ashforth, Harrison, and Corley, 2008, Bouchikhi and Kimberly, 2003).
Along with treatments for issues in the focus of attention, scholars have also
investigated treatments for issues outside of attention. The issues that managers do notregard worth consideration are placed outside of their attention. Managers usuallyjudge those objects with simple mechanical rules (March and Simon, 1958, Stanovich
and West, 2000). Otherwise, managers often ignore (or “fly”) them, consciously or
unconsciously (Cohen, March and Olsen, 1972, Gavetti and Levinthal, 2000, Starback
and Milliken, 1988). When managers’ cognition is rigid, some important issues arecontinuously moved away from their attention, and it prevents organizational change(Hannan and Freeman, 1977, Lenard-Barton, 1992).
Although dominant existing studies examine the effects of rigid cognition on
4issues both within the focus of attention and outside of it, some scholars imply thatsuch a dichotomy is too simple since the degree of attention to issues changes fromno-attention to full-attention as managers’ attention shifts. Managers have their own
distribution structure of attention. And managerial issues are scattered in this structure(Figure 1) (Barnett, 2008, Ocasio, 1997). Managers decide which issues should be
dealt with by relying on this structure and interpreting the surrounding situation(Barnett, 2008, Bowman and Hurry, 1993, Cho and Hambrick, 2006, Dutton andAshford, 1993, Hoffman and Ocasio, 2001, Yu, Engleman, and Van de Ven, 2005).
WIthin this structure of attention, some issues located at the center of attention arealways attended to and some located nearly outside are almost completely ignored, as
past studies about organizational inertia suggest. However, the other issues are not
fixed, but rather sometimes picked up and other times not. As the (interpreted)environment changes, managers’ structure of attention is reformed and the perceived
importance of various issues increase or decrease. Dutton and Ashford (1993) statedthat “An issue becomes strategic when top management believes that it has relevancefor organizational performance (p. 397).” Therefore, issues being attended to andissues not being unattended to are reconsidered when managers recognize substantial
environmental change (Barnett, 2008, Dutton and Ashford, 1993, Dutton et al., 1997,
Dutton et al, 2001).

5

Figure 1: The structure of the distribution of managers’ attention and issues

Our goal in this paper is to explore (1) how managers select issues, and (2)how this issue selection affects on realized strategy when managers show cognitive
rigidity. By introducing the viewpoint of issue selection (Ansoff, 1980, Dutton andAshford, 1993, Heath and Palenchar, 2008) we will be able to refine the understandingof the effects of cognitive rigidity on organizational inertia. After describing researchmethods, we conduct an inductive case study of Sharp, and articulate a set of formal
propositions based on the case.

Methods and Data
This study is based on an inductive case study of Sharp’s success and failure in the
LCD business from 1998 to 2012. After 1998, when Machida became president, Sharp
made huge financial and labor investments into LCD-panel development andmanufacturing. That policy initially brought Sharp great success, but it finally led
Sharp to the brink of bankruptcy. The Sharp case provides a good example for
exploring the relationship between issue selection and realized strategy in the presence6

of cognitive rigidity. Sharp kept its core management team (Machida, Katayama, andOkuda) almost unchanged during this period, and they showed a strong adherence topossessing and investing in the LCD panel production department. Controlling forchanges in the management team and of attentional focus, we can focus on the issue
selection and strategy formulation.
As our questions have an open-ended nature, we think the case approach will
be useful for theory building (Glaser and Strauss, 2009, Miles and Huberman, 1994,
Yin, 2014). We took a medium-term historical perspective to catch the transition of theattention, environments and selected strategy. We focused on the top management teamwhich has a critical influence on strategic decision making (Hambrick and Mason,
1984).
Data covering the entire Sharp case were gathered from publicly available
archival materials, including 14 security reports, 12 information briefings frommeetings with stockholders, four books (one written by Machida, the then president),
668 business articles from the Nikkei BP, and 74 articles from Shukan Diamond (bothJapanese journals), from 1998 to 2012. The book, “100 years of milestones by Sharp(Sharp hyaku nen no ayumi)” edited by Sharp, was of especially high value as it served
as a source for data prior to 1998.
We mainly use publicly available data since they are considered thesecond-best approach in examining the relationship between psychological and social
phenomenon (D’Aveni and MacMillan, 1990, Kaplan, Murray, and Henderson, 2003).
It gives us objective, time-series data about the incident and peoples’ thoughts (Nigem
and Ocasio, 2010). Although interviews are considered the best sources of data, data
gathered by interviews in which insiders look back at the incident are not used in this7

