IE 463
Lec 2. Relationships
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OUTCOMES OF INTERFIRM VALUE CREATION
1. Competitive Advantage
To survive and flourish in a competitive business world, each firm
develops relationships with its counterparts; sharing resources and
producing interdependency. This dependence results in
cooperative relations and the gaining of competitive positions.
Competitive advantage categories of cooperation are,
• investments in relation-specific assets
• substantial knowledge exchange
• combining of complementary, but scarce resources or
capabilities.
Relationship-specific asset: assets whose value is greater within a given
relationship than outside it. Ex: a supplier who makes investments in order to
customize her product for the needs of a purchaser.
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2. Customer Satisfaction and Loyalty
Interfirm relationships are developed to ensure customer
satisfaction and loyalty and to achieve competitive advantage. A
customer-centric orientation needs to be created which is possible
through interfirm value creating activities.
Ex. Improvement of customer service by raising availability and
reduced order cycle time (period between placing of one set
of orders and the next).
3. Long-term Orientation and Growth
In a strategic interfirm relationship, partners pursue strategic
goals through ongoing long-term joint activities that lead to the
building of long-term relationships. Credible and reliable behavior
by partners increases the long-term orientation of an existing
relationship. Joint efforts improve relationships and add value for
both sides.
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BUYER –SELLER RELATIONSHIPS
Relationships between buyers and sellers existed since humans
began trading goods and services. Relationships developed in a
natural way over time as the buyers and sellers developed trust
that is supported by mutual benefits.
These relationships have become "strategic" and the process of
relationship development is accelerated as firms strive to create
relationships to achieve their goals.
In today’s environment of relationship acceleration, there is less
time for the participants to carefully explore the range of long
term relationship development. The expectations of performance
have increased, making the development of a satisfactory
relationship even more difficult.
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Ex. Choosing a seller
An important phenomenon related to buyer-seller relationships
is that many buyers are developing single or few source suppliers
because of the pressure to,
• increase quality
• reduce inventory
• develop more effective management systems (like just-in-time)
• decrease time to market, etc.
The ultimate goal in developing such capabilities is to reduce costs.
But not all suppliers are appropriate partners for the type to
establish cooperative relationship with.
Supplier fitness can be checked by,
• the value that the supplier adds to production
• the operating risk associated with using the supplier
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EVALUATING SUPPLIER’S PARTNER QUALITY
low
operating risk
associated with
doing business
with seller
high
low
high
value added to product by seller
A supplier firm that falls in the shaded quadrant,
• contributes high added value; making him important for competitiveness
• represents low risk as a partner; making him a candidate for relationship
development
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BUYER-SELLER RELATIONSHIP DEVELOPMENT
Stage 1: Pre-relationship stage
• Search for potential partners
• Evaluate and select potential partners
• Cross-check partners’ competency
• Match needs and capabilities
Stage 2: Early stage
• Contact and establish rapport with partners
• Test for compatibility with partners
• Determine mutual goals
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Stage 3: Development stage
• Joint planning of activities, responsibilities and relationships
• Develop trust
• Regular contact and socialization
• Trial activities
• Adaptation and adjustment through agreement, negotiation
and self control
Stage 5: Final stage
• Long term rewards based on mutual behavior and trust
• Termination based on the extent of mutual interest and cost
benefit analysis of continuing the relationship
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OTHER EXAMPLES OF RELATIONSHIPS
In addition to complex and long term relationships between
industrial buyers and sellers, many others exist which are equally
important, but different in nature.
Consumer Relationships
Consumer's choice amongst a variety of brands is important. But,
not only is each purchase influenced by the consumer's attitude
to a number of brands (whether or not he has purchased each of
them before) , but perhaps more importantly brand choice is also
influenced by the consumer's relationship with the retailer.
That relationship is constructed from the meanings which each
party attaches to each other's actions - on one side,
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• the store's sales person, its merchandising and its overall
product assortment; or a company which has a portfolio of
customers with whom it develops and manipulates a
relationship, interacting by mail, telephone and perhaps less
importantly through visits to the store
• on the other the customer's purchase level and pattern and
his payment performance etc.
These all influence the customer making a brand choice and the
store deciding what should be shown to any individual
consumer.
Assortment: a collection of various kinds, a variety.
