what is keiretsu 
keiretsu is a japanese term referring to a business network made up of different companies including manufacturers supply chain partners distributors and occasionally financiers they work together have close relationships and sometimes take small equity stakes in each other all the while remaining operationally independent translated literally keiretsu means headless combine understanding keiretsupowerful families known as zaibatsus once ran the majority of japan s major industries that all changed after world war ii when the united states came in and busted up these structures zaibatsus were seen as monopolistic and undemocratic reportedly buying politicians in exchange for contracts and using pricing mechanisms that exploited the poor faced with economic hardships after the war japanese companies responded by reorganizing themselves as keiretsus japanese corporations value having close ties with one another working together rather than keeping others at arm s length is believed to be mutually beneficial for all parties in fact decades after its formation keiretsus still represent major parts of the country s economy keiretsu has even gone on to influence business practices in other countries albeit in a looser form in japan where companies are expected to cooperate keiretsus are regulated by specific laws outside the country the term generally refers to informal alliances between more than two organizations in 1996 academic jeffrey dyer wrote in harvard business review that chrysler s teaming up with suppliers to cut the cost of manufacturing cars meant it had created an american keiretsu many other companies in the united states and europe are viewed to have borrowed something from keiretsus too 1types of keiretsuthe keiretsu system is traditionally structured along a horizontal or vertical integration model a horizontal keiretsu is characterized by an alliance of different companies from various sectors including a bank the bank is the centerpiece of the network and is responsible for providing the other companies with financial services the purpose of horizontal keiretsus is to distribute goods around the world keiretsus seek new markets for keiretsu companies help establish keiretsu companies in other countries and sign contracts with other international companies that supply commodities used in japanese industry in contrast a vertical keiretsu refers to manufacturers suppliers and distributors partnering up with a common goal they work together to cut costs and become more efficient vertical keiretsus are a group of companies within the horizontal keiretsu the automobile company toyota is an example of a vertical keiretsu toyota relies on suppliers and manufacturers for parts employees for production real estate for dealerships steel plastics and electronics suppliers for cars and wholesalers while these ancillary companies operate within the vertical keiretsu of toyota they are members of the larger horizontal keiretsu although much lower on the organizational chart research has suggested that toyota has benefitted from the trust collaboration and educational support that are hallmarks of the keiretsu system its supplier relationships are more open international and cost efficient than ever before 2advantages and disadvantages of keiretsuworking closely together can bring many benefits companies in the keiretsu can leverage each other s expertise to become stronger and better information shared among customers suppliers and employees within the keiretsu can lead to increased efficiency as a result of this information sharing investment decisions can be made faster and suppliers employees and customers know the purposes and goals of those investments the key to successful keiretsu like partnerships is support cooperation trust and goodwill while it may not be intuitive in a hypercompetitive cost obsessed environment these relational elements are critical because they cut down on some of the hidden costs of arm s length supplier relationships that are characteristic of the western business model forming an alliance also limits the threat of competition and makes it more difficult for its members to be subject to takeover attempts by outsiders in addition the reduction of costs due to dealing with intra keiretsu firms can increase efficiency within the supply chain however there are also several drawbacks critics point out that their large size makes it difficult for keiretsus to adjust quickly to market changes and that limited competition leads to inefficient practices another potential issue is easy access to capital close relationships with a bank might encourage a company to embark on risky debt fueled strategies that an outside institution would probably never help to finance working together can bring benefitsleverage other company s expertiselimits threat of competitionincreased efficiency within the supply chaincannot adjust quickly to market conditionslimited competition leads to inefficient practiceseasy access to capital can encourage risky behavior