Inamori Begins Kyoto Ceramic (Kyocera) as a Venture Manager

One might object to inclusion of Kazuo Inamori in Part III covering the post-1990s period because Inamori founded Kyoto Ceramics in 1959 (Showa 34), and his success coincided with the rapid growth of the Japanese economy. However, there is a reason for situating Inamori in Part III rather than Part II. His entrepreneurial activities were characterized by bold risk-taking when he began as a venture manager. His future-oriented market cultivation and technological development were based on the premise of growth through learning rather than preservation of the status quo, and he continued to evolve through simple yet unique measures for organizational revitalization. Japanese business leaders had lost these elements during the period of stagnation, but all were crucial to revive Japan’s economy. As if to prove the point, Kazuo Inamori continued to play an active role in the post-1990s period by putting Daini-Denden Inc. (DDI) back on track and rebuilding the bankrupt Japan Airlines.

Kazuo Inamori was born in 1932 (Showa 7) in Yakushi-cho, Kagoshima City. In the screening exams for junior high school, university, and employment, he was rejected by all of his first choices. He attended Kagoshima Junior High School (equivalent of high school in postwar Japan) and Kagoshima University (School of Engineering) before joining the Kyoto-based Shofu Industries. The company manufactured and sold insulators used in power grids, but was struggling under competitive pressure from Nihon Gaishi (NGK Insulators) and others, and was also mired in serious labor-management conflict.

Kazuo Inamori’s activities at Shofu Industries were described by Tadao Kagono as follows:

Inamori’s first assignment at Shofu Industries was the U-Shaped Kelcima, a special porcelain part for cathode ray tubes, commissioned by Matsushita Electronics… .

As a researcher, he worked on the development of manufacturing technology for the U-Shaped Kelcima. The development process was not easy. It was a difficult component to manufacture, and at the time only Philips had the capability to produce it… .

The company succeeded in developing a new ceramic material called Forsterite, and mass production of the U-Shaped Kelcima was underway. At the time, the television boom had just begun, and the U-Shaped Kelcima, a component of cathode-ray tubes, was expected to be in great demand. The company decided to move to mass production and Inamori was transferred to the Special Magnetic Section where he began developing production methods.

In the Special Magnetic Section, he pressed ahead with the determination to “rebuild this company with new ceramics.” Refusing to accept transfers from the insulator division, which had surplus personnel, he personally handpicked a group of motivated employees. Despite the hardships, he succeeded in mass-producing the product.

As chief of the Special Magnetic Section, he worked on the development of forsterite-based ceramic vacuum tubes requested by Hitachi but was unable to produce anything satisfactory. Around that time, he had a conflict with the technical manager who had come from outside the company. Inamori decided to leave when the manager said, “With your technical skills and background, this is the farthest you can go. We will take care of the rest. Please excuse yourself from this projectFootnote 1”.

In 1957, when the mass production of the U-Shaped Kelcima began, Shofu Industries went on strike for two months. Inamori and staff at the Special Magnetic Section did not participate in the strike, and continued production of U-Shaped Kelcima to meet the demands of customers. The union’s obstruction made it difficult to ship finished products from the factory, but a cooperative female employee managed to smuggle them out. The female employee later became Inamori’s wife.

Despite all this hard work, the new head of the technical department insulted Kazuo Inamori’s technical skills and background. It was only natural that Inamori decided to leave the company.

After leaving Shofu Industries, Kazuo Inamori founded Kyoto Ceramic Co in 1959. To launch a venture company, securing managerial resources and customers is essential. According to Minoru Shimamoto, in the case of Kyoto Ceramic, a “chain mobilization of managerial resources” was at work.Footnote 2

Managerial resources consist of money, human and physical resources, but in terms of human resources, it was important that many of Inamori’s capable subordinates from Shofu Industries moved to Kyoto Ceramic. It was also important that Masaji Aoyama, a Shofu Industries supervisor deeply impressed by Inamori, joined him at the new company as well. Aoyama brought his college classmates, who then were executives at Miyaki Electric Manufacturing, to meet Inamori. As a result of strong persuasion by Aoyama and Inamori, Miyaki Electric executives, including company president Otoya Miyaki, agreed to provide Kyoto Ceramic with start-up capital. In addition, Kyoto Ceramic leased the company building and factory from Miyaki Electric. In this way, Miyaki Electric played the role of an angel investor, not only in terms of money but also in terms of physical resources, activating the mechanism of “chain mobilization of managerial resources.”