Mechandize: to promote the sale of, as by advertising or display.
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Manufacturer-Retailer Relationships
A manufacturer's relationship with retail distributors is a function
of the strength of the manufacturer's brand franchise but also of a
whole series of factors to do with adaptation of offering terms and
the particular things which are done for individual stores - in
tailored product, enhanced delivery, price modification etc.
Business Relationships
Mutually beneficial relationships including
employees, investors and other stakeholders,
result in confidence and trust that can carry
an organization through the inevitable hard
times.
Brand franchise: arrangement between a brand name manufacturer and a wholesaler or
retailer that gives the wholesaler or retailer the exclusive right to sell the brand
manufacturer's product in a specific territory.
Stakeholder: any individual or group which has an interest in and/or
is affected by the goals, operations or activities of the organization or the behavior of its
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members.
Business relations are relations between stakeholders in the
business process, such as
• employer- employee
• employer/employee - business partner
• employer/employee -outsourced employee
relations, etc.
In developing a business relationship, after one establishes a
relationship (by a phone call, personal contact, email, etc.), has to
properly maintain and deepen them.
Mutually beneficial relationships including employees, investors
and other stakeholders, result in confidence and trust that can
carry an organization through the inevitable hard times.
Franchise: i) the right to sell a company's goods or services in a particular area;
ii) a business that is given such a right.
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Research shows that even with the best products and business
practices, still strong relationships are needed to succeed in the
marketplace, therefore the relationships must be carefully
managed.
Business relationship management is a formal approach to
understanding, defining, and supporting a broad spectrum of
inter-business activities related to providing and consuming
knowledge and services via networks, with an emphasis on the
emergence of online networks as a primary medium through
which business relationships are conducted.
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SUMMING-UP
A relationship provides functions for each actor (resource
collection, innovation, productivity improvement etc.) and thus
becomes part of the organizational structure.
Each relationship eventually leads to new relationships with
third parties.
A real relationship is already a “quasi-organization” in itself.
The boundary of a firm is blurred as a result of its relationships
with the outside world !
Quasi: almost, resembling, seeming.
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RELATIONSHIPS IN INDUSTRIAL MARKETS
Relationships between actors (people,organizations) in
industrial markets define a structure in which,
• flows of tangibles (materials) and
• flows of intangibles (information, capabilities etc.)
take place (a medium or space of flows).
This is an exchange structure in which often lasting patterns of
interaction emerge.
Flows act as the intermediaries of value creation during the
exchange, in fact they sustain the industrial market.
A relationship that starts with initial contact and communication
develops into an interaction through exchange and adaptation.
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RELATIONSHIPS - INTERACTIONS
relationship
• mutual orientation
- preparedness to
interact
- mutual knowledge
- respect for interests
• investments
• dependence
• bonds
interaction
• exchange processes
- product/service exchange
- information exchange
- social exchange
• adaptation processes
- products
- production
- routines
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connecting
mechanism
transforming
process
exchange
interaction
interaction between
three actors
Interaction and value ceation in business relationships (eg. in networks)
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i. In exchange process, parties test how well they fit each other.
ii. During interaction, new knowledge and new skills are learned.
iii. In adaptation, misfits between parties are eliminated. Parties
influence each other toward adaptation in several ways,
• technical adaptation (modifying products, production, ..)
• logistics adaptation (stock levels, common delivery, ..)
• financial adaptation (handling payments, ..)
• knowledge adaptation (technical cooperation, ..)
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STRUCTURES IN RELATIONSHIPS
•
cooperation results in
links between activities
link
activity
activity
tie
• cooperation results in ties
between resources
• cooperation results in bonds
between actors
resource
resource
bond
actor
actor
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LEVELS OF ANALYSIS
interaction
single exchange
aggregate of interactions
between two actors
dyad
similar relationships a firm
has with other organizations
all the relationships
of an actor
portfolio
net
a whole structure of
an industry or market
network
(Ritter and Gemünden, 2003)
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DYAD
It is the primary business relationship structure between pairs
of three different types of subjects (activities, actors,
resources), which represents a function for each of them.
