What is Keiretsu? How It Works in Business, and Types

Summary

The video explains 'ketsu,' a Japanese business network involving manufacturers, suppliers, distributors, and occasionally financiers. Originating after World War II, ketsu networks foster close relationships and operational independence among companies, sometimes involving small equity stakes. Horizontal ketsu are led by a bank and focus on global goods distribution, while vertical ketsu streamline production efficiency. The system has influenced Western businesses like Chrysler, Scania, and Ikea, adapting elements of ketsu to improve supply chains and partnerships. Despite benefits, ketsu face challenges such as limited competition and potential risky financial strategies.

Takeaways

• 😀 Ketsu is a Japanese business network involving manufacturers, supply chain partners, distributors, and sometimes financiers, working together while maintaining operational independence.
• 😀 Ketsu often involve close relationships between companies, and sometimes, they take small equity stakes in each other.
• 😀 The term 'ketsu' is derived from the word 'headless', referring to Japan's transition from powerful families, known as *zaibatsu*, to more collaborative business networks after World War II.
• 😀 After World War II, Japan reorganized itself into ketsu networks to avoid monopolistic and undemocratic practices seen in *zaibatsu*.
• 😀 Ketsu systems are not just prevalent in Japan; they’ve influenced global business practices, especially in the U.S. and Europe, with companies like Chrysler forming their own 'American ketsu'.
• 😀 In Japan, ketsu networks are regulated by specific laws that govern cooperation between companies.
• 😀 Ketsu systems can be categorized into two types: horizontal and vertical integration models.
• 😀 A horizontal ketsu is a network involving different companies from various sectors, with a bank at the center that provides financial services to all parties.
• 😀 A vertical ketsu is a network of manufacturers, suppliers, and distributors working together to reduce costs and increase efficiency, like Toyota’s model.
• 😀 Ketsu networks promote mutual benefits such as increased efficiency, faster investment decisions, and enhanced expertise sharing among members.
• 😀 While ketsu systems offer many advantages, they also face criticism for their size, limited competition, and risk of risky debt-driven strategies due to close relationships with banks.

Q & A

What does the term 'Ketsu' refer to in a business context?

Ketsu is a Japanese term that refers to a business network made up of different companies, including manufacturers, supply chain partners, distributors, and occasionally financiers. These companies work closely together and sometimes take small equity stakes in each other, while remaining operationally independent.

How did the Ketsu system come into prominence?

The Ketsu system rose to prominence after World War II, following the destruction of the Japanese Zaibatsu, which were large monopolistic conglomerates. The United States dismantled these structures, and Japanese companies reorganized themselves into Ketsu networks to foster closer business relationships and improve efficiency.

What is the difference between a horizontal and a vertical Ketsu?

A horizontal Ketsu is an alliance of different companies from various sectors, including a bank that provides financial services to the network. In contrast, a vertical Ketsu refers to a network of manufacturers, suppliers, and distributors partnering up to reduce costs and increase efficiency.

How does the horizontal Ketsu model operate?

In the horizontal Ketsu model, the network consists of various companies, with a bank at the center. The bank provides financial services to the other companies, helping them expand and distribute goods internationally, and establishing connections with other global suppliers.

Can you give an example of a vertical Ketsu?

Toyota is an example of a vertical Ketsu. It relies on suppliers and manufacturers for parts, employees for production, real estate for dealerships, and other materials like steel, plastics, and electronics. These companies are part of Toyota’s vertical Ketsu but also belong to the larger horizontal Ketsu network.

What are some benefits of being part of a Ketsu?

Companies in a Ketsu can leverage each other's expertise, share information to increase efficiency, and make faster investment decisions. They also limit the threat of competition and reduce the likelihood of takeover attempts, while achieving cost reductions through dealing with other Ketsu firms.

What are some potential drawbacks of the Ketsu system?

Critics argue that the large size of Ketsu networks makes it difficult to quickly adjust to market changes. The lack of competition can also lead to inefficient practices. Additionally, easy access to capital from the central bank could encourage risky, debt-fueled strategies that an external institution might not finance.

How do companies outside of Japan incorporate elements of Ketsu?

Outside Japan, companies have adapted elements of the Ketsu system. For example, Chrysler teamed up with its suppliers to reduce manufacturing costs, creating an American version of Ketsu. Similarly, companies like Scania and Ikea have developed closer supplier relationships to improve supply chains, focusing on mutual advantage and efficiency.

What is the key principle that companies should keep in mind when forming their own Ketsu-like networks?

Companies interested in creating their own Ketsu-like networks should focus on building committed partnerships based on mutual trust and advantage. Collaboration should aim at maximizing efficiency and long-term success, similar to the principles of the Japanese Ketsu.

What role does a bank play in a horizontal Ketsu?

In a horizontal Ketsu, the bank acts as the central entity, providing financial services to the member companies. It plays a critical role in ensuring the financial stability of the network and helps coordinate business expansion and international contracts.