case since interviewees could have several biases like justification, over/undervaluation, consciousness about political interests, and self-defense. Though publishedsources also have some potential biases in that they are edited for managing
stockholders or other interested parties, they are thought to be the only sources thathave a certain degree of quality within the right time-series. In addition, somepublished sources, like security reports, are legally obligated to provide accurate
information. For these reasons, past research has also used public data as main sources
about people’s cognition (e.g. Barr, Stimpert, and Huff, 1992, D’Aveni and MacMillan,
1990, Kaplan, Murray, and Henderson, 2003, Nigem and Ocasio, 2010). Thus weconclude that, given our theoretical interests in the historical transition of attention andits effect on strategy, publicly available data like journal articles is one of the ideal
sources.
Analysis is structured as follows: First, we investigate the transition of
attention to issues and answers for them from the strategic plan section in Sharp’s
security reports. Next, we conduct a case description using journal articles, books,
information briefings for stockholder meetings, and financial data from security reports.
The case description consists of narratives of Sharp managers and realized facts suchas implemented strategies and their outcomes. Narratives are used for understanding
how managers recognize situations, and we examine how they turn into concrete
actions from realized facts. We integrate those findings about managers’ attention toissues, realized strategies, and their outcomes in the following section, and we create
some propositions about them.

8

Table 1: Issues mentioned in “Business situation and tasks to be tackled” in Sharp’s security reports (1998–2012)
Amountof deals

Enhance

Change(president)

1998

1999

2000

2001

2002

2003

2004

2005

2006

Machida

2007

2008

2009

2010

Katayama

LCD TV

15

8

7

En

Ch

En

Ch

En

LCD panel development

14

14

0

En

En

En

En

En

Solar cells

13

11

2

En

LCD panel manufacturing

11

9

2

mobile phone strategy

11

7

4

Semiconductor

7

2

5

LCD panel supply business

7

5

Branding policy

6

Alliances policy

En

En

Ch

En

Ch

En

Ch

En

Ch

En

Ch

En

En

En

En

En

En

En

En

En

Ch

En

En

En

En

En

En

En

Ch

En

En

En

En

En

En

En

En

Ch

En

Ch

En

En

Ch

En

En

En

En

Ch

En

Ch

Ch

Ch

En

2

En

En

En

Ch

En

3

3

Ch

En

Ch

En

En

6

4

3

Ch

Health instruments

6

2

2

Ch

Information technology

5

2

3

Business model

4

2

2

Home appliances

4

1

3

Bru-ray recorder

2

1

1

LED lighting

1

1

1

Audio equipment

1

1

1

multifunctional printer

1

1

1

En

En

En

Ch

Ch

En

En

2012
Okuda

En

Ch

2011

Ch
Ch

Ch
En

Ch

En

Ch
En

Ch

Ch

En

En

Ch

Ch
En

Ch
Ch
Ch

En

En

Ch

En
Ch

Ch

En
Ch

Ch
Ch

Un: the issue was mentioned, and its answer was declared enhancing or unchanging the current policy.
Ch: the issues was mentioned, and its answer was declared changing the policy from the past one.
Nothing: the issue was not mentioned.
Source: Sharp’s security reports (1998–2012)

9Ch

The Case
The frequency of the treatments of issues in Sharp during 1998–2012
At the beginning of the case, let us check the transition of the Sharp managers’ attention
over the course of the period. By checking the frequency of issues and answers given in
the company’s security reports “Business situation” and the following “Tasks to be
tackled (Table 1 and Figure 2),” we can confirm that Sharp managers persisted incontinuing LCD-panel development and manufacturing. In the security reports theytalked about the LCD TV business, LCD panel development, LCD panel manufacturing,the mobile phone business, and solar cells1 more than other issues. Those issues weredealt with more than 10 times over 15 years. Thus, we can conclude that those issues
were always positioned at the center of Sharp managers’ attention.

The ratio of
declarationof change

The frequency of treatments of issues

Figure 2: Attention map of Sharp managers for managerial issues and answers
Source: Sharp’s security reports (1998–2012)1

In 1998-2012 Sharp managers set solar cells as the second main business area and kept investmentsin this department. The high frequency and persistence in “solar cells” shown in Figure 2 reflected thissituation, and it also makes us confirm the validity of the analytical result that LCD panel
development and manufacturing was the focus of the attention for Sharp’s manager.
10

There are two ways of dealing with issues at the center of attention. The first is
keeping their answers unchanged. Answers in the area of LCD panel development,
manufacturing and solar cells did not change very much during the period. Managers
basically strengthened the technology and manufacturing capacities of LCD panels andsolar cells. The second way is by altering answers along with environmental shifts.
LCD-TVs and mobile phones are final products that use LCD panels. Those LCD-related
businesses were also always positioned at the center of managers’ attention. However,Sharp’s top managers frequently decided to change the answers for these issues. How do
we explain this difference in the way of dealing with things? Currently there is little
consensus on the subject, so we will consider it in the following historical descriptions.
The other issues were mentioned in less than half of all opportunities (less thaneight times). A notable fact is that the answers for those issues were more frequently
changed than ones at the center of managers’ attention. For example, branding policy was
picked up by managers in 2002, 2003, 2004, 2006, 2007, and 2008. In 2002 Sharp started
an improvement of its brand image in Japan. In 2004 it changes the way of branding from
simple image improvement to a strong association with LCD. Managers changed thispolicy again in 2006, from emphasizing branding in Japan to branding in foreign markets.
Another typical example is alliance policy. It was first mentioned in 2000. At that time
Sharp declared alliances with some electronics companies, but decided to stop in 2004.
After that Sharp restarted alliances with global companies in 2010. Thus, from security
reports, we could conclude that Sharp managers persisted in LCD panel production anddevelopment, while they frequently changed the handling of other issues at the same time.
As mentioned before, so far, we have no explanation for these things. From the next
section, we explore why such differences of handling among issues occurred and how
11they affected Sharp’s strategy.

