Management Control Systems in Japan

Takashi Shimizu

• Publisher: Routledge
• Year: 2017
• ISBN:
  9781351777780
• Edition: 1
• Topic: Business
• Subtopic: Managerial Accounting
• Index: Business

As the world's third-ranking economic power, Japan's style of management, such as the lifetime employment system, the seniority system, and an enterprise union, has been well studied. However, little else is known about the Japanese management control systems (MCSs) and management accounting systems, which are significantly different from other economic powers.

This book sheds light on Japanese MCSs and the differences with those of the United States, illustrated with examples from Mitsubishi Electric, Kao, and more. This book aids not only researchers in management accounting, but also provides more useful insight for international investors and management accountants that can prove useful in business management.

1
Introduction

What are management control systems in Japanese companies?

Key learning points

• Management control systems are critical to implementing business strategy.
• What are management control systems in Japan?
• How different are management control systems in Japan from those in the Western world?

1. What are management control systems?

The purpose of this book is to clarify the features of management control systems (MCSs) in Japanese companies by comparing them with MCSs that have developed mainly in the United States.

Why should the features of Japanese MCSs be clarified? The reason is that there are some important differences between Japanese and U.S. MCSs, and I want readers to know and understand Japanese MCSs. For example, in U.S. companies, it is believed that Balanced Scorecard (BSC) is an excellent management tool and all companies should use it. In contrast, not many Japanese companies use BSC, even though top management and managers in Japanese companies are cognizant of the advantages of using BSC. According to U.S. textbooks, this is considered to be poor strategy because BSC is widely known as the brightest management control system in the world.

I have studied textbooks and papers written about control functions and published mainly in the United States for years. Some of the ideas in these textbooks and papers are different from those proposed in Japanese books and papers and from what I have heard directly from managers of Japanese companies. As a native of Japan, I have in-depth knowledge about how MCSs are used by Japanese companies. However, when I explain Japanese MCSs to people from other countries, most of them ask me questions such as: Why do Japanese companies adopt a different system of MCSs from that explained in U.S. textbooks? Do those MCSs work effectively? If so, why? In this book, I answer those questions.

Before dealing with those questions, I first have to define MCSs. The next chapter describes the definition and development of MCSs in detail, but in the remainder of the present chapter, I would like to show the features of MCSs instinctively.

MCSs move people to right action

Kaplan and Norton (2000) described business activities in the theory of Balanced Scorecard as follows. Companies have a long-term goal to achieve. They set a goal as an idealized vision and always pursue it. This goal is often called a mission. Companies set mid-term objectives aligned with the mission and formulate a strategy as a route to achieve the objectives. The strategy takes a specific form on a strategy map and is disclosed to all employees. They understand the strategy and think about what to do through the strategy map. This point is important. A lot of authors, including Kaplan and Norton, say that what is most important in today’s management is that companies align employees’ efforts with objectives and make effective use of employees’ talents and skills in order to carry out a strategy.

It is employees that lead a company. Therefore, to implement a strategy successfully, companies need to formulate an effective strategy, make it understandable to employees, and communicate the strategy to them repeatedly so that they can have a thorough grasp of it. Also, companies have to make certain that employees consider how to play a part in implementing the strategy, and then put their ideas into appropriate action.

As mentioned in detail in Chapter 2, Anthony et al. (1965) named these systems management control systems. In the latest book by Anthony and Govindarajan, the authors state that “management control is the process by which managers influence other members of the organization to implement the organization’s strategies” (Anthony and Govindarajan, 2010, p. 6). As demonstrated by this definition, MCSs are aggregates of some systems that influence people. Each system needs to be linked so that the achievement of managers’ objectives may directly lead to the achievement of an organization’s goal. It is often said that suboptimal management decision making may result from a lack of alignment of managers’ objectives with an organization’s goals and from managers setting objectives that are too high and hard to reach.

Although the proper setting of an objective is a difficult issue, what is most important in setting an objective is how stretch objectives managers can set by themselves. If managers always do their best, companies can produce the best performance in any circumstances. Among Japanese companies, Toyota is a good example to exhibit this. All employees in Toyota always make every effort to produce higher performance through their own initiative, even though they are not forced to work hard by their boss. The more of these types of employees in a company, the higher its performance is.

