Management Accounting in an Amoeba Management Profit Center Setting
John Martin August 2, 2011 Accounting 521 Term Project Management Accounting in an Amoeba Management Profit Center Setting Introduction A profit center is a when a responsibility center’s performance is measured in terms of a profit. Both departmental revenue and costs are accounted for. The resulting profit (or loss) directly affects the bottom line of a company’s overall financial performance. Any department, division, business unit, etc. within an organization’s structure can be designated, structured and accounted for as a profit center. Peter Drucker originally created the term profit center in the 1940’s.
The idea was that the manager would treat the department much like his own business with an entrepreneurial spirit akin to the company philosophy while hopefully taking into account the long term viability of the department when making decisions. Some companies have gone so far to create micro-profit centers. In the spirit of promoting empowerment to lower level employees as well as to develop future managers, companies create large numbers of small work groups or “amoebas”. These 10 person groups may be in charge of a step in the manufacturing process and are required to sell their product internally to another department.
These inexperienced employees are acting as managers of their own entrepreneur spirited company. An example is technology company Kyocera Corporation in Japan. Its divisions frequently divide into amoebas expected to trade both internally and externally. Separate amoeba counts have been as high as 800 across all divisions. In this paper I will address the following: a. How much autonomy should a corporation grant its amoebas? 1 b. What kind of data should be measured and shared within the amoeba work group and for what purposes? c.
How transparent should management accounting data from one amoeba be for other amoebas within the same company and for what purposes? d. How do management accounting practices influence company culture? e. What is the management accounting role in enabling these otherwise inexperienced managers to succeed? f. Can the amoeba management system be transferred to other companies and other industries outside Japan? About Kyocera Kyocera Corporation is a Japanese multinational company based in Kyoto, Japan. Founded in 1959 as a company specializing in the production f fine ceramic components, Kyocera Corporation has grown into one of the world’s preeminent manufacturers of electronics. Although over the years Kyocera has been known more for its individualistic spirit than as a typical Japanese company with a communal spirit, the company’s corporate culture reflects a standard Japanese dedication to the manufacture of superior products. Kyocera is one of the most profitable companies in Japan. As of 2007, it was divided as 184 companies based on products and geography. Its divisional structure would be considered a diversified related firm.
The Amoeba Management System The founder of Kyocera Corporation, Dr. Kazou Inamori, developed the amoeba management system. It is based on the biological characteristics of an amoeba, an organism of micro size with an ability to change itself constantly as a matter of survival. As applied to an organization, the company itself is looked at as a set of living organisms working together. 2 In response to a growing bureaucratic system that its divisional structure ultimately created, Kyocera wanted to develop an organizational structure that generated a sense of partnership and profit generation at all levels.
Dr. Inamori desired to pass on his entrepreneur spirit to his employees, atypical of most Japanese companies. He wanted to permit employees to both have an influence in how their work is performed and to enjoy it. Amoeba units are profit centers and act as small separate companies. Most amoebas are in manufacturing (to produce the product) and sales (to sell the product). Amoebas trade both outside and inside the organization using market prices. An amoeba within an organization will commence, divide, or disband on a regular basis in response to needs.
Personnel moves from one amoeba to another on part or full time basis and always short term. Administrative support is provided by other departments to all amoebas. With the proper management control systems, namely performance measurements that contribute to a management accounting system which answers whether or not a company’s mission and objectives are being met, extensive autonomy granted amoebas is worthwhile as it best utilizes the most valuable and sometimes overlooked asset a company has, the minds and wills of its employees. Management Accounting Systems in Amoebas Dr.
Inamori of Kyocera felt that the amoeba itself is part of a management control system through independent profit management (the profit center designation) of small groups. A management accounting system is a tool within the management control system. Any accounting system is a measure and reporting system to aid managers in making decisions. Most specifically, it is part of the planning and budgeting process and performance evaluation process. 3 One reason a large company divides into multiple single business units is to promptly respond to market changes.
Even further would be the amoeba within the business unit. Its management accounting system will evidence profitability as it trades inside and outside the company on market pricing. The management accounting system requires amoeba managers to report operating and financial metrics to a section or division manager, generally monthly. Measured results may consist of value added labor hours in production and orders received, sales revenue, orders shipped, and value added labor hours by sales personnel.
Determining added value is behind Dr. Inamori’s devising of the “Hourly Efficiency Report”. Added value per hour is calculated by dividing added value by total hours worked: Added Value ($) Total Hours Worked (hours) In that an amoeba unit is generally one link in the overall value chain generated by a company, such as the production process or sales step, the added value provided by an amoeba displays the contribution of that amoeba within the organization’s overall contribution to the value chain.
