performance management system

Ralph W. Adler and Toshiro Hiromoto

Department of Accountancy, University of Otago, New Zealand and Graduate

School of Commerce and Management, Hitotsubashi University

Abstract

The design and operation of management control systems, what is increasingly being referred to as performance management, has occupied the attention of managers and scholars alike for the past 50 years. This paper discusses a Japanese-introduced concept called amoeba management, a concept that has the potential to revitalize and reinvigorate stale and stolid organizations. While the amoeba approach looks on the surface to be quite similar to the operation of profit centers, in actual fact amoeba management goes well beyond organizational structuring. Using Simon’s framework, this paper shows how the amoeba approach embodies all the characteristics of a complete performance management system. Amoeba management is well supported by Japan’s unique national culture. As a consequence, its transferability to other settings, such as Anglo-American ones, may be far from straightforward and may require additional, compensating mechanisms.

Keywords: performance management, management control, Simons, responsibility centers

Amoeba management

Amoeba management seeks to structure a company into small, fast-responding, customer-focused, entrepreneurially-oriented business units operating like independent companies that share a united purpose, i.e., the parent organization’s goals and objectives. The amoebas are intended to act in coordinated independence from each other. The goal is to empower each amoeba to the point that each is akin to an independent company, with each seeking to manage its profitability.

The use of the word “amoeba” is meant to capture the concept of an entity at its smallest, most elemental level, as well as to describe its life-like capability to “multiply and change shape in response to the environment” (Inamori, 1999: 57). In other words, amoeba management is intended to offer a spontaneous, homeostatic response to a business world that features rapid, dynamic change.

Amoebas typically consist of 5-50 employees. Each amoeba is responsible for a meaningful organizational activity, an activity that is meant to mirror what currently exists (or could exist) in the outside, competitive environment. The amoeba manager and his/her employees are encouraged to act like the owner of a small, independent company. Accordingly, the manager is responsible for a wide range of activities, including the regular ongoing daily

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activities of purchasing raw materials and hiring and scheduling labor, as well as the more strategic activities of new product and new market development. Ultimately, the amoeba manager is meant to be responsible for managing his/her unit’s profitability, and in the process becomes not just a valued and respected managerial decision maker but part of a set of de facto business partners.

Reliance on a myriad of small, loosely coupled amoebas creates a critical management challenge: how to ensure organization-wide harmony and coordination. For without this harmony and coordination, amoebas could undermine other amoebas' or, ultimately, the entire organization's performance (Inamori, 2007: 79). Accordingly, as Hiromoto (2005) points out, amoeba management features interactively cycling micro-macro loops (MMLs) of information flows between the organization as a whole and its individual amoebas. In particular, as Hiromoto (2007: 98-102) notes, the information flows focus on disseminating and receiving information related to two main factors: 1. organizational values and management philosophy and 2. organization-wide and amoeba-level performance.

The examination of amoeba management can be facilitated by applying Simon’s performance management framework. Accordingly, Simons’ performance management framework is next introduced and discussed. Following this discussion, Simon’s framework is applied to understand how an amoeba system operates and what it is expected to achieve. The experiences of Kyocera, a Japanese manufacturer of ceramics and printing-related devices, in using amoeba management are liberally drawn upon to showcase its features and illustrate its practices. In the final section, the paper’s conclusions, and implications of these conclusions, are offered.

Simon’s performance management framework

Simon’s performance management framework is characterized by four dimensions: belief, boundary, diagnostic, and interactive systems. Belief systems comprise the inherent values of an organization. These values are often a product of how senior managers define their particular organization’s mission and view the relationships among its key stakeholders. An organization’s values manifest themselves in the folklore, stories, symbols, and attitudes that are routinely expressed by the organization’s members.

