flowdit logo

What Is Keiretsu? Definition, How It Works in Business

What Is Keiretsu? Definition, How It Works in Business, and Types

Summary: Keiretsu is a business network that involves companies, like Toyota and Meiji Mutual Life Insurance Company forming alliances known as keiretsu and vertical keiretsu. Horizontal keiretsu consists of companies across industries, such as Mitsubishi Motors and Mitsubishi Trust and Banking while vertical keiretsu focuses on manufacturers looking for markets like Toyota.

These networks, often overseen by a bank like Mitsubishi Shoji aim to enhance business efficiency within the supply chain by providing capital access for companies and improving overall efficiency for all parties involved. Despite being operationally independent keiretsus maintains ties with suppliers, distributors, and financiers such as Mitsubishi Trust and Banking to boost efficiency and mutual success within the network.

Introduction to Keiretsu

What is Keiretsu?

Keiretsu refers to a term describing a business network created through collaborations, among companies. The term “keiretsu” signifies an independent group of member companies working together seamlessly. This unique business model has had an impact, on shaping the economy and business customs.

Exploring the Business Culture in Japan

Before delving into keiretsu it’s important to understand the basics of business culture. Japanese companies value long-term relationships and mutual trust which are deeply embedded in their business operations. This cultural element greatly affects how keiretsu is structured and operates.

Different Types of Keiretsu

Vertical Keiretsu

One form of keiretsu is keiretsu, where manufacturers form partnerships with suppliers and distributors. Within this framework companies in the keiretsu work to ensure a smooth flow of products and services along the supply chain. Vertical keiretsu enables companies to strengthen their market positions and explore markets collectively.

Horizontal Keiretsu

Another type of keiretsu is keiretsu involving companies operating in industries or related sectors. The goal of keiretsu is to enhance supply chain efficiency through business connections. Companies within this structure can pool resources reduce expenses and enhance competitiveness.

Implementation of Keiretsuin Business

Business Relationships within the Keiretsu

The keiretsu is a network involving firms, including zaibatsu holding companies as well, as influential suppliers and manufacturers. These groups of companies which range from primary to supporting roles make up the core of the keiretsu system operating both vertically and horizontally.

Vertical keiretsus, like the one linked with Toyota, consists of manufacturers and suppliers collaborating to explore markets and ensure a supply chain. In contrast, horizontal keiretsus involve trading firms and distributors teaming up to costs and compete effectively within the network.

Supplier Relationships

A critical aspect of keiretsu is the relationships that companies build with their suppliers. Keiretsu members often establish partnerships with suppliers enabling them to achieve economies of scale maintain quality standards and gain an edge in the market. These supplier relationships significantly contribute to the success of the keiretsu system.

Cross Shareholding and Collaboration

Cross shareholding is a practice, within a keiretsu framework where member companies occasionally hold ownership stakes in each other. This practice enhances interdependence and cooperation among keiretsu members. Cross shareholding promotes stability, within the network by aligning the interests of member companies and fostering long-term collaboration.

The Keiretsu System

Historical Context; From Zaibatsu to Keiretsu

Exploring the background of the keiretsu system requires us to delve into its origins. Before World War II, zaibatsu, which were family-controlled conglomerates held sway over the Japanese economy. Post-war reforms by Allied forces dismantled these structures paving the way for the rise of keiretsu.

The Major Six Keiretsu

Known as the Big Six keiretsu these influential business groups in Japan encompass an array of subsidiaries and affiliates across sectors. The prominent members are Mitsubishi, Sumitomo, Mitsui, Fuyo, Sanwa, and Dai Ichi Kangyo. These keiretsu have played roles in Japan’s progress and continue to wield significant influence over the nation’s business environment.

Illustrating with Mitsubishi Keiretsu

Let’s examine the Mitsubishi keiretsu as a case in point. The Mitsubishi Group consists of companies engaged in industries such as automotive, finance, and electronics, among others.
Mitsubishi companies work closely together in the keiretsu system sharing resources, technologies, and market insights to boost their strength.

Advantages and Disadvantages of Keiretsu

Pros of Keiretsu

Keiretsu provides advantages to its member firms;

Collaboration and Resource Exchange; By working keiretsu members can utilize each other’s resources, knowledge, and skills to enhance efficiency and competitiveness.

Stable Supply Chains; The strong ties, within keiretsu ensure a flow of goods and services reducing the likelihood of disruptions.

Access to Funding; Through shareholding arrangements in the keiretsu structure companies gain increased access to capital and financial resources.

Market Influence; Collectively keiretsu members wield market power that enables them to influence industry trends and standards.

Challenges of Keiretsu

Despite its benefits keiretsu also poses challenges;

Limited Supplier Options; Companies within keiretsu networks may have restricted supplier choices potentially constraining their flexibility and innovation.

Resistance to Change; The knit nature of keiretsu can lead to resistance against change and a slow response to market shifts.

Risk of Groupthink; Groupthink tendencies may arise within the keiretsu structure impeding individual thought processes and innovative ideas.

Network Dependency; Businesses reliant, on the keiretsu network could encounter difficulties if the network faces issues or disruptions.

Keiretsu, in Today's Business World

The Changing Face of Keiretsu

Over the years the keiretsu system has adapted to meet the demands of evolving business landscapes. Some keiretsu groups have transformations. Disbanded, giving rise to new ones. While the impact of keiretsu on Japan’s business scene remains significant the degree of reliance and collaboration has shifted.

Adoption of the Keiretsu Model in Global Business

The concept of keiretsu has found resonance in nations in East Asia. Countries like South Korea and Taiwan have embraced business structures like chaebols and guanxi networks. These systems mirror aspects of keiretsu by fostering ties and cooperative relationships among member firms.

FAQ | What Is Keiretsu

“keiretsu” is a Japanese word that translates to “headless combination.” It refers to a business network formed by an alliance of different companies in Japan.

There are two main keiretsu types: vertical and horizontal. Vertical keiretsu involves alliances between manufacturers, suppliers, and distributors, while horizontal keiretsu comprises companies operating in the same industry or related sectors.

Keiretsu operates through close business relationships among member companies. This includes long-term contracts, strategic supplier relationships, and cross-shareholding. The goal is to ensure a stable supply chain, resource sharing, and cooperation for improved efficiency and competitiveness.

Keiretsu emerged in Japan after World War II when the Allied forces broke up the zaibatsu, large family-controlled industrial conglomerates. The reforms introduced after the war led to the formation of keiretsu.

The major keiretsu in Japan, often called the Big Six, are Mitsubishi, Sumitomo, Mitsui, Fuyo, Sanwa, and Dai-Ichi Kangyo. These keiretsu have a wide range of subsidiaries and affiliates across various industries.

Keiretsu offers several benefits, including collaboration and resource sharing, stable supply chains, access to capital, and collective market influence. These advantages contribute to the overall competitiveness and success of member companies.

Some challenges of keiretsu include limited supplier choices, resistance to change, the risk of groupthink, and dependency on the network. Keiretsu structures can sometimes hinder independent thinking and innovation.

Image: Adobe Stock – Copyright: © lexiconimages – stock.adobe.com

Arne Reis

Founder

Arne Reis, Founder of flowdit

Combines practical innovation with a focus on quality.

Share post

Facebook
Twitter
LinkedIn
XING