Dyad is formed when there is an opportunity
• to rationalize
• to develop
• to exercise influence/power
dyad
efficiency and
flexibility presure
network
firms
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DEVELOPMENT OF STRUCTURES
single firm
dyad
activity
internal activity
structure
links
activity
pattern
actor
organizational
structure
bonds
networks
of actors
resource
internal resource
collection
ties
aggregation of
third parties
resource
constellation
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NETWORKS: INTERACTION APPROACH
• Interaction approach takes the relationships as its unit of
analysis rather than the individual transaction.
• Involves simultaneous analysis of the attitudes and actions of
both parties and emphasizes the essential similarity between the
purchasing (buying) and marketing (selling) tasks in relationships.
• The coordination and mobilization of the company's portfolio
of relationships and the mobilization of the resources of both
companies through interaction in those relationships enhances a
company's network position.
Network position: description of a company's portfolio of
relationships and the rights and obligations that go with it.
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ACTOR-RESOURCE-ACTIVITY MODEL
activities
resources
actors
Håkansson & Snehota (1995) have developed the model presented
above for industrial networks in a practical dynamic direction; a
dynamic entity that is built by actor bonds, activity links, and
resource ties.
With the help of these dimensions, the nature of a relationship
developed between two actors can be characterised. Additionally,
the dimensions can also be used to help illustrate those effects that
the relationship has on the dyad itself; on both parties separately;
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and, lastly, on third parties.
Thus, through utilisation of the dimensions, important and holistic
information can be obtained concerning the effects of each
relationship on the surrounding network.
i. Actor bonds connect actors together
Actor bonds affect the way the actors experience each other and
various situations.
Actor bonds have an influence on what kinds of identities are
formed for the various actors within the network.
An identity that is formed affects every activity performed by the
parties in the relationship, but also the activities performed
change the identities of the parties in the relationship.
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However, identities are also affected by the images one party in
the relationship has of the other. Some of these images are
formed through joint, concrete activities, but some are only
based on assumptions about the other party.
This kind of identity forming can be used to examine the
strength of the bonds between the actors.
Similarly, the level of mutual commitment and trust between
the parties can be used to this kind of examination of the
strength of the bonds between the actors. This is because the
bonds are created in a relationship where the parties show a
certain amount of interest in each other and become mutually
committed.
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ii. Activities are linked to each other
There can be identified, e.g., technical, administrative, and
commercial links between network activities.
An essential element is that development of the activity links is
affected by development of the overall relationship between the
actors.
Activity links can be seen as forming broader entities of activity
chains, in which the activities carried out by a single actor are
based on the activities that have been carried out by another actor.
This idea is in line with the expanded idea of “value chain” as an
inter-organisational value constellation, in which the interrelated
activities of different organisational actors are looked as one entity.
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The notion of value constellation emphasizes the notion of end
customer, thus a downstream movement along the overall value
chain.
iii. Resources are possessed by the actors and also shared and
distributed by the actors
Resources include different types of elements, such as various forms
of technology, materials, and information.
The role of the resource ties is to connect the resource elements
possessed by two or more network actors.
In addition to the activity links, also the resource ties are affected by
the development of the relationship between the actors involved.
Relationships are important business resources.
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RELATIONSHIP VARIABLES
The development of close relationships is a function many essential
processes.
1. Exchange
In a relationship, four main exchanges take place: product or service;
money; information, and social. Exchange of these elements may
become routinized over time which leads to the development of a
clear set of roles or responsibilities that each partner is expected to
carry out.
i. Product/Service exchange
As the exchange of a product/service provides the impetus for
buyer-seller interaction, the characteristics of the product/service
exchanged are likely to have a significant effect on the processes of
interaction which develop between the two parties. Importance of
the product/service to the buyer links it to his interaction goals.
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ii. Information exchange
Strategies giving rise to the partnerships between industrial actors,
such as joint product development and just-in-time systems,
require extensive exchange of technical and commercial
information.
The complexity of the product/service being purchased has
profound effects on the amount of information exchange which is
required and the length of time over which this occurs.
For instance,
• the exchange of technical specifications for a standard product
would not necessarily yield intense ties between buyer and seller;
• yet the purchase of a complex product may require close
collaboration and exchange of information between buyer and
seller over a period of months or even years.
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iii. Social exchange
Social exchange refers to the interpersonal relationships which
exist between members of organizations. Interpersonal contacts
are critical in the establishment of close, long-term relationships
between industrial actors. Social exchange facilitates problem
solving and is particularly important in overcoming barriers to
communication. The degree of social exchange reflects the
decision maker's need to trust his counterpart. Personal
relationships between members of the interacting firms build
mutual trust which serves as a risk reduction mechanism.
