ASIA SEMINAR 2

Why Focused Strategies May Be Wrong for Emerging

Markets. Notes.
-

Core competencies and focus are now the mantras of

corporate strategists in western economies.
Some groups operate as:
o holding companies with full ownership
o collections of publicly traded companies
o all have some degree of central control
Groups in emerging markets are under increasing pressure to
conform to western practice, scaling back scope of business
activity, as emerging markets open up to:
o foreign investors
o global competition
Conglomerates are too slow to compete nowadays.
A number of execs have decided to break up groups to focus
on core businesses.
Focus advice given from western businesses.
But emerging economies dont have the range of institutions
that support western business activities.
o e.g. regulation, venture capital
o may not be able to raise adequate financing or hire
skilled employees.
Although focus enables firms to perform a few activities well,
emerging market firms must take responsibility for wide range
of functions.

Institutional context therefore drives strategy.

Chaebols in Korea, Business Houses in India

Institutional Voids
Product Markets:
o communications infrastructure e.g. power shortages,
postal service, illiteracy.
o With a lack of this, firms face much higher costs in
building credible brands
o Groups have a benefit when they build up a brand, EOS
o Korean Chaebols extending group identity e.g.
Samsung
Capital Markets:
o without access to info, investors dont invest in
unfamiliar venture
Labour markets:
o scarcity of well trained people
o Groups can develop promising managers and spread
fixed costs over business.

o Korean Chaebols have set up collaboration with US

business schools to train their own people.
o Groups can develop internal labour markets of their own
-

Regulation:
o Diversified groups and coglomerates can use experience
and connections to earn advantage.
Contract enforcement
Indias largest conglomerate, Tata

How groups can add value

Brand name recognition in rural markets could leverage its
name in unrelated products targeted to same market.
Install systems to ensure consistent execution.
Manage corporate identities
Mimic institutions

Communicate strategy to investors

If groups arent adding value, they should consider focusing

Whither the Keiretsu, Japans Business Networks? How Were

They Structured? What Did They Do? Why Are They Gone?
Notes.
-

Japans business groups, Keiretsu

With institutional and economical change, they are a thing of
the past.
Keiretsu:
o
Clusters of independently managed firms
o
intertwined activities were reinforced by governance
mechanisms
o
Horizontal (financial) keiretsu
o
Vertical (manufacturing) keiretsu, composed of
manufacturer and affiliated supplier.
o
Distribution keiretsu
Postwar keiretsu from prewar Zaibatsu
o
Zaibatsu multilayered and industrially diversified
business entities controlled by family HQ or holding company
o
Pyramidal structures through equity ties, a small
number of family owners acquired control over large segments
of Japanese economy.
o
e.g. Mitsubishi shipbuilding, mining, banking,
insurance to separate legal corporations

Seminar 2 Notes
Features of groups
1) Central internal bank
2) Family owned
3) Centralised control
Why do they develop this?
1) lack of institutions in country
MITSUBISHI
1. What are horizontal keiretsu?
-

Zaibatsu pre-war had pyramidal structures

Vertical all integrated in supply chain, specialised in
manufacturing. Japanese are famous for their manufacturing.
Tightly integrated, closely coordinated. Can exist within horizontal.

2. How many well recognised large horizontal business groups are

there in Japan?
3. What are vertical keiretsu? Can you give an example of a wellknown vertical keiretsu?
4. What type of business group is Mitsubishi?
5. How old is it? Which other prominent pre-war peers did it have?
- 129 years
6. What share of Japans GDP did Mitsubishis top 30 group companies
produce around 1999?
- 8% - shows they are important.
7. How important were the zaibatsu to the Japanese economy before
the second world-war?
- Important throughout history, becoming more important. E.g.
South Korean chaebol.

OWNERSHIP
8. How are ownership relationships within the large horizontal keiretsu
organised?
-

Horizontally integrated, each firm has a share so each one cant be

taken over by international firms
After anti monopoly laws evolved. US law.
In Japan, could only own 5%. Outlawed this (8%)
Defensive mechanism, to reduce the concentration of firms in the
economy.
Cross shareholding, all firms exercise control over each other
together.
Less of a need to achieve short term goals and can focus on long
term goals as theres no pressure of being taken over.
Are boundaries easy to map out? no, because of the ownership
between lots of companies. Generally argued that Japanese groups
are less like the typical business groups, they dont tend to have a
clear hierarchical structure.

LEADERSHIP
1. Does the Mitsubishi group have a CEO? Is this typical of most
business groups elsewhere in the world?
-

No, but the chair is the closest to it.

Trading companies within Keirestu, bank, trading company and large
industrial company.

2. What are some of the main mechanisms whereby information is

shared/leadership given?
-

In the 1990s meetings began to break down, no clearly defined

leadership.
Mitsubishi suffered from real lack of leadership which led to crisis
and need for dramatic restructuring
Hard to make large strategic restructuring.
Nico securities sold to Citigroup.

3. Do definitions of business groups say that an element of central

coordination takes place within the groups? How are Korean groups
run?
-

Yes, implicit in idea of business group.

Should have some centralised control.

CAPITAL MARKETS

1. Why do capital market imperfections drive business group

formation?

Lack of credible institutions and regulatory environment so

investors dont want to invest in unfamiliar environments

Having little information and few safeguards, investors are reluctant

to put money into new enterprises.
More information
Trust need it as there arent good judicial systems in emerging
markets.

2) Do Japanese business groups have financial arms? Are they

important, do you think?
-

Besides acting as venture capitalists, groups also act as lending

institutions to existing member enterprises that are otherwise too
small to obtain capital from financial institutions.

Banks, insurance companies, etc

3) Does the Mitsubishi keiretsu have a financing arm? What is

it called?
-

Yes

Mitsubishi bank, trust and tokiomarine and fire.

Bank of Tokyo.

Some of these banks went bust so had to merge together. (1990s)

desperate for capital, balance sheets were weak, had to merge,
consolidate balance sheets, which led to mergers between big 6
keiretsu.

4) What welds Mitsubishi together?

-

Pyramidal structure

Central control and bank

Bank owns shares and has equity ties to member firms.

When banks went bust, group started to fall apart. Had to sell off a
lot of these shareholdings.

Horizontal Keirestu

5) How are the shareholdings of the Mitsubishi Group

organised?
-

Cross shareholdings, business own little bits of each other

Each one has no controlling say in business

All firms in group have to meet to discuss decisions as neither has a

say individually. Have to work cooperatively.

DIVERSIFICATIONSTRATEGIESINBUSINESSGROUPS
1. Is diversification a central component in the definition of the
business group concept?
-

True

2. Why is diversification an interesting phenomenon for

business/management scholars today?
-

Quite prevalent
In the west businesses are told to specialise which they do, but in
East Asia, they have to be diversified so their structure is different.
For academics this has become interesting.

3. Do businesses within the same Keiretsu generally compete with one

another? What was the one set policy? Who do they compete with?
-

One set policy,

4. Was blind expansion and excessive diversification a problem at

Mitsubishi in the 1990s? What ROE did they have and how does this
compare internationally?
-

Yes, about 4%

Business groups do act as an insurance mechanism. Insured member

enterprises so they have support.