The Japanese Business System: Key Features and Prospects for Change

Abstract

This paper argues that the Japanese business system cannot be adequately understood without extending the focus of analysis beyond the individual firm to the vertical keiretsu, or business group. The vertical group or keiretsu structure was first identified and studied in the auto and electronics industries, where it is most strongly marked, but it characterizes virtually all sectors, service industries as well as manufacturing. Large industrial vertical keiretsu are composed of subsidiaries engaged in three distinct types of activities (manufacturing, marketing, and quasi-related business.) The coordination and control systems are built on the flows of products, financial resources, information and technology, and people across formal company boundaries, with the parent firm controlling the key flows. The paper examines the prevailing explanations first for the emergence and then for the persistence of the vertical group structure, and looks at the current pressures for change and adaptation in the system. The Japanese Business System: Key Features and Prospects for Change D. Eleanor Westney M.I.T. Sloan School of Management Introduction In the late 1980s, the efforts of the business media and academic researchers to analyze the Japanese business system were spurred primarily by the desire to explain the success of Japan's economy and its firms. In the mid-1990s, however, with the Japanese economy mired in a prolonged recession, the business press virtually unanimously has portrayed a system in crisis, whose past successes contain the seeds of current and future difficulties, as its faces a changed international and domestic environment and unprecedented strains on its internal structures and processes (e.g. Economist, 3 June, 1995). The image of the Japanese business system in the popular press has changed much more dramatically than the system itself. But the image of the business system among academic researchers has also changed over the years. The intensified scrutiny to which Japan was subjected in the 1980s provided a model of the Japanese business system that built on previous work, particularly on the human resource management and decision-making systems of the large Japanese firm. But additional elements were added: assessment of strategic behavior in the mid-