Scaling Up with Amoeba Management: The Inspiring Story of Kazuo Inamori
This month, I immersed myself in the story of Kazuo Inamori. The tale of how he founded and scaled Kyocera into a multinational is both inspirational and fascinating. In fact, I think it is so good that I’m going to include the story in a new book I'm writing about large flat companies. But why is it so good? Let me explain the highlights.
In 1959, a young Japanese man named Kazuo Inamori became increasingly frustrated at Shofu Industries, a company he started working at after graduating as an engineer from Kagoshima University. Realizing that he could not reach his goals as an engineer at this company, especially after he had a blowout with the new boss recently appointed as head of his research department, he decided to quit his job.
Together with seven colleagues who all decided to leave Shofu Industries, he decided to start their own company, Kyoto Ceramics, later known as Kyocera. They had no money, no experience, no real technology, and no facilities, but that would not be a problem in the long run.
Let’s rewind a bit…
Let's travel back to Japan in the 1950s. Although Inamori and his friends did not have money, experience, technology, or facilities, they had the most important thing: each other. They treated each other as business partners and fully respected and trusted one other.
The first employees started to work together as fellows and felt they were real entrepreneurs who needed each other to make their company successful. And what a success it was—the company started to grow rapidly. Within five years, they grew to more than 100 people, then 200, then 300.
When the company started to scale into hundreds of people, Inamori started to develop serious doubts about running his company in the traditional way. Because Inamori wasn’t aware of the existence of management consultants, he developed a unique way of working based on his own personal experience with managing people.
This way of working was dubbed the “Amoeba Management System,” with the goal to “help people who work in amoebas to lead happier, more meaningful lives.” Not only did it do that, but it also enabled Kyocera to become a multinational company.
Inamori then used his unique management philosophy to build another large company, KDDI, from scratch and eventually used it to revitalize Japan’s national pride, Japan Airlines (JAL), from bankruptcy.
The roots of market dynamics in companies
Inamori’s Amoeba Management System can be regarded as one of the oldest and most significant catalysts that helped bring market dynamics into large organizations. One of Inamori’s most important management principles says it all: “Pricing is Management.”
Amoeba philosophy argues for dividing the large company into many small units, called “amoebas,” with each unit being the smallest possible that’s still capable of functioning as a discrete business unit (Kyocera had thousands of amoebas).
In this view, every single amoeba is seen as a self-supporting unit—an independent profit-and-loss center (with profit-and-loss statements and responsibility) linked directly to other amoebas and the market at large via market dynamics.
An official leader is appointed in each amoeba, and the amoeba leaders feel as if they are running their own little companies.
Although strongly centered around their leaders, all amoeba members are expected to actively run their unit and must set their own goals. And everyone in the firm is expected to do everything in their power to reach those goals.
Three key mechanisms
Each amoeba is expected to manage its own profitability with the idea that this allows them to respond rapidly to market changes. Inamori argued that three mechanisms are necessary for this to happen.
1. Amoebas pursue profit
Each amoeba must be able to pursue profit (“maximum added value”) by following the principle of “maximize revenues and minimize expenses.”
From Inamori’s perspective, sales are unlimited, and expenses can be cut to an absolute minimum. As such, his view is that profit can ultimately be raised to any level.
2. Amoebas transact autonomously
Each amoeba must be seen as an independent accounting unit that must be able to buy and sell with other amoebas.
At Kyocera, this was called “Internal Sales and Purchases,” which facilitated transactions between amoebas with prices calculated and guided on what the company’s end customer would pay for the product or service. However, prices were still ultimately determined by negotiations and consent between the individual amoeba leaders.
Moreover, the internal market prices had to align with the open market. Amoebas enjoyed the freedom to send work to outside contractors when in-house amoebas could not solve cost or quality-related problems.
3. Amoebas set monthly monetary targets
Finally, each amoeba must set monthly targets and make plans to reach those goals. They also must publish monthly results in a transparent manner so everyone can easily understand what the performance of each amoeba is.
Moreover, the targets and results must always be expressed in monetary terms based on the idea that money is a universal measure used by everyone on a daily basis and therefore is suitable to easily find common ground.
Manage the contradiction
Inamori believed that when such market principles run throughout the organization, amoebas cannot help but increase their competitiveness by constantly exploring how they can add value to their respective part of the business.
While he pushed for strong market dynamics inside the firm, Inamori also argued that there must be no contradiction between the success of a single amoeba and the prosperity of the whole. That is, it does not make sense for one single amoeba to perform well while the company as a whole suffers.
That is why Inamori argued that next to market dynamics, all amoeba leaders must be motivated to make decisions guided by the idea of what is best for the entire company.
Modern-day versions of Amoeba Management at scale
Over the last several decades, hundreds of companies, especially in the Asian region, have adopted and further developed Inamori’s Amoeba Management System.
As I wrote in the introduction, I'm currently writing a new book that captures the story of Inamori. Well, that and a lot more.
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