What Is Keiretsu?

What Is Keiretsu?

Let me explain what keiretsu means to you. It's a Japanese term for a business network that brings together various companies, such as manufacturers, supply chain partners, distributors, and sometimes even financiers. These entities collaborate closely, build strong relationships, and occasionally hold small equity stakes in one another, all while staying operationally independent. Literally translated, keiretsu means 'headless combine,' which captures its decentralized nature.

Key Takeaways

Here's what you need to grasp about keiretsu. It's that Japanese business network of diverse companies including manufacturers, supply chain partners, distributors, and financiers. They collaborate, maintain close ties, and sometimes invest small equity stakes in each other without losing their operational independence. These networks gained prominence after World War II following the breakup of the Japanese zaibatsu. A horizontal keiretsu forms an alliance of companies from different sectors, led by a bank providing finance. Meanwhile, a vertical keiretsu involves manufacturers, suppliers, and distributors teaming up to reduce costs and boost efficiency.

Understanding Keiretsu

You should know the history here. Powerful families called zaibatsu once controlled most of Japan's major industries, but that ended after World War II when the United States intervened and dismantled them. Zaibatsu were viewed as monopolistic and undemocratic, allegedly buying politicians for contracts and using pricing that exploited the poor. In the face of post-war economic challenges, Japanese companies reorganized into keiretsu.

In Japan, corporations prioritize close ties with each other. I see it as a system where working together, instead of keeping distance, benefits everyone involved. Even decades later, keiretsu still dominate significant portions of the economy.

This model has influenced business elsewhere, though in looser forms. In Japan, with its emphasis on cooperation, keiretsu are governed by specific laws. Outside Japan, the term often describes informal alliances among more than two organizations.

Back in 1996, academic Jeffrey Dyer noted in Harvard Business Review that Chrysler's partnerships with suppliers to cut car manufacturing costs created an American version of keiretsu. Many U.S. and European companies have adopted elements of this approach as well.

Types of Keiretsu

The keiretsu system typically follows horizontal or vertical integration models, so let's break that down for you.

A horizontal keiretsu is an alliance of companies from various sectors, with a bank at the center providing financial services. The goal is to distribute goods globally, seek new markets for keiretsu companies, establish them in other countries, and secure contracts with international suppliers for commodities used in Japanese industry.

On the other hand, a vertical keiretsu brings together manufacturers, suppliers, and distributors to cut costs and improve efficiency. These vertical groups exist within the larger horizontal keiretsu.

Take Toyota as an example of a vertical keiretsu. It depends on suppliers and manufacturers for parts, employees for production, real estate for dealerships, and providers of steel, plastics, and electronics for vehicles, plus wholesalers. These companies operate in Toyota's vertical keiretsu but are part of a broader horizontal one, though lower in the hierarchy.

Research shows Toyota has gained from the trust, collaboration, and educational support inherent in keiretsu, making its supplier relationships more open, international, and cost-efficient.

Advantages and Disadvantages of Keiretsu

Collaborating closely in a keiretsu offers clear benefits. Companies can draw on each other's expertise to grow stronger, and sharing information among customers, suppliers, and employees boosts efficiency. This allows quicker investment decisions, with everyone understanding the goals.

Remember, the key to successful keiretsu-like partnerships lies in support, cooperation, trust, and goodwill. Even in competitive, cost-focused environments, these elements reduce hidden costs compared to the arm's-length relationships common in Western models.

Such alliances also minimize competition threats and make takeovers by outsiders harder. Dealing within the keiretsu lowers costs and enhances supply chain efficiency.

That said, there are downsides. Critics note that their size hinders quick adaptation to market changes, and limited competition can foster inefficiencies. Easy access to capital from affiliated banks might lead to risky, debt-heavy strategies that external lenders would avoid.

How to Engineer Your Own Keiretsu

If you're looking to apply the keiretsu model, it can help deepen supplier relationships for long-term gains. Western companies often maintain arm's-length supplier ties, unlike keiretsu.

Some Western manufacturers have created hybrid programs borrowing from keiretsu. For instance, Scania, the Swedish bus and truck maker, strengthens loyalties by hosting workshops on its production system, focusing on continuous improvement and lean methods. Suppliers identify with Scania, which helps improve their processes without holding shares.

IKEA similarly builds committed partnerships based on mutual benefits, trusting vendors with key tasks and collaborating for efficiency.

If you want to build your own version, consider these principles. Balance short-term and long-term thinking by ensuring suppliers are competitive now and sharing cost-reduction benefits to show commitment. Get to know your suppliers by visiting their sites and forming joint ventures on key parts instead of full outsourcing.

Build trust by emphasizing mutual benefits that improve their operations. Use both explicit and implicit communication to avoid mistrust or misunderstandings. Assess your supplier portfolio, scoring them on quality, cost, delivery, people, and development—focus on those willing to learn from mistakes.

Cultivate personal relationships with supplier management and employees, perhaps by shadowing them on the shop floor to encourage problem-solving suggestions. Give underperforming suppliers chances to improve rather than switching. Involve their engineers in your product development teams to enhance competitiveness across the chain.

Example of Keiretsu

Mitsubishi drives one of the largest and most famous Japanese horizontal keiretsu. At the top is the Bank of Tokyo-Mitsubishi, with core members like Mitsubishi Motors and Mitsubishi Trust and Banking, plus Meiji Yasuda Life Insurance providing coverage to all.

They collaborate to distribute goods worldwide, seek new markets, establish companies abroad, and secure global contracts for commodities in Japanese industry. You'll notice many in this keiretsu include 'Mitsubishi' in their names.