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Keiretsu Objectives

 Outsourcing: Parent company entrust production of low value added products to
subcontractors. Reduces manufacturing costs such as metal processing, molding,
painting, assembly of materials etc
 Relationship building:ie relationships based on mutual trust. Helps reduce asset specify
risk esp when one firm makes significant amount of investment on the expectation of
continuous business relations with the other firm
 Risk sharing: Through mutual negations which allow for recouping of investment costs
incurred by members within the supply chain.

Keiretsu Characteristics
 Long –Term Continuous Trade: On the belief that long term trade agreement creates
economic efficiencies especially reducing startup costs when dealing with a new supplier
e.g. maintaining quality, deadlines, safety guidelines etc
 Fixed & non-symmetrical trade between companies: i.e Continuous, cyclical
transactions to ensure business continuity among firms
 Dispatching executives into the keirestu: i.e dispatching retired executives from parent
company to go work for sister company within the Keiretsu
 Holding each other’s stock: Holding stock/ shares in each other’s company within the
supply chain without managerial interference in day to day business except during crisis
where orders may be issued. They do this to prevent hostile take -overs
 Supplementing and sharing through business sharing: E.g a parent firm in
cooperation with a subcontracting firm establish a guidance system to govern quality
control and production technology

Criticisms
 Exclusionary: As business is conducted based on long term trade relationship
 Discourages Innovation: Even startups need to enter the supply chains led by big
companies to succeed
 They overinvest in declining business (because of reciprocal ties)
 They discourage free flow of trade and capital(competition)
 They discourage mergers and acquisitions which are valid ways of entering the Japanese
market through cross shareholding
 The distribution mechanism and network within keiretsu pose a big threat towards
foreign imports
 It is difficult to objectively examine and measure trade relationships based on trust as
opposed to market forces
 The costs of ending a long term relationship can be substantial (refer asset specifity)
 Affiliated companies may lack competent research and varied production technologies

 Holding each other’s tock prevent outsiders from buying shares and deemed as invasion of stockholders right (eg inability to prevent an external executive from reading a company’s ledger .