What about securing customers? Minoru Shimamoto writes:

At first, Inamori was not sure if Matsushita Electric would place a new order with Kyocera for this component [U-Shaped Kelcima], but as they had been hoping, Matsushita Electronics transferred orders for 200,000 units to Kyocera from Shofu Industries out of the original 400,000-unit order placed with Shofu. This was partly to hedge risk by placing parallel orders with two companies to prepare for an increase or fluctuation in the number of deliveries, but above all it was because Matsushita Electronics trusted this small newborn company due to Inamori’s prioritizing of delivery even during the strike.Footnote 3

Thus, Kazuo Inamori successfully launched Kyoto Ceramic.

Future-Oriented Market Cultivation and Technological Development

After its successful launch as a startup company through the development of the U-Shaped Kelcima, Kyoto Ceramic actively sought a growth strategy for the company’s next phase. Significant in this process was Inamori’s pursuit of future-oriented market cultivation and technological development. It was based on the premise of growth through learning, rather than the maintenance of the status quo.

Minoru Shimamoto explains:

There was no way that orders for the U-Shaped Kelcima would continue forever, and it was inevitable that Kyocera’s future growth depended on expanding its product repertoire. Inamori took the U-Shaped Kelcima to Hitachi, Toshiba, Mitsubishi Electric, Sony, and other companies that were researching and developing electron tubes at the time, inquiring about the needs for ceramic-based electronic components using materials such as forsterite and alumina … . Since home appliances were becoming popular during this period of rapid economic growth, domesticating the production of expensive foreign-made parts was an important issue for electrical appliance manufacturers. Therefore, different electronics manufacturers gradually began to make proposals to Inamori, who visited them on sales trips, asking Inamori if he could produce such and such ceramic parts for electronics.

On such occasions, surprisingly, Inamori immediately responded, “We can do it,” even if he did not know if the parts could be completed with Kyocera’s technological capabilities at the time. Still, he kept responding to their requests. Thus, Kyocera first obtained orders, then developed new technologies to manufacture the products, managing to produce orders barely in time. Behind this seemingly reckless approach was Inamori’s strong belief that whatever could be made abroad could also be made at his company, and his view that even if the technology was not yet perfected, his company could perfect it in the future. The company based its decisions for taking orders not on its technological capabilities at the time, but rather on the assumption of future progress.Footnote 4

This attitude and approach delivered great results in developing ceramic multilayer packages for semiconductor integrated circuits. Kyoto Ceramic “received an inquiry in the spring of 1969 from Fairchild Corporation of the United States for a high-density package. Two ceramic boards with printed electronic circuits, 25 mm long, 25 mm wide, and 0.6 mm thick, were stacked on top of each other, and the two boards were electrically connected through 92 0.25 mm holes, with 36 pins protruding from the periphery. The request was to develop this in three months.Footnote 5”

It was extremely difficult for Kyoto Ceramic to meet this order. Tadao Kagono explains that overcoming these difficulties gave birth to a unique confidence within Kyoto Ceramic. Kagono begins by quoting Inamori’s own words:

The development team worked tirelessly for about two months, sleepless and uninterrupted, and even forgot to eat if left unattended. The joy we felt when we finally managed to create the product, even if it was only one piece, was irreplaceable.

The engineers involved in its development were completely focused on the task. In the process of producing a single good product, awake or asleep, they kept thinking of solutions to overcome the successive obstacles. They never ran away from difficult situations but earnestly tackled development head-on.

As they continued, the technical problems that had seemed so difficult were gradually resolved. It was as if God had been watching our desperate efforts and was so moved by our pitiful state that He reached out His hand to us.

