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Review Keiretsu model of Transnational organization
Transnational Production Networks
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Headquarters
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R&D
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Production
Subcontracting
Strategic Alliances
Economic landscape

 Stable, long term, exclusive affiliations which form identifiable groups
 Families of related companies based on mutual obligations
 Ties are based on familial relationships, friendship, interlocking directorships, financial links
 Reminiscent of Japanese feudalism

Keiretsu Schematic Diagram

 Diversified Groups centred on banks
• manufacturing
• trading companies sogo shosha
• life insurance
• other financial

Horizontal keiretsu, some with origins to the pre 1945 zaibatsu

 Centred on large parent firm in one industry e.g.
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Toyota (automotive)
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Sony (electronics)
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Kirin (brewing)
Suppliers have suppliers which have suppliers
• a nested hierarchy of progressively smaller firms
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Satellite firm can supply only one larger firm
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Sub-contractors: shitauke

Vertical keiretsu, focused on industries and vertically linked to satellite firms

Webs of Enterprise!
Links between horizontally and vertically structured keiretsu

Focus on major automobile producers as vertical keiretsu :
Note exclusive links to banks, hence to other manufacturing industries and suppliers

 Familial alliances of affiliated companies
 In general, subordinate suppliers do not and can not supply two competing superior businesses
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Relationships are long term, stable and based upon mutual obligations
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Hierarchical
Downside?

 Consider Magna as a Canadian counterexample
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Founded in 1950s
Among world’s most diverse parts manufacturers & suppliers
 Contracts with competing assemblers
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 See for example: http://www.magnaint.com/magnaWeb.nsf/webpages/Products+And+Technology+-+Vehicle+Content?OpenDocument

 Headquarters
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Global
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Regional
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Cities as economic control points
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Strategic locations – hub cities
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High level business services
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Labour market – gold-collar workers
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Low level service occupations

 R&D Laboratories
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Vital to technological leadership
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Pure & applied scientific research
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Product design, testing, development
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De-bugging and local adaptation
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QC/Testing Lab – plant level, not really R&D
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Support Labs/Locally integrated
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Host market conditions, tech transfer and translator
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International interdependent R&D Lab
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Availability of scientists and engineers
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Proximity to information & cognate facilities: universities
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Infrastructure and amenities

Relict R&D facility,
Windsor, Ontario

 Production

 Flux
 Forces
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External: markets, regulation, tech Δ
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Internal: performance, “new broom”
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Strategy → Structure

 March 1998
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Costa Rica was selected because:
• reliable power and advanced telecommunications
• educated workforce, high literacy rate (95.5 percent)
• business environment
Heredia (10 kms NW of San Jose)
• two manufacturing plants and one distribution center
• assembly, testing and distribution
126 acre site

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Make – in-house – integrated/internalized
Buy – arm’s length – transaction costs
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‘Off-the-shelf’ or ‘off-the-rack’
Network – collaborative relationship
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Sub-contracting
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Independent firms
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Spin-offs
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Within a network of dependent lower tier firms

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Commercial subcontracting
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Entire product
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To spec, under principal’s brand name
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Retailer – buyer-driven production network
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Producer
– producer-driven production network
Industrial subcontracting
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Processes OR components
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Plating, packaging OR accessory parts (buttons & zips)
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OEM vs. Aftermarket auto parts

 Specialty subcontracting
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Specialty products or processes
 Cost-saving subcontracting
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E.g. sweatshop labour
 Complementary/intermittant
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Employment/capacity buffer

Why do parent companies use subcontractors in Japan?
Other
0.8
0.8
In the past
In the future
10.7
Partners in R & D
2.1
Manufacturing of small lots on commission
16
16.9
Flexible response to demand fluctuations
Specialized technology of subcontracting company
27.4
26.8
44.2
41.7
Reduction of costs
39.5
50.1
0 5 10 15 20 25 30 35 40 45 50 55 60
Percent of responses
Source: Ministry of International Trade and Industry. 1990. Small Business in Japan:
White Paper on Small and Medium Businesses in Japan , p. 85.