By having management of an amoeba take ownership of their own value added activities, and having the amoeba management reviewing its own operating and financial metrics such as orders received, value added per hour, man hours, revenue, and variable and fixed overhead, and comparing them to budget, prompt corrective action measures may be taken by those that understand the operation the most, the very employees within the amoeba. The small group size insists on full participation of all members in management.
The management system becomes transparent, as does the management accounting system which must provide accurate and timely awareness of the state of the amoeba. Transparency and disclosure of the state of the amoeba, other amoebas within the organization, and the company as 4 a whole, promotes awareness and in turn a sense of ownership among employees, often stimulating motivation in employees to strive for improvement. Due to the constant forming and disbanding of amoebas within an organization, consistency and comparability of common metrics is helpful as employees frequently move from one amoeba to the next.
What the company deems important to measure and share will help shape the company’s culture. Measurable accountability of a step in the production process clearly enumerates the value added contribution of the amoeba. In the case of the amoeba structure, the management accounting system of the profit center approach of the amoeba creates a culture of ownership among the amoeba members. This generates a sense of awareness by the amoeba manager similar to ownership in going about the duties and responsibilities.
Kyocera feels that instead of an employee having a “what can the company do for me” perspective he instead will exhibit a “what can I do for the company” kind of leadership. Management accounting practices within a company provides the framework for what is deemed relevant and important in order for the organization’s strategy to be fulfilled. At the amoeba level, departmental goals (in the form of a budget) are established so all members are aware of the objectives.
Frequent measuring of progress and outcomes such as sales orders, cost of goods sold, wages paid, overhead expenses, gross profit and value added by the amoeba, with all measures compared to budget, provides a running balanced scorecard that is easy to understand. By providing clear objectives and defined measurable categories, all employees will know what is expected of the amoeba. The employees are less likely to be distracted with irrelevant factors once they are aware of the measurable priorities the organization desires to see fulfilled.
Through regular communication of these operating metrics, often on a daily basis for 5 production related processes, any employee in the amoeba will feel a sense of responsibility. The small size of an amoeba group requires every employee to actively participate and contribute to its success, with no one employee in the group able to shirk its duties due to the small size and close relationships an amoeba produces. The small group size of an amoeba will cause employees to display their leadership and management skills out of necessity to meet objectives.
At the same time, the small size will enable the company to groom future leaders and manager without risking significant losses or setbacks. Transferability of the Amoeba Management System While the amoeba management system has enabled employees at Kyocera to be empowered with making a difference in how their company is run and generating a company culture of pride in ownership, adaptation outside Japan may be difficult to accomplish. There is less homogeneity in the workforce of other countries along with more of an individualistic spirit in western countries.
Japan as a culture and in particularly within its workforce has a team oriented belief system not easily replicated elsewhere. In addition, identify of self is strongly tied to the company a Japanese employee works for. The same dedication to one’s employer, a high value placed on work itself, and strong work ethic is not likely found in other countries. Amoeba Structure as Alternative Management Hierarchy Other companies are using the amoeba structure as an alternative to a more traditional vertically oriented management hierarchy.
It is also a manner to adapt to an industry’s need for a company to be dynamic and flexible with product development and sales in fast changing market environments. A well known example is the W. L. Gore & Associates, a privately held USA multi-national firm best known for its “Gore-Tex” textile material used in outdoor adventure weather resistant clothing. Gore emphasizes a team-based environment that supports personal 6 initiative and person-to-person communication among all of their employees leading to increased employee satisfaction and retention.
Gore’s hierarchy or lack thereof is best described as a flat, lattice organizational structure. There is no chain of command or predetermined lines of communication. Gore, which instead calls their employees associates that carry no titles, prefers selfregulating groups that are similar to amoebas. Their group leaders are nominated from within the group, with a group’s success based on performance measurement criteria formulated by the company.
An associate will transition between leader and member status in groups. Conclusion The very nature of an amoeba is constant transition. Members of an amoeba work group are expected to regularly change the group makeup, change leaders and change the objectives. Kyocera saw a need to address its inability to respond to market changes due to its growing bureaucracy created by its divisional structure. Empowering employees through the amoeba structure of a micro-profit center was their response.
Using clearly presented objectives, documented and measureable expectations (budget) with documented and measurable results (performance evaluation) presented in a transparent and understandable format (balanced scorecard) helped turn any employee into an amoeba manager with a sense of ownership as every employee is literally on the same page. 7 References Adler, Ralph W. and Toshiro Hiromoto. 2009. Amoeba Management: Lessons From Kyocera On How To Promote Organization Growth, Profitability, Integration, and Coordinated Action.
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