Explain the Keiretsu inter-structure, and discuss why it is no longer the case that the keiretsus are a source of competitive advantage.

                         Example of interactions between major keiretsu and other groups

Tokyu

Nippon

   Stell

Mitsubishi    

Morimura

 - -                                                                                                

Toshiba

Tokai

Mitsui                

                                                                   BJ

     Oji

  Toyota    

                   Sumitomo

Matsushita

                                                                                                                             Nissen

                                                                          Fuyo

           kawasaki

DBK

  Hitachi

Saibu Saison

Maiji

Furakawa

                                                                                                                           

                      Sanwa

                   

        Six major industrial groups                                             Vertical integrated groups

Two medium industrial                                                 Relationship

Groups led by leading banks

In according to a number of comparative advantages such large groups, Japan is dominated by keiretsu in terms of ownership, organisation, and management. Some dysfunctions can intervene within inter-firm structure and can affect them dramatically, if they don’t take any predispositions. These dysfunctions can be explained in three ways. The first way, we know that the firms are dependent of one another. Within the complex inter-firm structure, firms are profoundly entrenched and in this circumstance, a firm's vital resources may span firm limits and may be fixed in inter-firm routines and processes. Take for example, one firm may be indebted a lot of business processes or resource components to other firms within the network. Without them, the firm may not be able to carry on running the business. From the viewpoint of transaction cost, the insolvency of a firm is much expensive for other firm within the inter-firm structure. For that reason, they will be predisposed to rescue the member firms that become to struggle in case of financial problems. In the second way, our approach of dysfunction can also determine the qualities of network ties. To demonstrate our viewpoint, take for example General motors and Toyota in order to analyze their relationships with suppliers. In its strategy of inter-firm, General Motors hasn’t cultivated a steady network of supplier firms. To a certain extent, its correlation with supplier firm is more market-based and the relationship between General Motors and its suppliers may not sure and variable based on the price suppliers offer to it and other factors. On the one hand, Toyota tried to build long-term relationships with its supplier companies by actively facilitating knowledge sharing, transferring management practices such as operations management, transferring its personnel to suppliers. As a consequence, Toyota's network ties with its suppliers are further than transaction levels. On the other hand, it doesn’t without difficulty change its suppliers even if other suppliers offer lower prices to it. Instead, Toyota encourages its suppliers to lower their production costs by providing consulting services, information about cost reduction technologies, and so on. As the case of Toyota, many Japanese companies within keiretsu networks made investment for establishing prosperous network ties. Thus, letting members go into economic failure means that they are losing valuable ties that are developed by important investment. This may be one of the reasons that member firms try to rescue troubled firms within networks. The third way put in evidence cultural factors. Some scholars argue that Japanese firms emerge to have been successful at generating valuable network ties in part because of a country-specific institutional environment that fosters goodwill trust and cooperation (Dyer & Singh, 1998). They challenge that in other countries, for example, USA and Russia may not be able to imitate that kind of network structure because of an inability to replicate the communally complex of institutions surrounded in the Japanese institutional environment. The theory of individualism-collectivism may provide a view about the risk buffering system within Japanese firm networks. Some cultures such as USA develop citizens who are principally individualistic and others such as Japan develop citizens who are absolutely collectivistic (Moorman & Blakely, 1995). Because collectives tend to weigh more on group benefits than individual benefits, the group of people in collectivistic culture may be easy to foster the helpful relationship. In these relationships, unselfish behaviours such as rescue others without any return can happen quite often.

In the 1980s and 1990s, Japan is composed of dual economy between the keiretsus and non-Keiretsus. Trading and bank were hold by the former by 30-30% and the latter by 67-70%. We also add the keiretsus structure cooperated with and received strong support from the Japanese government. In the late 1980, the keiretsus contributed 17% of the total sales and 18% of the total net profits of all Japanese businesses, thus they employed 5% of Japan’s work force.