Sharp’s evolution using a “spiral strategy”: 1912–1997
Sharp was founded in 1912 by Tokuji Hayakawa based on his metalworking skill.
Hayakawa was an inventor who introduced unique products like the Tokubijo buckle in1912 and the mechanical pencil in 1915. From those initial innovations, Hayakawa
established a company philosophy of “We are dedicated to the use of our unique,innovative technology to contribute to the welfare of people.” It was named the“spiral strategy” and turned into Sharp’s basic business approach. It wascharacterized by the simultaneous evolution of core devices and final products.
Based on the spiral strategy, president Tsuji, who was president during the periodof 1986–1997, decided investment into LCD and developed final products
including:“LCD Viewcam,” “Nintendo Gameboy,” and PDA “Zaurus.” Thanks tospiral strategy, by the time Mr. Tsuji retired as president, LCD panels and LCD-related
products sales had grown to 3 billion USD and 3,5 billion USD. Total sales of LCD panel
and applied products comprised approximately 30 percent of Sharp’s total corporate
sales.

Machida’s inauguration in 1998
In June 1998, Mr. Machida was promoted from the foreign sales department to company
president. In his inaugural press conference, he clearly set success of the LCD-TV
business as Sharp’s next strategic goal:

Machida (President): Sharp’s problem is low brand perception. For branding, we
12have to make a “clear face” for customers. To this end, we will set LCD
technology as our face. From now, every Sharp product will be related to LCD
technology. TVs are a typical one. By 2005, we will replace all Cathode Ray
Tube (CRT) TVs with LCD TVs in Japan. We commenced to produce LCD
panels by ourselves, to increase brand perception. Customers did not evaluate
our CRT TVs well, even though we produced them at the highest quality. The
reason was that we did not manufacture CRTs by ourselves, but purchased themfrom external suppliers. To change our brand image, we have to produce a coredevice by ourselves … In August 2000, we will begin operations in a marvelous
LCD panel plant at Taki. We have invested 60 billion JPY (500 million USD) on
its construction. However, its attractiveness is not in the amount of investment,
but in the way of production.2

Sharp therefore started its LCD TV production. As the LCD TV market had notflourished enough and no other company had tackled it seriously, Sharp was actually the
first major entrant. Sharp introduced a new brand, AQUOS (LC-20C1) to the Japanesemarket. Sharp realized a 40 percent price decrease compared to other company’s
preceding models by aggressive investment into its LCD panel plant Taki.3 Although
Sharp had a strict financial rule that a department’s investment must be less than 10
percent of its sales, less than retained earnings, and less than annual cash inflow, Machidanevertheless executed investment beyond these rules. After that, investments in LCD
panel production were always treated as extraordinary outside-the-rule cases.4
Thanks to the success of the AQUOS, Sharp gained an over-80 percent global
share and 380 million USD sales in the LCD TV market in 2001 (Figure 3).5 In thefollowing year, SONY and other rivals entered the LCD TV market, but Sharp maintained
a greater than 50 percent share and grew sales to 710 million USD.6 Machida gained
confidence in his strategy since Sharp was able to achieve great success even while the
Shukan Diamond, January 15, 2000, p.115.
Nikkei Electronics, January 15. 2001, p. 40.
4 Saji CFO, Shukan Diamond, October 13. 2001, pp 92-93.
5 Shukan Diamond, February 16, 2002, p.20.
6 Nikkei Electronics, October 21. 2002, pp.26-27.
2
3

13

LCD industry environment worsened.7
Machida (President): The founder, Hayakawa, said “seek unique technology.” I
put it in another way, make “only one” product ... When I was the sales manager
of CRT TV, retailer sales staff asked me, “Whose CRTs does Sharp use for TVs?”
I felt mortified. However, now AQUOS could get a better valuation than any
other model. This is the power of “only one” product. Our employees are
increasingly coming to understand this.8

Market
share
(%)

Year

Figure 3: Worldwide market share of LCD TVs.
Source: (2001, 2004) Nikkei Electronics, Mar. 26. 2007,(2007) Nikkei Business, Apr. 7. 2007(2010) Nikkei Business, Dec. 13. 2010.