2. What are management control systems in Japan?

My research field is management accounting, and I have been studying management control systems and strategic management systems (SMSs) for years. Because many theories about MCSs and SMSs, as well as performance management models such as beyond budgeting, were developed in the United States and Europe, I have translated some of these works into Japanese to introduce them to Japanese scholars, businesspersons, and students. Some examples include Strategic Focused Organizations (Kaplan and Norton, 2001), Business Performance Measurement (Neely, 2002), Strategy Maps (Kaplan and Norton, 2004), Beyond Budgeting (Hope and Fraser, 2005), Balanced Scorecard: Step by Step, 2nd edition (Niven, 2006), Implementing Beyond Budgeting (Bogsnes, 2009), and the like. These books are extremely insightful, but I doubt whether they can be perfectly applied to Japanese companies. For example, Kaplan and Norton (2000) advocated that one of three value propositions – operational excellence, product leadership, and customer intimacy – be selected by companies as an area of focus, and that companies should not pursue more than one value proposition, because pursuing multiple value propositions may result in all propositions being incomplete. Is this really true?

Japanese companies always pursue operational excellence, product leadership, and customer intimacy simultaneously. That is, the goal of Japanese companies is to offer customers better products or services at lower cost, although observers outside Japan may argue that Japanese companies have lost their former splendor due to pursuing multiple value propositions. Japanese companies are extremely conscious of customer satisfaction. While it is clear that a company wins in a severe competition by ensuring a high level of customer satisfaction, in order to do so, it must exercise cost management.

When top managers of Japanese companies are asked about the most important stakeholders for companies, what do you think most of them say? Their answers probably will be investors, shareholders, customers, employees, and communities. If this question is given to top managers in the United States, their answers will certainly be shareholders. What does this difference arise from?

Companies, especially listed companies, are managed with funds provided by shareholders. Therefore, companies must value shareholders as stakeholders. However, to achieve outstanding performance financially, companies must make customers satisfied and draw a higher evaluation and a better act out of customers. To improve customer satisfaction, companies need to be excellent in every process. To make every process excellent, it is important for companies to employ talented people and train them, build better systems, and provide an information system. This is the cause and effect chain shown in “Balanced Scorecard,” advocated by Kaplan and Norton. As shown later, the adoption rate of BSC by Japanese companies is extremely low. That is not because Japanese companies that do not adopt BSC do not accept its theory. On the contrary, the logic of BSC is common knowledge in Japanese companies.

Instead, employees are treasured in Japanese companies. I would like to describe the historical background of this feature. The modern history of Japan focused on catching up. In the Edo period (1603–1868) Japan was in international isolation, with few diplomatic relations with other countries. During the Meiji period (1868–1912), the country was far behind Europe and America in terms of knowledge, technology, and social systems. Consequently, Japan rapidly advanced modernization under central government leadership. The phrase “We will make every effort in one body” was often heard in Japan, even after World War II. Japan made a unified effort to regain a rich life under democracy after a disastrous life in bombed ruins.

In modern days, Japan fundamentally focuses on making people’s lives rich. Japanese people have roots in agriculture, where people have treasured working in a group for thousands of years. Each person’s role was to keep order and play his or her role in the group. The rule of the group was that each person should work for the whole group, and the profits the group earned should be returned to each person. This traditional view forms the basis of Japanese MCSs. All employees working in companies thought that working hard was a contribution to society. For example, Sakichi Toyoda, the founder of Toyota, writes at the beginning of the Five Main Principles of Toyoda (Toyoda Ko-Ryo), “Always be faithful to your duties, thereby contributing to the company and to the overall good” (http://www.toyota-global.com/company/vision_philosophy/guiding_principles.html). This shows that for Toyota, first of all it is important to serve the nation. Also, the phrase, “Always strive to build a homelike atmosphere at work that is warm and friendly” is written in the company’s guiding principles. Toyoda persuaded his employees to have a family-like relationship.

Regarding contributing to society, the founder of Panasonic, Kounosuke Matsushita, advocates the philosophy that businesspersons’ mission is to supply people with various products as abundantly and cheaply as water. Through this philosophy, the thought that company activities benefited people began to spread throughout the whole company.

Accordingly, Japanese people thought that company employees were a kind of family, that the family made an affluent society in one united body, and finally that it brought them affluence. This history prevented management from thinking that employees were just the labor force, and prevented employees from thinking that a company was just an organization giving pay. Also, as mentioned before, Japanese companies give a high priority to customers. A lot of Japanese people deeply believe that the customer is always right or that the customer is king. On the other hand, U.S. companies probably think that only some targeted customers should be treated as king. Although Japanese companies’ view of customers is slightly changing these days, their view that all the customers paying for products or services have the highest priority is still deeply rooted. Compared with U.S. companies, fewer Japanese companies have the view that they should target customers and tailor products or services to their needs.