Sometimes, in a situation of pain and suffering and dire need, we may discover a phenomenon that we had overlooked earlier and solve the problem in one fell swoop. This moment, that we might call a revelation whispered by God, must be the path that leads to genuine creation.Footnote 6

Commenting on Inamori’s words, Kagono wrote: “Production of multilayer packages for semiconductors began the following year, in 1970. Through this kind of work, a unique belief was created within Kyocera: the belief that a desire penetrating even to the subconscious plays a decisive role in the fulfillment of a mission.Footnote 7”

The successful development of ceramic multilayer packages brought about significant advances in the business development of Kyoto Ceramic. Officially changing its name to Kyocera in 1982 (Showa 57), it evolved into a global company.

Hourly Profit System and “Amoeba Management”

The success of the ceramic multilayer package gave Kazuo Inamori confidence in his market cultivation and technological development capabilities. In addition, “It was around this time that the hourly profit system… the prototype for the so-called Amoeba Management system, was created.Footnote 8”

Shimamoto Minoru explained this system:

The hourly profit system calculates the value added per hour per process by subtracting raw materials cost and other expenses from the output and dividing it by the total hours worked. This allowed employees to clearly see the value added, and easily understand how to increase it. The approach of Amoeba Management, on the other hand, was to divide and manage the organization, at the time becoming larger and larger, into smaller units [like amoebas] as if each one was an independent small-to-medium sized company. The number of such amoebas increased every year, totaling two in 1965, eight in 1966, fourteen in 1967, and seventeen in 1968 (according to the 40th Anniversary Company History Compilation Committee of Kyocera Corporation [2000],Footnote 9 p. 63). The income and expense of each amoeba were measured by the hourly profit system. It [the amoeba] split up as needed, and the smaller units competed to increase the efficiency of each. This indeed was a system to simultaneously maintain adaptability to the business environment and sustain organizational efficiency. Footnote 10

The “hourly profit system” and “amoeba management” that comprise “a system to simultaneously maintain organizational efficiency and adaptability to the business environment,” became deeply ingrained in the management of Kyoto Ceramic (Kyocera), and served to continuously revitalize the organization. These simple and unique organizational revitalization measures were later utilized in Kazuo Inamori’s restructuring of Japan Airlines (JAL).

An Entrepreneur Who Upholds His Philosophy on Management

Kazuo Inamori is also known as a business leader with a clear management philosophy. Kazuhiro Tanaka, who presents Inamori’s philosophy of management, considers Inamori an entrepreneur who is in the same league as Eiichi Shibusawa and Konosuke Matsushita.Footnote 11 Tanaka states: “The philosophical goal of Kyocera, as formulated by Kazuo Inamori, is ‘to pursue the material and internal happiness of all employees and at the same time contribute to the progress and development of mankind and society.’ To achieve this goal, Inamori’s principles such as “Respect the Divine and Love People,” “Adhere to Universal Principles,” and “Do What’s Right as a Human Being” become the norms to be followed.Footnote 12”

According to Tanaka, the following three points should be noted concerning the entrepreneurs who present their philosophy on management.Footnote 13

  1. 1.

    Their management philosophy is derived from their own earnest experience.

  2. 2.

    They have unwavering faith in their management philosophy.

  3. 3.

    They closely connect the “way of management” with the “way of human beings.”

Regarding point (1), Kazuhiro Tanaka says that in Inamori’s case, he had the following background:

Inamori, who originally founded Kyocera in Showa 34 [1959] out of the “desire to put his skills to the test,” was shocked when some of his younger employees soon confronted him with a co-signed letter demanding a guarantee of their future treatment. Inamori spent three days and three nights trying to persuade them and rejecting their demands, but the experience made him realize for the first time that “Running a company is not about realizing your own dreams, but about protecting your employees and their families, now and in the future." (Inamori 2012Footnote 14, p. 40)Footnote 15