Boundary systems are commonly referred to as the “rules of the game.” While Simons suggests that these rules of the game are best expressed in the negative, such as a statement like “the company will not source its inputs from sweatshops,” these negative expressions can be readily seen as the flip side of positive expressions. For instance, the above negative expression can be reworded as “the company will only source its inputs from suppliers whose work practices include internationally-deemed acceptable standards of workers’ rights and safeguards of employee health and safety.” Accordingly, what most matters for boundary systems, especially if the organization seeks to promote employee initiative and creativity, is not whether the boundaries are negatively or positively stated but that only the minimum number and most crucial set of boundaries are imposed. To do otherwise will constrain employee action and creativity.

Diagnostic systems are the set of measures that an organization routinely collects for the purpose of ensuring that the organization is basically on track for doing what it needs to do. The measures are meant to provide managers a quick assessment of how their organization is performing, with this performance generally being relative to a set of predetermined

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standards or benchmarks. Assuming that the measures indicate performance is near the benchmark or within certain prescribed parameters, then the employee needs to take no further action. It is only when the measures signify some type of abnormal performance that employee investigation and action is required.

Interactive systems refer to the use of surveillance practices of and the promotion of employee conversation and debate about organizational challenges that are likely to significantly impact the organization’s strategy and/or the implementation of it. As Simon’s notes, interactive systems cover the kinds of challenges that are likely to give managers sleepless nights. Managers and their employees must remain vigilant to these environmental opportunities and threats. They do so by ensuring that their organizations regularly and frequently gather data about the direction and movement of these key challenges, and subsequently ensuring that the data serves to situate and motivate employee thinking and action.

Amoeba management at Kyocera

Table 1 uses Simon’s four dimensions of belief, boundary, diagnostic, and interactive systems to describe and discuss amoeba management at Kyocera. As previously noted, Kyocera is a Japanese manufacturer of ceramics and printing-related devices. It is a pioneer and leading innovator in the use of amoeba management. Amoeba management system features Amoeba outcomes · Purpose of work · All organizational members · Purpose and responsibilities of a are treated as true business Belief company partners · High trust · Customer-oriented philosophy · Entrepreneurial orientation · Nothing should be hidden · Fast, self adjusting subunit Boundary · relationships akin to a living Diagnostic · Profit margin chart organism · Order backlog data · Daily meetings involving management group and amoeba · Amoeba unit success is achieved but not at the leaders sacrifice of corporate · Daily meetings involving amoeba success Interactive leaders and amoeba members · Monthly meetings involving business headquarters, sectional, divisional, · Organization growth departmental and amoeba leaders · Organization profitability · Organizational integration · Coordinated action Table 1: Amoeba management illustrated using Simon’s performance management framework

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Belief systems

Kyocera’s amoeba management system is predicated upon and enabled by a set of powerful organizational values. The extensive nature and uniqueness of these organizational values is at the core of why Inamori (1999: 58) views amoeba management “as a management system, not merely a technique.” While some of the values are generic to Japanese companies, others are unique to Kyocera.

Amoeba management success can only occur when amoeba managers and employees act like independent, profit conscious companies and do so in a way that does not compromise the greater good of the company. As previously noted, MML information flows, and in particular the MML comprising organizational values and management philosophy, are used to temper selfish behavior. Kyocera’s organizational values are a product of both Japan’s national culture and its founder, Kazuo Inamori.

As noted in the work of Hofstede (1991), Japanese culture is characterized by high collectivity. As such, Japanese people are more willing to put the needs of their collective group ahead of any one person’s individual needs. This manifest itself in such ways as Japanese workers being more likely to agree with such statements as, “I want to live up to the expectations of my family, friends, and society.” Such an attitude of placing one’s wider society first helps to ensure that the amoebas are working for the greater good of their company, and not just for their own self interest.

Japanese workers’ conceptions of what work is serves as a further check on amoebas acting out of selfishness. Whereas it has been noted that Americans see work as a disutility, something that has to be done to acquire leisure, Japanese workers view work as a valued end itself. In particular, as Sullivan (1992: 71) has long pointed out, for the Japanese, “work is what one does if one is a good person.” Kazuo Inamori reinforces this idea when he writes that “work can provide a degree of spiritual satisfaction.” This understanding of Japanese people’s views of work gives rise to Akio Morita’s, the founder of Sony, description of work as a useful tool for ensuring that the interests of owners, managers, employees, and even society are achieved.