Following the exchanges between two firms and the resulting
cooperation, adaptation take place which either firm may make in
the elements exchanged or the process of exchange.
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2. Commitment
The desire to continue the relationship and to work to ensure its
continuance. Commitment implies importance of the relationship
to the partners and a desire to continue the relationship into the
future.
3. Cooperation
Similar or complementary coordinated actions taken by firms in
interdependent relationships to achieve mutual outcomes or
singular outcomes with expected reciprocation over time.
Cooperation is a product of the exchange episodes that take place
between partners. As representatives of organizations interact over
time, agreement is reached as to the appropriate role and scope of
both firms. The activities of both partners are "geared into each
other with a maximum of effectiveness and efficiency”.
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Thus, cooperation refers to the extent that the work of buyer
and seller is coordinated. Buyers and sellers who relate to one
another in a cooperative mode intentionally seek common goals.
Furthermore, it has been shown that members of buying and
selling firms are often willing to engage in cooperative behavior
in order to maintain a relationship which is viewed as being
mutually beneficial.
The interaction of cooperation and commitment results in
cooperative behavior allowing the partnership to work ensuring
that both parties receive the benefits of the relationship.
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4. Adaptation
Adaptation occurs when one party in a relationship alters its
processes or the item exchanged to accommodate the other party.
It refers to the extent to which the buyer and seller make
substantial investments in the relationship. By virtue of having
committed resources to the relationship, the party making the
investment has adapted to the needs of his counterpart.
Adaptations may be made by either partner with regard to basic
business procedures, such as inventory management and the
collection and dissemination of information, and/or product or
process technology. One or both parties may even adapt their
attitudes, values, and goals in order to further the exchange
process or enhance the relationship.
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The adaptation process may be initiated by either party and
adaptations may either be mutual or one-sided.
Adaptations such as just-in-time purchasing and production, joint
research and development processes, or training of the customer's
workforce by the manufacturer may result in considerable gains in
efficiency.
5. Interdependence and Power Imbalance: The power of the
buyer or seller is closely tied to the interdependence of the
partners in a relationship. Power imbalance is the ability of one
partner to get the other partner to do something they would not
normally do.
Power imbalance leads to asymmetries in the relationship
outcomes such as decision making, conflict resolution, information
sharing or appropriation of the benefit. Such asymmetries can
adversely affect trust.
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6. Trust
A belief that one relationship partner will act in the best
interests of the other partner. Trust is a fundamental relationship
building factor. One party believes that its needs will be fulfilled in
the future by actions taken by the other party.
7. Mutual Goals
The degree to which partners share goals that can only be
accomplished through joint action and the maintenance of the
relationship. Mutual goals provide a strong reason for relationship
continuance; influence performance satisfaction which, in turn,
influences the level of commitment to the relationship.
8. Non-Retrievable Investments
The relationship specific commitment of resources which a partner
invests in the relationship. These non retrievable investments
(capital improvements, training, and equipment) cannot be
recovered if the relationship terminates.
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10. Bonds
i. Structural Bonds: Structural bonds are forged when two
parties make investments that can not be retrieved when the
relationship breaks down, so the relationship is prevented from
coming to an end. Structural bonds develop over time as the level
of the investments, adaptations and shared technology grows
until a point is reached when it may be very difficult to terminate
a relationship.
Firms with high levels of structural bonding have a higher level of
commitment to the continuance of the relationship than firms
with lower levels of structural bonding.
Ex. A machine tool manufacturer providing training to the
customers’ operators would inhibit the customer from switching
to another supplier due to the cost and disruption caused by
retraining.
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Ex. Company A has involved his customer B in product
development projects with knowledge and expertese exchange. As
a result, resources are shared and activities are jointly performed.
B would prefer to remain as the customer of A, since joint
knowledge and improved production processes reduce operating
costs. The bond is so deep because it offers a value added that the
customer can’t give up.
Structural bonds represent the strategy to built up long-term
relationships.
Transaction: i) a business deal (an occurrence in which goods, services, or money
are passed from one person, account, etc., to another), ii) the act or process of
doing business with another person, company, etc.
