Lesson 9 – How Do You Keiretsu?
Content created by Darin Gerdes of Charleston Southern University. Copyrights owned by Great Business Networking and Darin Gerdes. Commercial use and reproduction not authorized without written consent.
“It is literally true that you can succeed best and quickest by helping others to succeed.”
Great businesses are known for something special. Apple is known for amazing products like the iPhone. Wal-Mart is known for low prices. Coca Cola is known for a simple, refreshing beverage. Toyota is known for quality. These are a few of the world’s largest public companies.
The Story Behind The Story
But the story of what these companies are known for is not as interesting as the story of why they are known for it. While each company has a unique selling proposition, they also have particular characteristics that help them succeed in their markets.
Apple was an early innovator in computers. It was IBM’s most potent rival in hardware and Microsoft’s nemesis in software. In recent years, the company recreated itself, bringing digital music mainstream with the iPod and iTunes. It is now the 12th largest publically held company in the world (“The World’s Biggest,” 2015). We think of Apple as a manufacturer, but it is really a design company that outsources all of its manufacturing to China (Chen, 2012).
Wal-Mart keeps the prices low because they have constructed the most efficient distribution system. This efficiency allows them to push prices lower than their competition, attracting more and more business. They have razor-thin margins, but they make their profit on velocity. As Ron Loveless, a senior vice president who was one of the early managers put it,
People say Wal-Mart is making $10 billion a year. But that’s not how the people inside the company think of it. If you spend a dollar, the question was, how many dollars of merchandise do you have to sell to make that $1. For us, it was $35. (Fishman, 2006, p. 23)
In other words, Wal-Mart makes less than three cents per dollar, but they move so much merchandise that they have become the 16th largest public company in the world (“The World’s Biggest,” 2015).
Coke has two core competencies. It is essentially an advertising company with an incredible supply chain. Coke is available in every country on the planet, and it moves “drinks from its factories to supermarket shelves within 48 hours” (“From Factory to Fridge,” 2015). Then,
Once products are delivered to the stores, the company also has a role in ensuring that bottles make it all the way to the shoppers’ fridges. The company’s marketing departments has exceptional relationships with retailers to ensure that in-store merchandising makes Coca-Cola products easy to find. (Murphy, 2015, para. 8).
Coca-Cola is the 93rd largest company in the world (“The World’s Biggest,” 2015), which is not bad for a company that bottles flavored sugar water. It is one of the most recognized symbols on the planet, beating both the Christian cross and the Islamic crescent on some surveys. Nevertheless, according to Investopedia, the company spent nearly 3.5 billion in advertising (roughly 7% of total revenue of 45.93 billion) in 2014.
Toyota is the 11th largest company in the world (Forbes, 2015). The automaker is known for quality, and this quality can be traced back to statistical quality control, Total Quality Management (TQM), and a philosophical system of continuous improvement (“Total Quality Management,” n. d.). Toyota also pioneered Lean Manufacturing, Just in Time (JIT) manufacturing, and The Toyota Production (TPS) system, which became a marvel in industry. This was much of the reason for Toyota’s success as an auto manufacturer. According to Forbes, “Toyota remains the world’s biggest automaker…The Japanese company sold 10.23 million vehicles in 2014, beating both Volkswagen and General Motors” (para. 1).
In the beginning, there was no guarantee of Toyota’s dominance in the market. Toyota began as Toyoda Automatic Loom Works, Ltd., shortly after Sakichi Toyoda built the automatic loom in 1924. An automobile department began in 1933, and this became Toyota Motor Co., Ltd. in 1937. Though the company grew during World War II, it found itself in crisis by 1950. It would not export its first car to the United States until the late 1950s (“History of Toyota, n.d.). As Osono, Shimizu, & Takeuchi, (2008) explained,
Fifty years ago, Toyota Motor Corporation dipped its toe into the big pond of the U.S. automobile market with a tiny car that could only have been viewed with derision. It was 1957—an era of huge front-end Buicks and tail-fin Cadillacs. As one of the company founders Shoichiro Toyoda recently described it, the Toyopet Crown couldn’t make it onto the highway unless the on-ramp was downhill. But true to its practice of continuous improvement (kaizen), Toyota kept on trying to get it right. It went on to produce the more sensible Corona in 1965, followed by the Corolla, the Camry, the Lexus, the Prius, the Tundra, and you know the rest. (p. 1)
The first lesson, then, is that there is no one right way to be successful. Apple, Wal-Mart, Coca Cola, and Toyota all each followed very different paths. Each company’s success is the story of comparative advantage, writ large. But this is not the primary point of this lesson. Let’s continue with Toyota’s story.