Kyocera is a perfect showcase for how work serves to define workers and produce societal benefit. The mission statement of Kyocera is stated as:

To provide opportunities for the material and intellectual growth of all employees, and through our joint effort, contribute to the advancement of society and mankind.

In addition to the role national culture plays in helping to ensure the unselfish operation of amoeba management in Japan, Kyocera’s history and, in particular, the background of its founder, Inamori, exert a key role. As Inamori (1999: 25) notes, his background as an electrical engineer at Shofu provided scant preparation for his role as founder and CEO of Kyocera. Compounding this problem, a problem which he described as his having “absolutely no experience, no background in management, and no confidence of success” (1999: 25), was the fact that there was no one to mentor him or offer experience, management advice, or confidence. Inamori describes the loneliness and isolation he felt during these initial days. It was at this point that he realized the need and benefit that could come from empowering his employees and letting them share in the responsibility of being an owner.

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Such empowerment, or so he felt, would allow him to gain the business partners he so desperately craved.

Inamori acutely understood that appointing people to management positions did not change the fact that his company sorely lacked management expertise. He further understood that there was no quick solution to obtaining this management expertise. Accordingly, soon after assuming his role as Kyocera’s CEO, Inamori came to the conclusion that the best way to operate his company was to base management decisions on whether they were the “right thing to do as a human being,” which Inamori further defined as the things that your parents and teachers taught you were right (Inamori, 1999: 31). This, in turn, led him to adopt as the company’s corporate motto: Kei Ten Ai Jin, which translates into “respect the divine and love people.”

Kyocera’s corporate motto is a key factor behind the success of its amoeba management system. First, it helped the company, including the CEO and his amoeba managers to overcome their collective lack of management expertise. More specifically, the corporate motto provides a clear framework on which management decisions could be based. A second benefit of the corporate motto is that it helps to preclude the occurrence of selfish amoeba behavior. In particular, the corporate motto serves to instill in its employees the values of being “unselfish and noble” (Inamori, 1999: 28), and this helps ensure that the loosely-coupled, entrepreneurially-inspired amoebas will act for the greater good of the company.

There are two further parts to Kyocera’s belief system that promote its amoeba management success: high trust and a customer-oriented philosophy. The strong Japanese work ethic noted above and Japan’s commitment to the philosophy of total quality management help underpin and make possible the high trust and customer-oriented philosophy.

Unlike a western view that sees employee behavior and motivation as a nexus of quid pro quo relationships between the organization and its employees (see, for example, Bass, 1985, and his concept of transactional leadership), amoeba management views worker motivation as the product of a person’s inherent desire to know that he/she has contributed to the good of the company and, by so doing, has earned the respect and appreciation of his/her peers (Inamori, 1999: 59). The belief that workers are naturally striving to produce their best and the organization’s best performance creates an environment of full trust, and helps transform the view of workers from simply being empowered employees to being the true business partners that Inamori so deeply craved when he set out to develop his amoeba management system.

Without full trust for the capabilities and motivations of his employees, Inamori’s Kyocera would never have been successful in creating and implementing an amoeba management system. He had to believe that his employees shared his sense of duty for making high quality products, ones that customers respected and valued. A lack of trust or a misplaced sense of trust is inimical to the use of an amoeba management system.

A customer-oriented philosophy is a further characteristic of Kyocera’s belief system and an integral part to supporting the operation of its amoeba management. Inamori describes the need for amoeba employees to be their “customers’ servants” (Inamori, 1999: 41). According to Inamori (1999: 41), this means not accepting the role with reluctance but doing so willingly and graciously. The amoebas are encouraged to produce “crisp” products, or what Inamori (1999: 43) refers to as “cutting edge quality that reminds our customers of the

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crisp touch of freshly-printed paper money.” By striving to be a customer’s servant, and it must be remembered that these customers can be either internal or external to the company, amoebas will ensure their coordinated, harmonious, and successful actions.