The Kameyama plant
Along with Machida’s desire for the possession of a strong core device, he realized agreater investment into a new LCD panel plant named Kameyama in 2001. The amountof investment reached 1.25 billion USD. It started operations in January 2004, and Sharp
gained the world’s largest panel production capacity. It annually produced more than amillion LCD panels for TVs, and earned some billions USD. The Name “Kameyama”
7
8

Nikkei Business, April 8, 2002, pp.31-33.
Shukan Diamond, November 22, 2002, pp.58-59.
14became the symbol of Sharp.9
Machida decided to invest in Kameyama because competitors quickly caught up
with Sharp both in terms of product technology and manufacturing capacity. Around 2001,
Sony, Samsung, and LG decided to enter the LCD TV business and invested as muchmoney as Sharp. In 2002, Panasonic started producing TVs with an alternative technology,
Plasma Display Panel (PDP). 10 To compete with those who had larger financial
capabilities, better brand perception, and more distribution channels, Machida thought thehigher production efficiency of LCD panels had come to be a clear competence of Sharp.
Therefore, Machida and his colleagues changed their strategy. They stopped allocating
resources to departments other than those involved with LCD-related products, andfocused them on LCD-related areas.

Machida (President): Sharp will pursue success in the LCD business. We will doeverything for LCDs continuously: R&D, panel production, and TV production
within Sharp. However, because of resource limitations, we will focus on LCDs
and stop investments in other areas of business. At first, we decreased
investments into our semiconductor business. We have to change traditionalmodes of thought about our resource allocation.11

Saji (CFO): The Kameyama plant will make LCD panels twice as large as thoseof Samsung. It will be more efficient than any other rival plants. In the LCD
business, the source of competitiveness is efficiency. Even then, the timing of aninvestment is ultimately decisive, so we have to consider the timing and scale of
our investments carefully.12

Within the construction term of Kameyama, Machida decided to conceal the
manufacturing technologies and know-hows used in Kameyama in what he called a
Nikkei Business, February 2, 2004, p. 9.
Nikkei Microdevices, July 2003, pp.147-148.
11 Nikkei Microdevices, March 21, 2002, p.12
12 Shukan Diamond, February 1, 2003, p.92.
9

10

15

“Black box strategy”. This is to prevent technology leakage from Sharp to rival
companies, since they could start LCD panel production by transferring technology fromJapanese equipment manufacturers and other panel manufacturers. While Samsung andSony jointly established an LCD company S-LCD in 2003 and LG and Philips
established a joint venture in 2002 to share production and technical development costs,
Sharp decided to remain independent.

Machida (President): It is a mistake to set plants carelessly in an emerging
country to obtain cost competence. Technical spillovers are very rapid in thosecountries. Therefore, we decide to master integrated manufacturing within Japan.
Integrated manufacturing is our lifeline, our 21st century vision, and our uniquecapability to generate “only-one” product.
In fact our share has declined in standardized LCD-panels supplied for PC
monitors. But high-definition LCD-panels for TVs have remained competitive.
To make such LCD panels, firms have to accumulate several pieces ofknow-how. Due to a lack of this know-how, other companies cannot produce
LCD panels as well as Sharp does. Sharp alone has the proper knowledge for
this, and should protect it, in the same way traditional Japanese eel restaurants
13
protect their original sauces.

Competition intensifies
Though the Kameyama plant brought Sharp considerable profits and sales from 2004 to2008 (Figure 4), the business environment in LCD TVs worsened. In 2004 and 2005,
S-LCD, LG-Philips, and Taiwanese LCD panel suppliers like AUO and CMO started theoperation of a large LCD panel plant.14 Their facilities were as large as or larger thanthose at Kameyama. As they continuously invested, their LCD production capacities
exceeded those of Sharp (Figure 5). In 2005, Sharp’s TV share fell to 21.9 percent, while
LG-Philips increased to 14.7 percent, Sony’s reached 11percent, and Samsung reached13
14

Nikkei Business, January 5, 2004, pp.42-43.
Nikkei Microdevices, September, 2004, p.151.
16

9.8 percent.15

MillionUSD

Million
USD

Year

Figure 4: Sales and Operating profits of Sharp Corporation.
Source: Sharp Corporation security report, 1989–2013.

Million
USD

Year

Figure 5: LCD panel shipment amounts for TVs
Source: (2000, 2003, 2006) Nikkei Electronics, Mar. 26. 2007,(2009) Nikkei Business, Dec. 13. 2010

Under this intensification of competition, Sharp’s managers decided to change thebusiness domain, while they maintained the policy of investing in LCD panel production.
15

Shukan Diamond, April 16, 2005, p.117.
17

They targeted the final product LCD-TV market and component LCD panel supply
market simultaneously. In the LCD-TV market, Sharp decided to focus on the Japanesemarket where it already possessed largest share and brand perception, while it did not
focus on competition in foreign markets. In contrast, in the LCD panel business, Sharp’s
managers decided to pursue the global market, since they thought their LCD panels were
better performing than other external suppliers like AUO and CMO. Thus, they allocatedmore resources to panel sales than before.