One often-overlooked key to Toyota’s success was its keiretsu, a method of organizing little known outside of Japan. According to the Economist Magazine,
Keiretsu is a Japanese word which, translated literally, means headless combine. It is the name given to a form of corporate structure in which a number of organisations link together, usually by taking small stakes in each other and usually as a result of having a close business relationship, often as suppliers to each other. The structure, frequently likened to a spider’s web, was much admired in the 1990s as a way to defuse the traditionally adversarial relationship between buyer and supplier. If you own a bit of your supplier, reinforced sometimes by your supplier owning a bit of you, the theory says that you are more likely to reach a way of working that is of mutual benefit to you both than if your relationship is at arm’s length. (2009, para 1).
This was not a common approach in the West. In contrast, Ford attempted to control every step of the manufacturing process buy owing everything needed to produce a car, going so far as to purchase rubber plantations. This approach, known as vertical integration, was simultaneously safe because it ensured control, and risky because it married the company to select businesses. Later, it became more common for Detroit automakers to outsource parts, playing one supplier off against another in order to obtain lower prices.
This is where Toyota’s keiretsu provided an advantage. Toyota used its keiretsu to accomplish the same objective. It did not take the same risks as Ford since it did not own the whole company, and it had enough of a vested interest in each supplier that it shared the Toyota Production System (TPS) with suppliers in order to ensure greater quality and efficiency. Toyota’s suppliers then began to demand that their suppliers adopt the system (McCann, 1998, p. 10).
The keiretsu provided a win-win scenario. Where Coca Cola has historically had a contentious relationship with their bottlers and Wal-Mart is known for putting the squeeze on producers, Toyota works with their suppliers to make them better. According to Jeffrey Liker (2004), “Toyota was different from the other Japanese automakers….There was a sense of partnership between Toyota and its suppliers that we did not see a s strongly in the keiretsu of Mazda and Nissan” (p. xiv).
For example, in 2000, when Toyota sought to cut costs by 30%, it did not just demand cost reductions, but it worked with its suppliers to find ways to accomplish this task, improving their operations in the process.
Toyota’s cost-cutting program—dubbed CCC21, or Construction of Cost Competitiveness for the 21st Century—has been a remarkable success. With just one year to go, the plan is on track to save the automaker some $10 billion over its five-year time frame. Not only is CCC21 sourcing components more cheaply but Toyota has also improved the parts’ quality. (“A ‘China Price,’” 2005, para. 2)
Instead of closely guarding the Toyota Production System (TPS), Toyota, “takes transparency to a new level…Toyota goes so far as to give tours of its company to competitors (not as risky as it sounds, because Toyota knows that culture cannot be stolen)” (Fullan, 2008, p. 99).
This mentality extended to dealers too.
Senior managers take every opportunity to interact at the front line and all employers work hard to make dealers an integral part of the organization. Global Marketing Division General Manager, Katsuyoshi Tabata, described one of the ways they do this from his experience while working at Toyota Motor Sales, USA:
‘By sharing our future plans, in good times and bad times, dealers feel that they are trusted by the distributor, and that the distributor is trusted by TMC, Toyota Motor Corporation. This will increase their commitment to Toyota, and this makes a difference when we can’t provide new models for a while or when we want them to invest in facilities or people.’ (as cited in Osono, Shimizu, & Takeuchi, 2008, p. 132)
Toyota executives look to dealers for insights, and they work to help their dealers be successful. The executive vice president and president of Toyota Motor Sales, USA, said, “I think the most important thing that differentiates Toyota from other companies is … the way it treats its dealers in its business operations.” He continued,
Toyota is different than other manufacturers in its philosophy toward dealers. Simply said, we treat our dealers as partners. We truly listen to their opinions and incorporate them as an integral part of our entire business formula. We pursue growth with our dealers based on the same Toyota principles while helping to make them profitable. (as cited in Osono, Shimizu, & Takeuchi, 2008).