In the mid -1980s, the global economic and financial order that was established at Bretton Woods in 1944 was under pressure from several sources and subject to revision. The cooling of Cold War tensions allowed Western governments to reconsider the institutions of international trade and finance, such as free trade, privatisation, liberalisation and deregulation. In this period of time, in Asia the spectre of communism had receded with Japan securely located within the Western sphere of influence and the Plaza Accord in September 1985 signalled the beginning of a new era in Japan economic and corporate development and marked the beginning of a period called the Endaka and the end of Japan’s export-oriented industrialisation. This accord resulted in numerous unintended consequences that shaped the future of the keiretsu inter-firm structure. With the appreciation of the yen, Endaka was to produce a more insidious effect, depressing Japanese interest rates to historically low levels that were negative in real terms. Long-term negative real interest rates set in motion an asset-price spiral in real estate and equity market prices, creating a bubble economy. Increases in the value of equity allowed firms to reduce their dependence on bank debt and, as many firms were also cash-flow positive in this period, they could finance their expansion through retained profits; together, these factors allowed firms affiliated with business groups to loosen ties with their main bank. When the bubble economy collapsed in 1991, the brutally deflating asset values instigated a decade-long depression in the financial and corporate sector. Now the long reaction time of the keiretsu companies in relation to external changes gradually became a major disadvantage for them. This is the reason why by the early 1990s, the advantages that a keiretsu provided to its affiliated members began to diminish and also one of reasons that why it is no longer the case that the keiretsus were a source of competitive advantage.

There is accumulating evidence that the financial market performance of Japanese firms has been in relative decline since 1991. However, it is important note that decline is relative. Nolan (2001) also observes that even after the long stagnation of the 1990s, many of Japanese firms was less significant than their stagnant stock market performance. However, the continuing malaise in Japan’s keiretsus as source competitive advantage generated scepticism about the value of blank-led corporate governance. The focus began to turn to the negative aspects of business group affiliation. Several recent studies provide evidence that departs from the profit redistribution and insurance hypotheses, casting the keirestus in less glowing terms. Main banks are viewed as imposing a variety of costs on their affiliates in a manner that captures the rents and expropriates other classes of shareholder while powerful keiretsu members exploit weaker firms and utilise complex corporate structures to exploit minority investors by selling low-quality assets in equity markets. However, contrary to the previous studies, Gedajlovic and Shapiro (2002) find that firms within keiretsus tend to have poorer performance and a greater variance than do independence firms. They speculate that there is a possible explanation for their contradictory results: most previous failed to control for key firm-specific factors that would have a direct and considerable impact on firm risks. They also found that keiretsus tend to be older and larger in size than independent firms.

The other reason is the earlier in the 1970s, Japan started exporting heavy industrial goods and importing raw material and fuels. But the country continued to be closed economy keeping out foreign products, foreign capital and foreign management. Non-Japanese firm began to cry foul over the exclusionary trade practices in Japan. Without access to the national distribution system, foreign firms found it difficult a dent in the Japanese market. For example cross-ownership between Japanese automobile manufacturers and their dealers acted as on obstacle to the entry of foreign players.

Finally, predictions that keiretsus are becoming obsolete and their businesses are likely to dissolve are overstated. During a long period of rapid growth, Japanese were hailed as a model of development worthy of emulation in mature and developing economies alike. After a long period of inertia and the fitful and uncertain restructuring, should the Japanese keiretsu still be regarded as exemplary model of reform? Khanna and yafeh (2005) are not confident that japans’ corporate groups hold many lessons for business groups that encounter problems in other emerging economies’ markets. They contend that Japanese business groups are fundamentally different from groups found in other parts of the world: they are centred on banks, they are not controlled by families, they haven’t alternative organised mechanism of joint decision making, and the vertical keiretsu are essentially operational elements.  

                                                                             

                                                                                  REFERENCE

Dyer, J. H., & Singh, H. (1998). The relational view: Cooperative strategy and sources of inter-organizational competitive advantage. Academy of Management Review, 23 (4), 660-679.

Gerlach,(1998). The Japanese corporate network - A block model analysis.  37 (1), 105-139

Lincoln J. R., Gerlach M. L., Ahmadjian C. L. (1996). Keiretsu networks and corporate performance in Japan. American Sociological Review, 61 (1) 67-88.

Lincoln, J. R., Gerlach, M, & Takahashi, P. (1992). Keiretsu networks in the Japanese economy: A dyad analysis of inter-corporate ties. American Sociological Review, 57, 561-585.

Moorman, R. H. & Blakely, G. L. (1995). Individualism-collectivism as an individual difference predictor of organizational citizenship behavior. Journal of Organizational Behavior, 16 (2), 127-142.

Nolan, B. (2001). Social structure and competition in interfirm networks. Asian Business Group, 42, 35-67.

 Khanna and yafeh (2005). Social structure and competition in interfirm networks. Asian business Group,111,112

Gedajlovic and Shapiro (2002). Social structure and competition in interfirm networks. Asian business Group,88,89

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