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ii. Social Bonds: The degree to which individuals are integrated
into group or society through social interaction. Individuals may
develop strong personal relationships which tend to hold a
relationship together. Buyers and sellers who have a strong
personal relationship are more committed to maintaining the
relationship.
Social bonding is found in positive interpersonal relationships
between buyer and seller. They may be easier to break than
structural bonds as buyers can find it difficult to justify an inferior
decision based on friendship.
It is important that suppliers understand the value that different
types of bonds bring to customers.
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COOPERATION and COLLABORATION
i. Cooperation is the process of working or acting together; joint
operation or action of autonomous organizations.
It is a form of behavior and refers to the practice of individuals and
groups working in common with commonly agreed-upon goals and
possibly methods, instead of working separately in competition.
ii. Collaboration is working with each other to do a task or a project.
It is a recursive process where two or more people or organizations
work together to realize shared goals, (this is more than the
intersection of common goals seen in cooperative ventures, but a
deep, collective, determination to reach an identical objective).
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COOPERATIVE AND COMPETITIVE ASPECTS OF
INTERFIRM RELATIONS
i. In competitive interactions the relevant goals of both parties
cannot be simultaneously satisfied.
• A relationship where there are mutual and positive bonds
between the parties is seen as cooperative, whereas a competitive
relationship is characterized by an absence of bonds or negative
mutual bonds.
• Non cooperation is usually regarded as opportunism and conflict.
• Interfirm competition comprises the behaviors and sentiments
which are directed towards impeding trading partners from
reaching their goals while facilitating reaching one’s own goals.
• It is often argued that cooperation and competition coexist in
relations.
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Firms manufacturing the same product may be cooperative with
regard to expanding the total market but competitive with regard
to the share of it each attains.
Within a buyer-seller relationship parties may cooperate to
achieve reliable quality, delivery, and acceptable price but
compete for the most favourable payment terms. Parties may
continue to compete for more advantageous financial terms within
the context of an otherwise cooperative relationship.
ii. All activity undertaken jointly or in collaboration with others
which is directed towards common interests or achieving rewards
is covered by the definition of cooperation.
• Cooperation contains, sentiments, behavior and expectations of
future behavior.
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• In buyer-seller relationships cooperative behavior includes the
coordination of tasks which are undertaken jointly and singly to
pursue common and/or compatible goals and activities undertaken
to develop and maintain the relationship.
•Cooperative expectations arise between firms as a result of
cooperative behavior and sentiments and also support and sustain
that behavior.
• Firms specializing in different production and marketing activities
participate in a complex form of cooperative behavior where
different and complementary actions are executed simultaneously
and with reference to each other. In part this is possible as a result
of the operation of common understandings about the way business
is conducted. These system norms (behavior that contribute to
maintenance of a system) facilitate interactions occurring in social
systems. A considerable portion of commercial behavior is organized
through such norms.
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• Cooperation is also facilitated by relationship norms (that
maintain a relationship). In relationships cooperation can be part
of the norms, e.g. through time the division of tasks and the way in
which these will be performed are embedded into the
relationship.
• Cooperative expectations include the attitudes, perceptions and
sentiments (including concern for the other party’s well-being,
trust, and personal bonds arising among the people involved.
Alternatively cooperative behavior can be overt (open) where a
person or firm may direct the actions of another as a means of
organizing a joint action; or people or firms may jointly organize
their activities to achieve a given end.
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STRUCTURES OF COOPERATION: EXTREME CASES
market
transaction
no cooperation /
collaboration
alternative types of cooperations
integrated
company
complete
cooperation /
collaboration
• Market transaction: customer placing the order - supplier
supplying the goods – customer reimbursing the supplier for the goods
received (customer is free to seek another supplier).
• Integrated company: coordination takes place within the same
organization creating a hierarchy.
The market mechanism (price) is supposed to take care of resource
allocation, but there are other relational needs and problems that
require the fitting of internal activities with those of external
counterparts like “suppliers and customers”. They are much “thicker”
then depicted by market models.
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Therefore;
the market mechanism (price) is supposed to take care of
resource allocation, but there are other relational needs and
problems that require the fitting of internal activities with those of
external counterparts like “suppliers and customers”. They are
much “thicker” then depicted by market models.
