Keiretsu is a Japanese term signifying a powerful business network comprising various companies like manufacturers, supply chain partners, distributors, and financiers. Working harmoniously together, they share close ties and sometimes hold minor equity stakes in each other, though they remain operationally independent. Translated directly, keiretsu means “headless combine”.
Key Takeaways
- Keiretsu is a Japanese term referring to a business alliance of manufacturers, supply chain partners, distributors, and financiers.
- These companies collaborate closely, sharing interests while maintaining operational independence and often holding minor equity stakes.
- Keiretsus gained prominence post-World War II after dismantling the previous zaibatsu system.
- Horizontal keiretsu involve alliances between companies of different sectors, usually led by a bank.
- Vertical keiretsu refers to partnerships among manufacturers, suppliers, and distributors to cut costs and improve efficiency.
Understanding Keiretsu
Powerful families, known as zaibatsu, ran many of Japan’s major industries until World War II when the U.S. dismantled these monopolistic structures. Post-war, facing economic hardship, Japanese companies reorganized into keiretsus. Contrary to a competitive model, keiretsus value close cooperation for mutual benefits.
Decades after their creation, keiretsus still play a significant role in Japan’s economy. This network has even influenced global business practices, with companies outside Japan forming loose alliances resembling keiretsus.
Since 1996, when academic Jeffrey Dyer noted that Chrysler’s cost-reduction strategy with suppliers mirrored a keiretsu, many Western firms have adopted similar collaborative models.
Types of Keiretsu
Traditionally, keiretsus follow horizontal or vertical integration models.
Horizontal Keiretsu
These alliances involve companies from various sectors, with a central bank providing financial services. Their purpose is to distribute goods globally, establish firms in international markets, and sign contracts with global commodity suppliers. They represent a network aiming for market expansion and resource sharing.
Vertical Keiretsu
These involve partnerships between manufacturers, suppliers, and distributors to cut costs and boost efficiency. For example, Toyota relies on a vast network for supplies, parts, and other production needs, benefiting from trust and collaboration within the vertical keiretsu.
Advantages and Disadvantages of Keiretsu
Pros:
- Shared Expertise: Companies leverage each other’s strengths, resulting in mutual growth and better outcomes.
- Increased Efficiency: Shared information and resources enhance operational efficiency and innovation.
- Competition Limitation: Reduces outside competition and protects from cross-border takeovers.
- Supply Chain Efficiency: Streamlined operations boost supply chain efficacy.
Cons:
- Slow Adaptation: Large size and structure can hinder quick market adaptation.
- Inefficiency: Lack of competition may result in inefficient practices.
- Risk Encouragement: Close ties to banks might lead to riskier financial decisions.
How to Engineer Your Own Keiretsu
Key Considerations:
- Short-Term and Long-Term Focus: Suppliers must be competitive now while building long-term relationships.
- Know Your Suppliers: Understanding suppliers’ processes is critical; joint ventures help deepen these insights.
- Build Trust: Mutually beneficial relationships are the foundation of trust and competitive improvement.
- Balanced Communication: Emphasize both explicit and implicit communication to foster trust without misunderstandings.
- Supplier Assessment: Evaluate and score suppliers to identify those with the highest potential for improvement.
- Cultivate Personal Relationships: Enhance collaboration by building personal connections with suppliers’ teams.
- Supplier Development: Provide underperforming suppliers with opportunities to improve before resorting to alternatives.
- Integrate in Product Development: Include suppliers’ engineers in development teams for enhanced competition.
Inspiring Examples of Keiretsu
Mitsubishi is a primary example of Japanese horizontal keiretsu. The Bank of Tokyo-Mitsubishi leads this network, including core members like Mitsubishi Motors and Mitsubishi Trust and Banking. Joining forces with Meiji Yasuda Life Insurance, they assist each other in globally distributing goods, founding international entities, and entering global contracts.
This extensive cooperation resonates in their intertwined operations and mutual use of the Mitsubishi name, exemplifying the keiretsu’s synergy in expanding global influence.
Related Terms: Supply Chain, Zaibatsu, Monopoly, Strategic Alliance.
References
- Harvard Business Review. “How Chrysler Created an American Keiretsu”.
- Harvard Business Review. “The New, Improved Keiretsu”.
