Self-control allows muscular management　― Keep your organization ‘muscular’ 2 ―

This time, Inamori* spoke about the above motto in his book : Practical Accounting -Business Administration and Accounting -. What Inamori said is quoted with “”.

Mr. Inamori highlighted the below five points for us to keep the above motto, in the chapter of ” Keep your organization muscular”. We will elaborate more for points three to five.

Make the best use of “second-hand” assets
Maintain the sound and healthy accounting (no non-performing assets)
No increase of fixed costs
No speculation ? count only money earned from hard working-
Buy only what is necessary

３．No increase of fixed costs

“ Therefore, what is important for muscle management is not only to lower variable costs that are linked to operating efficiency, such as raw material costs, but also to increase profit margins by keeping fixed costs at a constant level or lowering them as much as possible. In other words, as shown in the figure, by lowering total costs as much as possible, the break-even point is lowered, and as a result, profits are increased. . . . . therefore, like increasing fixed assets or labor costs, company management must be very much cautious about the increases in fixed costs. Top leaders often believe they are expanding their businesses, but when they look carefully at the fixed cost, they are astonished to find that fixed costs have increased unbelievably and it’s hard to go back. This sometimes happens. Despite the desires of top leaders, their companies end up weakening its management structure. ”

→In the course of our real estate assignments, in the property inspections, I have seen various properties, such as headquarters, factories, offices, stores, employee dormitories, and the president’s residential assets. I have often found some facilities to be overinvested. Those facilities are not either generating revenue or contributing to adding values. They are just causing additional and unnecessary costs. If top leaders have subconscious mindsets that they must increase costs, their actions will be naturally driven by such mindset and lead to increased fixed costs. I must talk to myself to be careful about my state of mind and pay close attention to increases in fixed costs.

４．No speculation ? count only money earned from hard working-

Inamori talks about the real estate bubble that occurred in Japan in the 1980s.

“(Regarding Kyocera’s prudent management during the bubble), I told them ‘I didn’t have the foresight that everybody says. But I don’t like chasing speculative profits. That helps nothing. I didn’t want to make money by flipping real estates.’ Speculation is basically a zero-sum game in which one person gains profit at the loss of another. Therefore, even if you get a speculative profit, it does not mean that you have created some value for the world. I mean the economic value, which positively helps people and society. Such value has nothing to do with the speculative activity. I believe the mission of a company is to create new value and contribute to the progress and development of human society through innovation and creative actions. I call the profits that come from such activities “profits earned from hard working.” I believe that they are the right profits that companies should pursue.”

→In addition to the bubble at the end of the Showa era, the bubble before and after the Lehman Brothers clash, and even now, we are in a situation called the “Everything bubble”. As Mr. Inamori mentioned here, the same situation we have seen now: people get more than full loans from banks to buy real estate. Looks like, “History repeats itself” and I think that is because the human mind does not change. Everyone fundamentally has the desire to “make money with no hard work”. If you think you’ve worked hard as a small business owner, you might think, “I’ve been working hard, so now I should deserve to rake in.” I think I should always think firmly about what the right profit is to be pursued by a company.

５．Buy only what is necessary

Inamori spoke about “budgeted accounting”.

“In other words, only the expense budget is steadily executed, and the budgeted sales have never been realized as expected. Isn’t that the reality of the budget system, is it? Therefore, I have been telling Kyocera staff, `Every single expense should be approved by the company. Furthermore, Kyocera purchases raw materials and other items only in the amount needed each month. . . . I know the price is cheaper if we buy in bulk, but this is not true at the end of the day. I know people are attracted by promotional sales: if you buy five liters, it will be cheaper, but you will end up wasting materials by using it excessively or spilling it. However, if you only have what you need now, you will use it carefully. So, if you need one littler now, you should buy one littler only.
(When I mentioned this to the accounting manager), he said, `That goes against common sense in business administration and accounting. Every economics and accounting book in the world tells you to buy the cheap one, but it doesn’t tell you to buy the expensive one.” I said, `I don’t care about common sense, just buy what you need” and we have done our best under this principle. The accounting manager later admitted my motto and said, `President Inamori, I realized that the truth contained in simple example you shared, and it is important.’”

→We must always question common senses and think about what it really means to `benefit’. It reminds me of the proverb “Penny wise and pound foolish.” I’ve also heard that, in Buddhism, using materials with the highest care is also called `donation’-giving what you have to others-. I believe that this “buy what you need” is the conduction of the “donation” virtue.

In summary, be especially cautious of unconscious increases in fixed costs and stick to “buy what you need”, while restraining your temptation to speculate. I think all of them are self-disciplines. Ath the end of the day, training our mind is very important.

* Mr. Kazuo Inamori, the founder of Kyocera, KDDI (one of the top tele communication companies in Japan) and the top of revitalization project of JAL. As a well-known Japanese entrepreneur, he has been sharing his experiences and management know-how with managements of small to middle companies in Japan.