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RELATIONSHIP PORTFOLIO
A firm can manage the connections between its relationships in
terms of the relationship portfolios. These portfolios are a part
of firm’s strategic resources and comprises all the relationships
with other organizations the firm is involved in.
Portfolios include exchange and other type of relationships with
actual and potential
• suppliers
• customers
• distributors
• other org.s like government agencies, competitors and
complementors
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Portfolio Management: Balancing the benefits and costs of
exploitation vs. exploration
Exploitation: refinement and extension of existing competencies,
technologies and paradigms (returns are positive, proximate and
predictable)
Exploitation, ie. developing close, cooperative long lasting
relationships helps firms to adapt their products, operations and
services to meet each other’s needs better.
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Exploration: experimentation with new alternatives (returns are
uncertain, distant and often negative).
Exploration, ie. developing new relationships with
customers, suppliers and other types of org.s provide new
relationships that become important sources of learning and
development that challenge old routines and patterns of
thinking.
The appropriate balance of exploitation vs. exploration
depends on the nature of environment and the benefits of
learning and knowledge development.
Exploration is more advantageous in dynamic environments,
like the computer industry.
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ALLIANCES
Organizations have been placing greater priority on managing
external environment by building stronger relationships with
customers and suppliers. These relationships however, do not
always reach the level of organizational partnerships.
Recently, org.s have moved beyond customer/supplier
relationships to establish alliances with their competitors.
These inter-firm alliances often take the form of formal
partnerships, ranging from joint product development to R&D
collaboration.
Strategic alliances are voluntary agreements involving sharing,
co-development of
• products
• technologies
• services
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CAUSES OF ALLIANCES
Motivating factors
1. Pressure to access know-how and promote new knowledge
and learning
• it is increasingly difficult for a single firm to develop
internally all the capabilities needed for innovation
• it is not always feasible to obtain knowledge via market
because required knowledge is specific to the application
• knowledge can have tacit (implicit) or dense components that
need to be transmitted via interaction
As the required knowledge base becomes more complex, the
locus of innovation shifts from individual firm to networks of
alliances where firms use their;
Tacit: Difficult to express in words, understood without being openly expressed,
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conveyed by implication.
• absorptive capacity (ability to identify, process and utilize
knowledge
• ability to develop and manage collaborations to create and
apply new knowledge
2. Coping with greater competition, crowding and speed
• greater R&D competition leads to speedy innovation and
new product development, collaborations can stimulate the
rate of innovation
• competition impels firms to partnering with other org.s to
create new entrepreneurial startups, or motivate organizational
alliances
3. Obtaining complementary capabilities
Firms enter alliances to share resources, gain experience and
develop their capabilities
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4. Managing uncertainty risk
• firms reduce uncertainty and share risk in joint ventures
• firms manage technology and knowledge uncertainities
more effectively in alliances
5. Improving flexibility and complex adaptation
• social relations/networks facilitate exchange and alliance
development
• networks allow better adaption to the changing environment
by absorbing shocks and short term pressures
• firms in networks pool resources, pursue longer-term
strategies, help out partners when needed and and diffuse
valuable information
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Facilitating factors
1. Organizational position and reputation
• an organization’s reputation is closely related to its alliances
• alliances with technically distant competitors extend a firm’s
knowledge base into new areas, which enhances its
reputational position in technical space
2. Trust
• alliances require high levels of trust
3. Communication Technologies
• ICT provides new advantages for alliance formation
4. Government and regulatory context
• national environment for competition and cooperation is
improved by regulatory reforms and support mechanisms
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US ALLIANCE CAPITALISM : FLAGSHIP-LED CLUSTERS
Flagship firms (IBM, Hewlett-Packard, Microsoft, or NEC (a Japanese
IT company), have the reputation and market presence to attract a
number of cooperative partnerships between suppliers, customers,
government and even other competitors.
The Flagship firm, because of its market position, coordinates many
of the network functions of its partners (but not the daily
operations) since the flagship becomes the R&D center, the
marketing outlet, the key customer/supplier, and application
developer for smaller network partners.
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The flagship firm’s resources and global perspective enable it
to develop global strategies that can capitalize on the
capabilities and knowledge of all partners.