Viewed in this light, Japanese companies chiefly think of their contribution to society. In other words, their contribution means making an affluent society – that is, improving customers’ lives. The development of technology is essential to this mission, including information systems that employees can use and act on; most importantly, Japanese companies need a mission to encourage employees.

I learned that Professor Kaplan and Professor Cooper examined Japanese companies before. Although I do not know whether they learned the basic view of Japanese companies I outlined previously, I can ascertain the same view from their books on BSC and Target Costing. However, there is one differing notion that U.S. companies should focus their efforts on one of the three value propositions.

The basis of Japanese MCSs lies in providing empowerment to front-line employees. However, it would be untrue to say that empowerment is carried out perfectly. Some front-line employees and lower managers do not have much control to change how they work. Nevertheless, such employees should think about how to improve quality, lower costs, and step up the tempo of production. Why do most Japanese employees have such eagerness? What MCSs encourage them to have initiative? I would like to offer some answers of my own to these questions in this book. I will show the present state of Japanese employees, explain what brings about such a state, and attempt to illustrate the Japanese way of thinking.

Incidentally, I do not intend to say that Japanese-style MCSs are always right. Under proper conditions, those MCSs work well in Japanese companies. Inevitably, whether Japanese MCSs work well depends on background in management, especially people’s way of thinking about management. A lot of Japanese companies have begun to notice this, and are tailoring Japanese-style MCSs to global management, centering them. Most of the readers of this book will probably want to know about Japanese companies’ MCSs and their management style. First, I would like to explain Japanese companies’ MCSs and why Japanese companies have such MCSs. That will help you to understand Japanese companies’ behaviors.

3. The areas of management control systems in Japan

Some authors classify MCSs into various areas. A detailed way of classifying MCSs is mentioned in Chapter 2 of this book. Here I use the classification by Merchant and Van der Stede (2012). According to them, MCSs can be classified into three main groups: results controls, action controls and personnel controls, and cultural controls. From these three viewpoints, I will explain the features of Japanese companies.

Results controls

The most typical system of results controls is a budgeting system. Under the budgeting system managers at the investment center and the profit center have responsibility for profits, and managers at the cost center have responsibility for costs. When managers attain their budget targets, they are considered to have contributed to the attainment of the organization’s objective, and they earn high rewards.

Thus, results controls have a deep connection with a reward system. Employees make efforts to set objectives and achieve them. Companies highly rate employees who can achieve objectives, and give rewards for their good performance. In this case, the objective is often a financial one. Most middle managers and senior managers in particular have financial objectives, as do some lower managers and even some front-line employees.

Results controls in the United States mean that when a manager has high-level objectives and accomplishes them, he/she earns a high reward. These results controls are thought to work very effectively if a company has easy-to-measure financial measures and managers can produce an effect on them. In fact, the pay per performance system (PPP system) in most U.S. companies is structured in this way. On the other hand, although Japanese companies introduce a PPP system partly, they basically adopt a holistic approach of aiming to concentrate on improvement in the whole company’s performance, not individual performance.

In The Japanese Factory (Abegglen, 1958), James Abegglen cited lifetime employment and seniority-based wages as features of Japanese companies. They maintain lifetime employment, changing seniority-based wages. Each employee’s promotion is determined by general judgment based on financial performance, non-financial performance, and evaluations by superiors, colleagues, and subordinates. However, the Japanese pay system is basically pay for skill. It is thought that skills improve with age in Japan, so most companies adopt a compound pay system formed by pay for skill and wages based on job eva...

Table of contents

• Cover
• Title
• Copyright
• Contents
• List of figures
• List of tables
• Acknowledgments
• 1 Introduction: what are management control systems in Japanese companies?
• 2 Management control systems: definitions and development
• 3 Cost allocation systems: ABC versus Japanese cost accounting innovation
• 4 A challenge to better budgeting in Japanese companies
• 5 Management in decentralized Japanese companies
• 6 Balanced Scorecard versus the Japanese system
• 7 Performance measures: ROI, ROS, ROE, and EVA®
• 8 Management of advertising expenses in KAO
• 9 Transfer pricing in Mitsubishi Electric
• 10 Beyond budgeting or new budgeting? The case of Disco
• 11 Microprofit centers: amoeba system in Kyocera
• 12 The story of a comeback from bankruptcy: Japan Airlines
• Index