Boundary systems

The idea of not hiding information, and instead ensuring transparency in all activities, is an important boundary system for organizations that wish to use amoeba management. As Inamori (cf HBR case, footnote 52) notes, if the goal is to encourage employees to adopt the mindset of a business operator, then the organization needs to disclose as much information as possible about company circumstances. To do otherwise is akin to the mistake of failing to equate authority with responsibility.

The desire to share and expose information to the organization’s collective scrutiny is a classic feature of total quality management. The identification of organizational constraints, bottlenecks, or problems, as TQM proponents will commonly point out, typically offers significant opportunities for organizational improvement and competitive success. Due to the fact that amoebas are meant to operate in an organic, homeostatic manner in relation to their dynamic environment, the receipt of information, especially information about a failing internal process or a changing external environment, are vital to the successful operation of the amoebas.

It is for these reasons that Inamori requires his amoeba managers to be completely open and candid about their business performance. He understands that amoeba management will not work in an environment where people fail to fully disclose information or look for excuses. Accordingly, he expects his employees to indentify what went wrong and how the problem is going to be overcome. As noted above, the fact that trust is a very strong part of Kyocera’s belief system means that amoeba managers are able to openly and honestly discuss the situation, without fear of retaliative or punitive actions.

Diagnostic systems

The idea behind amoeba management is to empower workers to the point that they become independent owners and ultimately interconnected business partners of the organization. When Inamori conceived his amoeba management idea, he used the model of food stall seller. According to Inamori, there were just a few, basic factors that amoeba managers and their employees needed to monitor: revenues and expenses.

By subdividing the company into meaningful organizational activities, such as those that could realistically exist in an outside company, and assigning a transfer price to transactions between the loosely coupled amoebas, it became readily possible for amoeba managers to manage their unit’s profitability. As one refinement to the calculation of amoeba unit profitability, the profit of an amoeba is divided by the amoeba’s total number of labor hours for the given period of time. This produces an hourly efficiency number that can be used as an index for comparing amoebas with each other. In fact, the hourly efficiency measure is used at all levels the company: amoeba, divisional, and corporate. These hourly efficiency measures are captured in what are termed “per-hour profit margin charts,” which are indicative of dashboard indictors and ultimately diagnostic control.

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Amoeba management is especially well suited to fast-paced, dynamic markets. As Inamori (2006) notes, under such environments it is essential “to flexibly address these changes and to make preemptive moves ...” For example, if the market price for the company’s end product falls, then the amoeba management system is meant to create what the literature defines as a “reflexive,” “spontaneous” reaction to the prices the company’s amoebas charge one another. Of course, the changes in pricing are likely to also be accompanied by an equally “reflexive” and “spontaneous” change to the respective amoebas’ production levels. It is for this reason that order backlog data becomes a particularly important indicator of performance and management action. The order backlog data provides essential data for developing future sales and production plans. Accordingly, the order backlog data becomes another important dashboard indicator that is used for diagnostic control.

Interactive systems

There is a constant and continual need to ensure the coordinated action of the loosely coupled amoebas. While an organization like Kyocera’s belief system is the primary means by which this coordination is achieved, Kyocera takes advantage of other techniques for coordinating its amoebas’ activities. Face-to-face contact through the use of daily meetings and monthly meetings forms the primary supplementary vehicle for achieving this coordination.

Daily meetings are held within each amoeba. The workers meet to discuss and comment on the recent (generally the previous day’s) performance of their amoeba. While the hourly efficiency is used to motivate the discussions, it is important to understand that the hourly efficiency is only the beginning point for the discussions. The meetings are intended to get behind the numbers and understand why and how the hourly efficiency appears as it does.