Machida (President): We will try to keep greater than 50 percent share in world
LCD panel production. Half of our products will be sold to other LCD TV
manufacturers, and the rest will be used for our own TVs. Such a plan can beachieved if we continue to invest in production capacity. Only 3 percent of the
global TV market has been replaced by LCDs and PDPs. From our calculations,world total LCD panel and TV capacity will be 4.5 times than what it is now.
Rivals will make huge investments in the near future. To catch up with rivals, wewill also maintain our investments in LCD production capacity.16

To cope with this substantial investment, Sharp accelerated its concentration ofbusiness areas. In 2005, managers decided to withdraw from the personal computerbusiness and reduce activity in home appliances.

Machida (President): Now we have reached the time to decide whether the home
appliances division continues, because it cannot make a profit even if we shift
production to emerging cost-competitive countries. Also, the PC side of thebusiness faces a difficult situation. Therefore, we have decided to stop allocatinglarge amount of resources to them.17

Keeping LCD panel capacity enlargement and changing marketing strategies
After starting Kameyama Phase 2 operations, Sharp’s LCD-related division’s sales
16
17

Nikkei Business, January 5, 2004, pp.42-43.
Nikkei D&M, February, 2004, p.24.
18

increased by a few billion USD every year. Sales of LCD panels and TVs came tocomprise over half of Sharp’s total sales in 2006 (Figure 6). In the period from 2005–
2008, Sharp showed its best financial performance each year, though the businessconditions of LCD panels and TVs gradually deteriorated. Sharp’s share of the global
LCD TV market fell from No.1 to No.3, after Samsung and Sony.18 Sharp also faced ahard fight in the LCD panel business. Machida planned for approximately 50 percent of
LCD panels to be sold externally, but the result was approximately 20 percent due tosevere price competition.19

Million
USD

Year

Figure 6: Sharp’s LCD-related division sales and ratio to corporate sales
Source: Sharp Corporation security report (2002–2012)
In 2007, Machida handed over the role of president to Katayama. “To support young
Katayama,” Machida took up the newly-made chairman post, which had the right ofrepresentation. The Machida–Katayama diarchy structure was thus formed.20 Under the
Machida–Katayama structure, Sharp maintained the same basic policy of focusing on
LCD device business development, with some modifications. In 2007, Machida andKatayama decided to invest in a new facility: Sakai. The amount of investment was
Nikkei Microdevices, July 2006, p.97.
Shukan Diamond, April 16, 2005, pp.117-118.
20 Nikkei Business, March 19, 2007, p.8.
18
19

19

approximately 3.4 billion USD.

Katayama (President): When I was an engineer, I had a plan of building an LCD
industrial complex like those in the petrochemical industry. The strength of
Kameyama Phase 2 lies in vertical integration from LCD panels to final products.
We will evolve such a vertical integration model at Sakai site. We are planningto gather several component makers and infrastructure companies together in the
Sakai site.21

In contrast, Machida and Katayama modified the company’s marketing strategy withchanges in the competitive environment. First, Sharp altered the target market of theirTVs from Japan to the world. Sharp lost opportunities to obtain a larger global market
share since it focused on the Japanese market (Table 1). To improve world-wide sales,
Machida and Katayama decided to shift marketing resources allocation from Japan to theUnited States., Europe, and China.
Table 2: Market share of flat panel TVs, 2006
Japan
U.S.
Europe
China
World
Sharp
41
11
7
3
10
Sony
19
13
13
5
12
Samsung
0
12
20
5
17
Philips
0
13
19
3
11
Source: Nikkei Electronics, Mar. 26. 2007.
Machida (President): I do admit that we failed to capture the global market … At
first, we will execute a marketing program in the U. S., and next we will take up
the challenge in Europe, where we did not have strong distribution channels. The
developing speed of international competitors appears quite threatening to me
now. In several business areas, the competitive environment changes rapidly
these days because of the entrance of foreign newcomers.22
Second, Sharp ceased its secretive independent “Black box strategy.” Katayama andMachida sought a potential partner able to develop LCD technology and business with
21
22

Nikkei Electronics, August 13, 2007, p.9.
Nikkei Electronics, September 25, 2006, p.170.
20

Sharp. Considering the capacity of Sakai, they felt that Sharp needed partners who would
constantly purchase LCD panels from them. In 2007, Sharp established a special task
force to make alliances, and it achieved an alliance with Pioneer in September 2007,
Toshiba in December 2007, and Sony in February 2008.23

Katayama (President): The market size of LCD TVs will grow continuously fora while. To keep up with that growth, we have decided to find partners withwhom we can jointly invest in and develop LCD panel facilities. Moreover, thealliance is important from the viewpoint of stable operations.
Of course, we are not going to change the basic policy of pursuing uniquedevice technology. We have to keep our sales volume sufficiently high to invest
in the next technology, but it becomes difficult to do this by ourselves. So wehave decided to run our business together with our partners.24
A stumble
After 2008, when the sub-prime shock’s influence spread, Sharp came to suffer fromboth a decrease in sales and an increase in operating losses. In March 2009, Sharp reported that its
annual corporate sales had fallen and its net loss came to 1.2 billion USD. This marked the first
instance that Sharp announced a net loss after being listed on the Tokyo stock exchange in 1956.
Machida and Katayama acted quickly. They closed the obsolete Taki and Kameyama
plants and declared a strategy change. Sharp agreed a contract with a Chinese company, Nangjing
Panda, to whom it sold Kameyama Phase 1’s production capacity together with technical support.