More importantly, they lived this philosophy. Where American auto manufacturers have consistently been in adversarial relationships with their dealers, Yukitoshi Funo, President of Toyota Motor Sales USA, offered a different perspective:
Why allow so much profit to flow to the dealers? Why not let profits flow to the factory—the manufacturer? Increasing the number of dealerships is good for the factory, but not so good for individual dealers faced with the prospect of another new dealership across the street. So, if you think of the factory first, you increase the number of dealerships. But if you think of the dealers first, the preference is to refrain from increasing the number of dealerships and put everyone’s heads together to come up with ways to increase efficiency. (p. 133).
Toyota has succeeded by working for the good of its suppliers, distributers, and dealers in its keiretsu. This is the primary lesson. The principle is that you help yourself as you help others because you invoke the norms reciprocity (Pfeffer, 2010, p. 97). Toyota has found that, in Napoleon Hill’s words, “It is literally true that you can succeed best and quickest by helping others to succeed.” (2008, p. 345)
How Do You Keiretsu?
It is likely that you are not running a large automobile manufacturer, but you can apply the same principles in your situation. We are all dependent, to some degree on others to supply or distribute our goods and services. What if you invested in your suppliers or distributors? Would it make a difference? It does not have to be a financial investment; it may be sharing knowledge that you possess that would help them service you more effectively.
What are you doing to help others who help you?
Who is in your Keiretsu? (Think about suppliers and distributors—those whose absence might cripple your operations)
How do you go above and beyond to contribute to those who contribute to your success?
A “China Price” for Toyota. (2005, February 20). Bloomberg Business. Retrieved from http://www.bloomberg.com/bw/stories/2005-02-20/a-china-price-for-toyota
A look at Coca-Cola’s Advertising Expenses (KO, PEP). (2015, August 13). Investopedia. Retrieved from http://www.investopedia.com/articles/markets/081315/look-cocacolas-advertising-expenses.asp
Chen, B. (2012, Jan 25). The real reason the U.S. doesn’t make iPhones: We wouldn’t want to. Forbes. Retrieved from http://www.forbes.com/sites/forbesleadershipforum/2012/01/25/the-real-reason-the-u-s-doesnt-make-iphones-we-wouldnt-want-to/#6e57ec3b4bde
Fishman, C. (2006). The Wal-Mart effect: How the world’s most powerful company really works–and how it’s transforming the American economy. New York: Penguin Press.
From Factory to Fridge. (2015) Global Manufacturing. Retrieved from http://www.manufacturingglobal.com/lean/358/From-factory-to-fridge:-Inside-CocaColas-supply-chain
Fullan, M. (2008). The six secrets of change: What the best leaders do to help their organizations survive and thrive. San Francisco: Jossey-Bass.
Hill, N. (2008). The law of success. New York: Jeremy P. Tarcher/Penguin.
History of Toyota. (n.d.). Toyota-global.com. Retrieved from http://www.toyota-global.com/company/history_of_toyota/1960-1969.html
Keiretsu. (2009, Oct 16). The Economist. Retrieved from http://www.economist.com/node/14299720
Liker, J. (2004). The Toyota way: 14 management principles form the world’s greatest manufacturer. New York: McGraw-Hill.
McCann, P. (1998). The economics of industrial location: A logistics cost approach. New York, NY: Springer.
Murphy, A. (2015, May 6). 2015 Global 2000: The world’s biggest auto companies. Forbes. Retrieved from http://www.forbes.com/sites/andreamurphy/2015/05/06/2015-global-2000-the-worlds-biggest-auto-companies/#a3839d66e48
Osono, E., Shimizu, N., & Takeuchi, H. (2008). Extreme Toyota: Radical contradictions that drive success at the world’s best manufacturer. Hoboken, N.J: John Wiley & Sons.
Pfeffer, J. (2010). Power: Why some people have it–And others don’t. New York, NY: HarperBusiness.
The World’s Biggest Public Companies (2015). Forbes. Retrieved from http://www.forbes.com/global2000/list/#tab:overall
Total Quality Management (TQM). (n. d.). 75 years of Toyota. Retrieved from http://www.toyota-global.com/company/history_of_toyota/75years/data/company_information/management_and_finances/management/tqm/change.html