On point (2) Tanaka states that “Kazuo Inamori has adhered to the ‘principle’ of ‘doing what is right as a human being and pressing on’ as the basis for his managerial decisions. If you oppose this, you will never succeed, and if you adhere to it, at least you will not make a big mistake.Footnote 16” Finally, regarding point (3), Tanaka quotes Inamori as saying: “I believe that by pursuing the ideal form of human beings, the foundational pillar on which corporate management should be based will also become clear.Footnote 17” Tanaka evaluates him thus: “Inamori is an entrepreneur who aimed to apply the ‘good way of living’ to the ‘good way of managing’.Footnote 18”

Inamori’s management philosophy became official within Kyoto Ceramic (Kyocera) as the “Kyocera Philosophy.” In 1984 (Showa 59), Inamori established the Inamori Foundation with a private fortune of 20 billion yen and began awarding the Kyoto Prize, an international award program, among his other charitable activities. The Kyocera Philosophy was thus communicated to a global audience.

Founding of Daini-Denden Inc. (DDI)

Inamori’s entrepreneurial activities continued unabated even after Japan’s economic bubble burst and the country’s economy began to slow down. From 2003 to 2004, the “Weekly Economist” magazine published a series of interviews – “Testimonies on Modern Industrial History” – with business leaders who had achieved exceptional success even during the “Lost Decade of the 1990s.” Inamori appeared as one of the interviewees, discussing the founding of Daini-Denden Inc. (DDI) and its subsequent development into KDDI.Footnote 19

A photograph of a group of people smiling and shaking hands while standing in front of a brick-textured wall. They are in formal attire with a flower-patterned badge. A logo of K D D I is the on wall.

Kazuo Inamori (second from right, 2000) at the launch of KDDI (photo provided by Mainichi Shimbun)

In 1985, the privatization of Nippon Telegraph and Telephone Public Corporation (NTT) ushered in the newly liberalized era of Japan’s telecommunication sector, leading to the entry into the business of new firms collectively called New Common Carriers (NCC). The first of such was Daini Denden Kikaku, established in 1984 under the leadership of Inamori, and renamed DDI in 1985. In founding DDI, Inamori teamed up with Sachio Semmoto who had left NTT and pressed for the liberalization of the telecom sector; Inamori also received support from Jiro Ushio of Ushio Electric, Akio Morita of Sony, and Makoto Iida of Secom, who were all in favor of deregulation.

In 2000, DDI merged with KDD, which had inherited the international telegraph and telephone business from the (public) Kokusai Denshin Denwa Co. It also merged with IDO Corp., whose major shareholders included Teleway and Toyota Motor. The resulting organization became [the new] DDI Corp. In 2001, DDI changed its name to KDDI, which still exists today.

I served as an interviewer of Inamori for an interview that appeared in the Weekly Economist. As a result, I later had an opportunity to contribute an article to the Weekly Economist concerning my impressions.Footnote 20 Here are its contents:

During the interview with Mr. Kazuo Inamori, I was especially impressed by two points. One was the process of establishing DDI as a “Columbus’ Egg” solution, boldly challenging the Nippon Telegraph and Telephone Public Corporation [predecessor of NTT], and the other was the process of establishing KDDI amidst stiff competition following DDI’s founding.

Regarding establishment of DDI, we must not overlook the fact that the very emergence of DDI itself was an “unexpected” event. When the Nippon Telegraph and Telephone Public Corporation was to be privatized and the telecommunications business liberalized, conventional wisdom assumed that the Japan National Railways, the Japan Highway Public Corporation, and electric power companies, with assets suitable for laying telecommunications lines, would be first to enter the business. However, it did not play out that way. None of them were enthusiastic about the idea. A stalemate emerged as Hisashi Shinto, the president of Nippon Telegraph and Telephone Corporation feared that the privatization might fail through lack of competition. The idea of establishing DDI, proposed by Kyocera’s chief, Inamori, broke the stalemate. Thus, DDI became the “Columbus’ Egg,” and Japan National Railways, the Japan Highway Public Corporation, and the electric power companies finally climbed aboard and entered the telecommunications business. The liberalization of Japan’s telecommunications industry was a “once-in-a-century project,” but it materialized only with the influence of the pioneer Inamori.