Katayama (President): We have already recognized our mistake that we produced
TVs within Japan and then sold them to global customers. So we will quickly
change our business style to one of “locally produced and consumed.” Sharp will form
partnerships with some Japanese and international companies to prepare a new LCD
technology and facility. By using partnership contracts, we will limit our own
investment and get cash flow by offering technical support to our partners.25

Shukan Diamond, January 26, 2008, pp.109-113.
Nikkei Business, April 7, 2008, pp.7-9.
25 Nikkei Business, July 6, 2009, pp.22-24.
23
24

21

However, they still continued construction and investment in the Sakai plant.
Katayama explained such action like this:Katayama (President): It is not contradictory to our new policy of “locally produced andconsumed” that we continue producing LCD panels in Sakai. It can take on the role of a
“Mother plant” of our global LCD panel facility network. We will build our advanced
technology in the Sakai mother plant, and then give it to our global partners. 26

Uncompleted restructuring
Although Sharp modified its strategy in 2009, its crisis continued. Machida andKatayama continued to set LCD panels as Sharp’s core competence. Sharp did notinvest in businesses other than LCDs. Thus, Sharp’s sales and profit exclusively depended on
LCD TV and panel sales. However, in terms of LCD TVs, Sharp’s share was only 6.4 percent,ranking it No. 5 in the world, while Samsung, at 18.8 percent, ranked as a top seller. The situation
was the same in the LCD panel business. Companies that targeted emerging countries did notpurchase Sharp’s high price panels, so the Sakai plant’s operating rate did not rise above
approximately 50 percent. In 2011 Sharp’s annual sales dropped approximately 10 billion USD
lower than that in 2008. Net losses came to 3.7 billion USD. Since Sharp relied on debt and did
not have enough liquidity on hand, it nearly went bankrupt.
Katayama resigned as president to take responsibility for this huge loss, and Okuda
became the new president in March 2012. However, the actual situation did not change.
Katayama remained on the committee board as a chairman after Machida. Machida retired aschairman, but he still had influence on Sharp’s management, since Okuda was under his guard.27
They executed some strategic modifications and countermeasures for the immediate
financial problems. However, they essentially continued the LCD focused strategy.

26

Shukan Diamond, September 18, 2010, pp.22-23.

Some analyst thought the struggle for power among Machida, Katayama, and Okuda
was one of the reasons that Sharp was unable to change in 2012. (Shukan Diamond, May
25, 2013, pp.10-12)
27

22

Okuda (President): In the era of globalized competition, our independent vertical
integration strategy had limitations. We have to increase our speed, through utilizing
collaborations with other companies. We will depend on foreign partners for new
product or market development, and we will focus on technological development ofcore devices. Our LCD devices are still competitive. By enhancing this technicalcompetence, we will survive as a device supplier.28

Sharp’s managers decided that it would become a panel supplier, and they made efforts toforge partnerships with companies that facilitate the consumer product business. They signed acontract in which Honhai would invest 6.5 million USD in the Sakai plant and pay several billion
JPY to buy Sharp’s TV plants. Okuda also agreed to contracts with Apple, Qualcomm, and Intelin 2012.
In addition, Okuda tried to reduce employment costs. Okuda cut down the number ofregular employees for the first time since Sharp was listed in 1956. Sharp employed 56,756
personnel at that time, and he decided to eliminate approximately 8,000 jobs from across theentire global production chain. At last, approximately 11,000 employees were let go due to an
unexpected increase in early retirement.
These efforts helped Sharp move further away from bankruptcy. Nevertheless, thefundamental problem of its dependence on LCD panel production did not change. Thus, sales andprofit did not recover in the depressed economy. In March 2013, Sharp reported that net losses
were 5.4 billion USD. To take responsibility for these losses, all three leaders, Okuda, Katayama,and Machida left Sharp. At this point, the influence of Machida was completely extinguished.

Analysis and discussion
The variety of degrees of attention paid among issues
From here, let us make links between fact findings and theoretical considerations.
Looking back the Table 1, Figure 2 and the case description (it is summarized in Table 3),28

Nikkei Electronics, April 2, 2012, p.15.
23

Table 3: Summary of the Sharp caseYear

1998–2000

2001–2003

2004–2006

2007–2008

2009–20112012–

LCD panel
Manufacturing

Construction – Takiplant
(0.5 bil USD)
For starting
LCD-TV

ConstructionKameyama plant(1.5 bil. USD)
For production
efficiency

Construction Kameyama P.2(3bil.USD)
For developing panel
supply business

Construction – Sakai
plant(3 bil. USD)
For differentiation

Investment on Sakai
plant (1.5bil.USD)
as technical transfer unit

Investment stop

LCD related businessentry to LCD TV
business firstly forbranding

Keeping the leader
position in LCD TV

Developing LCD
panel supply businessas well as TV
business

TV: Change the target
from Japan to Global
Panel: Keeping Hi-end
segment.