The flagship-led systems of industrial collaboration led by the
flagship firm include
•
•
•
•
key suppliers
key customers
selected competitors
non-business infrastructure (NBI)
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competitors
key suppliers
key customers
flagship
firm
other suppliers
other customers
non-business infrastructure
universities, research institutes
community colleges
trade associations, unions
public services
commercial relationships
network linkage
governments
(federal, state, local)
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KEIRETSU (JAPAN)
Keiretsu refers to a uniquely Japanese form of corporate
organization. A keiretsu is a grouping, or family of affiliated
companies that form a tight-knit alliance to work toward each
other's mutual success. The keiretsu system is also based on an
intimate partnership between government and businesses.
It can best be understood as the intricate web of relationships
that links banks, manufacturers, suppliers, and distributors with
the Japanese government.
Keiretsu operate globally. They are organized around their own
trading companies and banks. Each major keiretsu is capable of
controlling nearly every step of the economic chain in a variety
of industrial, resource and service sectors.
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1. Horizontal keiretsu are headed by major Japanese banks and
include the "Big Six" - Mitsui, Mitsubishi, Sumitomo, Fuyo, Sanwa,
and Dai-Ichi Kangyo Bank Groups.
2. Vertical keiretsu are industrial groups connecting manufacturers
and part suppliers or manufacturers, wholesalers and retailers; lead
by a major manufacturer.
These verticle keiretsu include car and electronics producers (Toyota,
Nissan, Honda--Matsushita, Hitachi, Toshiba, Sony)) and their
"captive" subcontractors.
Distribution keiretsu, a subgroup of vertical keiretsu, control much of
Japanese retailing, determining what products will appear in stores
and showrooms -- and at what price.
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HORIZONTAL KEIRETSU
Bank
Trading
Company
Manufacturer
Affiliates and subsidiaries
– Highly diversified function.
– A “trinity” or core:
• A bank at the core.
• A trading company.
• A manufacturer.
– Cluster of affiliates and
subsidiaries:
• From related and
unrelated industries and
services.
• Major manufacturers.
• Large service providers
like life insurance
companies.
• 10-15% equity ownership.
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VERTICAL KEIRETSU
Suppliers
Manufacturer
Wholesaler
Retailers
– Centered around a major
manufacturer that is not
part of an horizontal
keiretsu.
– Consist primarily of
supplier and distributor
relationships.
– Mainly automobiles and
electronics.
– Service the large
manufacturer at the core
of the keiretsu.
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Governance Profile
(Toyota vs. GM and Ford)
arm’s-length
suppliers
arms-length
(independent)
suppliers
35%
25%
partner suppliers
*
partner suppliers +
percent of
total
component
costs
48%
10%
internally
manufactured
internally
manufactured
55%
27%
* two or fewer suppliers
for a product category
+ Kankei kaisha
General Motors
and Ford
Toyota
62
KNOWLEDGE SHARING IN TOYOTA GROUP
Toyota
consultation teams
(on-site assistance)
supplier
association
• knowledge exchange
with all Toyota
suppliers
- Toyota policies
- applicable best
examples
(costs, quality,
safety, management)
quality
workshops
Toyota
production
system
workshops
Jishuken activities
(supplier teams)
logistics
workshops
• on-site know-how sharing
with small groups of
suppliers
- selecting a different area
each year for improvement
- visiting each supplier’s
plant for improvement
63
STRUCTURE OF THE MITSUI CONGLOMERATE (1993)
Construction
Textiles
Cement
Mitsui
Construction
Toray
Industries
Onada
Cement
Sanki
Engineering
Chemicals
The Core
Retailing
Mitsukoshi
Food
Nippon Floor
Mills
Mitsui
Toatsu
Chemicals
Mitsui
Petrochemical
s Industries
Denki
Kagaku
Kogyo
Finance &
Insurance
Electrical &
Mechanical
Mitsui Trust
& Banking
Mitsui
Engineering &
Shipbuilding
Sakura Bank
Mitsui
Mutual Life
Toshiba
Corp.
Mitsui & Co.
Mitsui
Marine &
Fire
Toyota
Motors
Mitsui Real
Estate Dev.
Paper
Transport
Oji Paper
Mitsui OSK
Lines
Steel
Japan Steel
Works
Ishikawajima
Harima
Industry
Mitsui Metal
Processing
Mitsui
Warehouse
64