There is also a daily meeting held between amoeba leaders/managers and the divisional management group. Again, although some of the dashboard indicators of hourly efficiency and order backlog motivates the meetings, the purpose is to get behind the numbers and engage in a dialogue that discusses and shares ideas for improving the amoebas’ and the division’s performance.

Once each month there is a meeting involving amoeba leaders, divisional heads, sectional heads, and participants from headquarters. Similar to the daily meetings, the intention is to go beyond merely presenting performance data, and to begin indentifying and debating critical market trends and their implications for the company, from the aggregate level all the way down to its various amoebas.

Conclusion

Drawing upon Simon’s (1995) framework, the amoeba system, as exemplified by Kyocera, can be seen as a full-bodied performance management system. While the amoeba system was modestly championed by Kyocera’s CEO, Inamori, as a way to compensate for his lack of managerial nous, the reality is that the amoeba system represents a very shrewd way to promote fast response to highly competitive and quickly changing external environments.

Amoeba management’s kaizen approach to quality and cost might be seen, and rightfully so, as being similar to other Japanese management techniques. But in addition to its emphasis on quality and cost, and what helps set amoeba management apart from such techniques as TQM and JIT, is the additional entrepreneurial dynamism that amoeba management brings to a

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company. Amoeba management seeks to develop this entrepreneurial spirit by empowering all employees and instilling in them the sense and pride of being business partners. The ultimate aim of amoeba management is to inspire an organizational-wide effort to pursue improvements in product/service cost, quality and innovation.

Amoeba management can, as Inamori often promotes it, be a highly successful means for jolting organizations, whose market success has taken them from being small and agile to large and lethargic, out of their lethargy and back to being quick, nimble, and customer-responsive. In addition, however, it would appear that amoeba management, especially in regard to its attention to the simultaneous improvement across the three dimensions of cost, quality and innovation, is an especially pertinent technique for organizations operating in hyper competitive settings. As Adler (2006) notes, for these organizations, which are likely to be pursuing either consciously or unconsciously Cooper’s (1995) idea of confrontation strategy, there is no opportunity to make trade-offs between cost, quality and innovation. Attention to and improvements across all three are necessary just to stay competitive and remain viable.

Amoeba management therefore is relevant to many organizations operating across many different settings. Though the need for amoeba management may be great, its successful adoption is unlikely to be easy or straightforward. This is likely to be especially true for Anglo-American organizations, which are unlikely to be able to readily draw upon or develop the kind of belief systems needed to support amoeba management system adoption. As noted above, the collective/team oriented approach of Japanese workers, combined with their views about work being a valued end itself, are important supporting mechanisms of amoeba management. It may prove difficult for Anglo-American organizations to develop suitable strategies to overcome their handicapped position on these two factors or come up with alternative means for compensating this disadvantage. There will, however, likely be lessons to be learned from the previous transplantation of other Japanese management techniques (e.g., TQM) to Anglo-American settings, and these lessons could feature as a guide to the adoption of amoeba management as well.

References

Adler, R.W. (2006) “Confrontation strategies and the design of performance management

systems,” Chartered Accountants Journal, Vol. 85, No. 2, pp. 55-58. Bass, B.M. (1985) Leadership and Performance Beyond Expectations. New York: Free Press. Cooper, R. (1995) When Lean Organizations Collide: Competing Through Confrontation,

Cambridge: Harvard Business School Press. Hofstede, G. (1991) Cultures and Organizations. London: McGraw-Hill.

Inamori (1999) Respect the Devine and Love People, SanDiego: University of San Diego

Press. Inamori (2007) A Passion for Success, Singapore: McGraw-Hill.

Mayo, A.J., Egawa, M. and Yamazaki, M. (2008) Kazuo Inamori, A Japanese Entrepreneur,

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Simons, R. (1995) “Control in an Age of Empowerment,” Harvard Business Review, pp. 80-81. Sullivan, J.J. (1992) “Japanese management philosophies: from the vacuous to the brilliant,”

California Management Review, Winter, pp. 66-87.

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