making alliance with
global firms
Start technical transfer
business

focus on LCD panel
supplyDecrease of productline of LSI

Withdrawal from PC
business

Retrenchment from home
appliances businessOver 80 percent
share in LCD TV

Share down in LCD
TV

Severe competition bothin TV and panel

Sub-prime shock
deteriorated LCD
business

Financial crisis.
LCD panel iscommoditized

Non-LCD related
business

Business
Situation

Low performancein CRT TV
business24

we can reconfirm that Sharp’s managers paid most of their attention to LCD panel
development and production, and they persisted in possessing and investing in them.
Such an adherence to the LCD panel facilities limited Sharp’s strategic options andbrought on the crisis. These findings are consistent with the past research about cognitionand organizational change indicating that managers are unwilling to change answers forthe issues in which they were most interested (Kaplan et al, 2003, March and Simon,
1958, Tripsas and Gavetti, 2000).
Next, from the case, we can indicate that Non-LCD-related departments except
for solar cells were disposed of, as competition in the LCD-related business accelerated(Table 3). The semiconductor department was curtailed in 2001, PCs in 2005, and home
appliances in 2006. Managers recognized those products were difficult to develop, both interms of business and technology. Multifunctional printers had some degree of presencein the market, but managers did not invest in those areas. Revisiting Figure 1, we can findthat those products were positioned always nearly outside the area of focus. Figure 1
shows that Sharp’s managers did not mention non-LCD-related business often: seventimes for IC (four times especially for withdrawing from it), four times for home
appliances, once for multifunctional printers, and PC’s were never actually discussed. Tosummarize, managers disposed of or ignored products viewed as being nearly outside offocus. This finding is also consistent with previous studies (Gilbert, 2005, Ocasio, 1997,
Cohen, March, and Olsen, 1972).
From Figure 1, we can say that issues concerning the LCD-TV
business strategy, mobile phone business strategy, LCD-panel supply business,alliance policy, branding policy, health instrument business strategy andbusiness model were shifting around in the focus of their attention. Thoseissues were dealt with when managers recognized they were important. They
were characterized by frequent changes in answers. Figure 2 shows thefrequency of answer change tends to be higher when the amount of deals is
lower. In other words, Sharp managers tended to keep answers unchanged for
issues which managers always paid attention to and to change answers
frequently for ones that managers only sometimes paid attention.
Let us examine in detail the situation of frequent changes in issues and answers.
Concerning the business strategy for LCD-TVs, Sharp managers always paid attention toit, but they changed answers for it semi-regularly. They decided to enter into the large
size LCD-TV market as a substitute for CRT-TVs in 1999. They gave the role of branding
for the LCD-TV business in 2001, but they changed it to Sharp’s main business in 2004.
They changed market focus from Japan to Global in 2006, began focusing on thehigh-end segment in 2008, and focused again on the Japanese market in 2010. About thealliance policy, managers decided to become independent in order to hide Sharp’s
technology and know-how in 2002 (it appeared in the security report in 2004). They did
not consider it during the period from 2005–2007, but they reconsidered it in 2008 (itappeared in the security report in 2010) and started alliance building to facilitate thetechnology transfer business. Furthermore, Sharp managers tackled issues about businessmodel change from 2009, while they had never dealt with it by 2008. Such flexible deals
for issues and answers were quite different from those for always-central issues andissues always outside of attention. Therefore, we can add up a new proposition about thedealing with managerial issues and answers:

PROPOSITION 1. Even when managers persist in specific answers for central issues,
26they have a certain degree of freedom for choosing which issues to attend to and answers
for them.

Issue and answer selection as a tactic for a temporary expedient

From this case, we pointed out an example of flexible changes in issues andanswers for maintaining the answers to central issues: the policy of internal LCD panel
development production. Checking the narratives, we find that Sharp managers changed
their explanations for possessing LCD panel facilities in the changing businessenvironment. In 1998, when Machida was promoted to president, he decided to construct
a new LCD panel plant for making LCD TVs. Its objective was to improve brandperception. In 2001, Machida decided to invest in a new plant called Kameyama, forrealizing more efficient production to compete with larger rivals like Samsung and Sony.
When Sharp was constructing Kameyama Phase 2 in 2004, managers explained that they
had to enlarge capacity for developing the panel supply business and TV businesssimultaneously. When continuing investment in the Sakai plant, Sharp managers
explained that Sakai was vital as a “mother plant” for facilitating partnerships. Frequentchanges in the business strategy for TVs, mobile phones, and panel supply, businessmodel, alliances policy, and branding policy had been done in accordance with those
explanations.
From these considerations, flexible changes toward which issues deserve
attention and answers could be explained as a way of temporary expedient. Whendecision-makers persist in specific managerial policies, they have to develop rational
reasons to convince internal members, external stakeholders, and also themselves, of thevalidity of their policy. And those reasons have to be modified as environments changes.
27