Behind Inamori’s establishment of DDI were several circumstances that deserve special mention. These include his encounter with Sachio Semmoto, the support from Jiro Ushio, Akio Morita, Makoto Iida, and others, and the financial strength of Kyocera, giving the company credibility. However, during the interview, I strongly felt that Mr. Inamori’s own pioneering spirit was the essential factor in the birth of DDI. The establishment of DDI would mark a major epoch not only in the deregulation of the telecommunications industry, but also in pursuit of deregulating the whole Japanese economy. The doors of history are often opened not by conventional wisdom but by the unexpected wisdom of a single pioneer.

Regarding the establishment of KDDI, through the interview I was able to understand the “struggle” of DDI. However, it seemed more like a “travail” than a “struggle.” Mr. Inamori spoke dispassionately of a series of interesting facts: obtaining cooperation from Mr. Shinto, president of Nippon Telegraph and Telephone Public Corporation, regarding the laying of microwave lines immediately after the company’s establishment; the failure of the first dedicated telephone line business, as it was unable to exercise buying power such as at Japan National Railways; cases in which headhunted managers could not always demonstrate their full potential; internal opposition to the commercialization of the car phone; disagreement between Mr. Inamori and Mr. Semmoto regarding the commercialization of PHSFootnote 21; managing to establish KDDI under the leadership of DDI while paying due consideration to Toyota, to which DDI made concessions regarding the regional division of the car phone business.

Nearly twenty years have passed since the liberalization of Japan’s telecommunications business. In recent years, mobile communications centered on hand-held devices have rapidly increased their weight in the telecommunications industry. In the Japanese market, three companies, KDDI, NTT DoCoMo, and Vodafone, are competing fiercely for market share. If KDDI had not existed, Japan’s mobile communications business would have been “occupied” by member companies of the NTT Group, the successor of Nippon Telegraph and Telephone Public Corporation, and by foreign companies. If that had happened, the very meaning of telecommunications industry liberalization would have been subject to fundamental review. Actually, however, KDDI exists, and its “au” brand of cell phones still sometimes takes the top spot in the share of monthly new subscribers. Kazuo Inamori encouraged the employees gathered at the launch of DDI and spoke passionately about the company’s philosophy to improve service and lower prices by stimulating full-fledged competition between telecommunications companies. This philosophy continues to live on today.

The final sentence, “This philosophy continues to live on today,” still holds today (May 2019), more than 15 years after I penned the recollection above.

Restructuring Japan Airlines

In the 2010s, there was yet another event that further raised Inamori’s reputation as a manager: successfully rebuilding bankrupt Japan Airlines in a short period of time.

JAL went bankrupt in January 2010 (Heisei 22) due to multiple factors such as its dysfunctional board that remained dependent on the government even after the airline’s full privatization and also on a group of parliamentarians close to the transportation lobby; the coexistence of several labor unions and serious labor-management conflicts; and the assumption that “a national flag carrier will never go under.” To restructure the company, Inamori was appointed Chairman of the Board in February of that year. He managed the restructuring of the airline with his brilliant leadership. In September 2012, just two years and seven months after the delisting of the airline due to bankruptcy, JAL was successfully relisted on the First Section of the Tokyo Stock Exchange.

After assuming the chairmanship, the first thing he did to rebuild Japan Airlines was to conduct thorough leadership training that included elements of the “Kyocera Philosophy.” At first there was strong resistance within JAL, but gradually the “JAL Philosophy,” based on its Kyocera counterpart, took root. In particular, the Amoeba Management System of “visualizing” income and expenses for each workplace and facilitating improvements in business performance, demonstrated great effect. Methods such as managing the income and expenses for each aircraft became the norm thereafter.Footnote 22

The hourly profit system and amoeba management, mechanisms to simultaneously maintain organizational efficiency and adaptability to the business environment, proved effective even outside the boundaries of Kyocera. The universality of Inamori’s management philosophy and management methods became clear to everyone.