Therefore, decision-makers frequently change the meaning of the central policies, andmodify peripheral settings around them. Such flexible but temporary adjustments toenvironmental changes are explained as an aspect of justification for immutable corepolicy (Festinger, 1957, Staw, 1981, Staw, McKechnie, and Puffer, 1983). Suchman(1995) discussed, in the context of organizational legitimacy theory, there are three tactics
for justification: (1) efforts to conform to existing situations, (2) efforts to select among
multiple environments, and (3) efforts to manipulate environmental structure. Those threetactics could be seen in Sharp managers’ treatment of issues, except for those about LCD
panel department.
Thus, Sharp’s contrasting stickiness to central issues and flexibility for others isthought to be two sides of the same coin: the target and the means of justification. Sharp’s
managers wanted to keep the policy of possessing LCD panel production anddevelopment departments, so they modified answers for several related issues to give a
suitable meaning to LCD panel production and development. As the environmentschanged, the attention distribution of Sharp’s managers was restructured. Along with thisattentional shift, they altered the choice of which issues were attended to and theiranswers, and used them to justify the possession of LCD panel department. Consequently
we came to a proposition about the relationship between central issues and answers andthose related to central ones:

PROPOSITION 2. When managers persist in specific answers for central issues, theyflexibly pick up other issues and give answers to them to justify the central issue.

28

Flexible issue and answer selection rather intensifies rigidity

Flexibility about peripheral issues and answers is important in the sense of administrative
science, because it prevents drastic organizational changes. If Sharp’s managers did notchange market strategy or alliance strategy so flexibly, or if they did not noticeenvironmental changes, Sharp’s strategic inadequacy would have become obvious earlier.
Then, they could have changed their solutions to LCD panel production and development.
Flexible changes of which issues to attend to and their answers around the true center ofattention disguised the essential problem occurring in the central issues and answers: The
inadequacy of excess LCD panel production facilities. Thus, we can discern anotherproposition:

PROPOSITION 3. Flexible changes of issues and answers for the sake of justification
prevent drastic organizational change by disguising the inadequacy of fixed answers forcentral issues.

Past studies stress that rigid cognition prevents organizational change bybringing adherence to central issues and ignorance to outside ones (Leonard-Barton, 1992,
Triopsas and Gavetti, 2000). By introducing an attentional view that issues and answers
are moving up and down in managers’ minds, we added another impact of rigid cognition
on issues and answers to the middle of both. Flexibility in selecting issues and solutions
is sometimes quite problematic because it disguises fundamental problems occurring withcentral issues, because such flexibility would be brought about by the justification biasthat makes managers keep their core strategies unchanged (Figure 7).

29Issues always in the focus of attention
Keep answers unchanged
Issues moving between focus andoutside of attention
Managers’
rigid
cognition

Modification of selection ofissues and answers inaccordance with the situation

Rigidity in
Strategy
choiceIssues always outside of attention
Disposal of issues or
ignorance to select answers

Figure 7. Ways of dealing with issues in focus, outside of focus and in-between whenmanagers have adherence
Limitations
This study has some limitations. First, this is an inductive case study, so empirical tests
are out of scope of this paper. Future work could test numerically the propositions derived
from this study. A related problem concerns the duplicability of the phenomenon. We
cannot say that firm managers always show flexibility in issues that are not placed at thecenter. How often and when this flexibility occurs should be examined in the future. To
solve these problems, not only quantitative tests but also several other qualitative caseanalyses are needed.
Despite these limitations, we can nevertheless conclude that firm managers
change which issues they attend to and their answers when they have a certain degree ofadherence to central issues and answers, and it enforces the rigidity of their decisions for
issues in their focus. As this study is for hypothesis generation, future research should test
such hypothetical relations with more strict methods.

30

Conclusion: implications for academics and practitioners
In this study, we searched for the effect of managers’ cognition on issue selection andorganizational inertia. Previous studies mainly investigated the cognitive effect on issues
either in the focus of attention or those outside of it. In order to refine the understandingof rigidities in making strategy, we introduced the idea that the degree of importance ofdifferent issues was changing. By examining the transition of issue selection, narratives
by managers, realized strategy, and the final outcome from the case of Sharp crisis, wefound that managers’ adherences bring certain flexibility in selecting issues and answers,
but it rather reinforces rigidity in making strategies for their central issues.
Finally, we would like to discuss the implications for practitioners. Our study
suggests that organizational evolution is prevented not only by poor managers but also by
smart ones. Managers who understand the business situation and possess good judgment
often fail to make changes if they persist in something critical in changing environments.
In such a situation, flexible peripheral tactic changes do not refer to the capability tochange, but really mean that managers try to justify their current strategy. In this sense,
managers should be reflective about their fundamental beliefs, when they confront
environmental changes.
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