Keiretsus and Conglomomerates

Keiretsus and ConglomomeratesBy, Jeffrey FisherSociology of Organizations, Fall 2014 Prof. RiehlTeachers College, Columbia UniversityMitsubishiAndBerkshire Hathaway

Mitsubishi represents the old Zaibatsu now Keiretsu of Japan and Berkshire Hathaway represents an American Conglomerate1

Corporate CultureStakeholder vs. Stockholder ModelEast vs. WestThe many subsidiaries operate independently all to help the center with the bottom line in the West in contrast to the East where all of the subsidiaries operate more so to help the employees and the communities

The logos and list of companies in Berkshires portfolio represent businesses that are all owned by the conglomerate. Some deals are different then others, certain subsidiaries are purchased for 80% of their shares with an earn out of the rest at a later date for reporting tax reasons others are purchased in their entirety. Both corporations list or have listed some subsidiary stocks on market exchanges, Berkshire had listed its WESCO subsidiary while Mitsubishi Motors is listed.2

Essence of the M -FormConglomerate acquisitions by M-forms did not represent inefficient empire-building by managers, according to Williamson (and contrary to most empirical evidence [Amihud and Lev 1981]; rather, these acquisitions were missionary work meant to rehabilitate poorly run businesses-the M-forms burden. The M-form conglomerate profited by identifying and buying undervalued targets and running them more effectively by implementing appropriate internal financial controls, ultimately benefiting economic efficiency (Williamson 1975). (Davis p.553)

Berkshire had done this with Fruit of the Loom which was purchased out of Bankruptcy and GEICO which a large portion was purchased at approximately $2 a share and Mitsubishi did this with its Morgan Stanley position during the financial crisis of 2007-2008 to some extent (capital requirement controls in particularly). However, both Berkshire does not make a habit of engaging in M-form acquisitions, if there is a target corporation that is being well run and is profitable and makes sense then Berkshire has no problem acquiring them as well. Such as was the case with Marmon, Iscar and BNSF.3

American Conglomerates and the M-Form

The American conglomerates that were going concerns but are no longer in existence still provided some efficiencies that we use today, thanks to the M-form. Once such example is Rapid American Corporation, an American Conglomerate that at one time owned RKO Stanley Warner Theaters before the concept of the multiplex was in existence. Prior to the multiplex, single movies played at theaters. The multiplex concept allowed theaters to utilize their overhead to show multiple films and maximize their profits by engaging return customers for the different films they were showing at the same theater. After Rapids acquisition the multiplex concept was introduced to RKO, thus improving the efficiency of the subsidiaries assets, the subsidiary was profitably sold. This is unlike Berkshire whose holding time for their subsidiaries is forever.4

Hawthorne Effect on Target Before and AfterThe Hawthorne effect- individuals change or modify their behavior when they know they are being observed. Increase attention could lead to increased worker productivity.Subsidiary managers and executives not observed by parent prior to acquisition. After acquisition closes subsidiaries are observed by parent corporation on at least an annual basis if not a Friday meeting a month in the case of Mitsubishi

The Hawthorne Effect can take place during work and for the Conglomerate and Keiretsus cases by subsidiaries trying to make their numbers for the quarter or the year by having a parent corporation observing them as well.5

Double Hawthorne Effect

The Hawthorne effect allows employees to be monitored and may result in a change in their behavior. In the case of the Conglomerate and Keiretsu the subsidiary managers may be monitored by the parent and the subsidiaries subsidiary may be monitored by the subsidiary and/or the parent due to the Hierarchical authority inherent in all such organizations6

Hawthorne EffectIn the illumination experiments, some workers were defensive or suspicious and curbed their output, while others, overly anxious to cooperate, increased their output by spurting. (Wickstrom, 364).In times of window dressing for quarterly earning or sales of entire subsidiaries or the entire target corporation a long sprint or spurt may be achieved by the entire team to increase revenues and profits while management is preparing a sale.

Spurting could happen by the laborer on the assembly line and by the subsidiary manager trying to book sales now and increase them for the quarter or year for the parent corporation that oversees that division.7

The HierarchyHierarchically both theTop Down Conglomerate and ManagerialKieiretsus shareAuthorityThe same structure

From a Hierarchical point of view both organizations have the authority to oversee not just the managers directly below them operating subsidiaries but the entire division itself.8

IntegrationBoth Berkshire and Mitsubishi make acquisitions to compliment existing businessesBoth engage in Vertical and Horizontal acquisition integrationBoth engage in branding and economies of scale

The Integration process here is in fact Win Win within both the Conglomerate and the Keiretsu

Cost savings and synergies come with integration.9

CentralizationSubsidiaries let the parent report their financials for them lowering costs and creating strategicsynergies. In both situations the whole is greater than the sum of its parts

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Protect and DefendBoth the Keiretsu and the Conglomerate have better chances of survival by acquiring, building, creating and maintaining strategic and competitive advantages as well as building Moats both competitive and financial. Berkshire through core insurance and Mitsubishi through its core bank

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Keiretsu and Conglomerate The FinancialsOrganizationally both ally themselves with strategic partners to sustain and grow both domestically and internationally. Though not wholly owned subsidiaries, a seat on the Board and a Vote provide a voice.Mitsubishi

Berkshire -

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The Hawthorne Effect, the Foucault Effect and Open Market InvestmentsWhat would senior management do?How do I monitor myself to do what senior management would want me to do?

https://www.youtube.com/watch?v=O0R_9L_D2Yk

After the Hawthorne effect and employees get a feel for what old and new management wants from them they may then engage in the Foucault effect. This ingratiates them at once with their peers in the newly merged organization and ingrains and reinforces the corporate culture. Reputation is as valuable as the bottom line in both firms so knowing what not to do and not doing it is as important a Foucault effect as knowing what to do and doing it. Berkshires' Chairman and CEO stepping in for an open market investment they had in Solomon Brothers Investment Bank in the 1990s where Berkshires Chairman and CEO became interim Solomon Brothers Chairman and CEO due to some nefarious dealings is an example of this.13

Hands Off Managerial Approach Goes Well With FoucaultBoth Berkshire and Mitsubishi allow their subsidiaries to operate independently. Subsidiary heads may expect a Hands Off approach by Parent Corporation management. Mitsubishi holds monthly Friday meetings with subsidiary executivesBerkshire holds its Annual Meeting with its executives and shareholders from all over the world.

The monthly Friday meetings allow senior executives to better understand where the whole Keiretsu is at an ongoing basis. While the annual meeting at Berkshire is coupled with a caveat, executives are to bring bad news to Parent Corporation chiefs ASAP besides that it is a hands off approach. It should be added that Berkshire has an annual Friday event at their annual meeting. It should be noted here that the Foucault effect works very well when coupled with hands off management. As opposed to the Hawthorne effect employees under the Foucault effect are self monitoring already know what the organization accepts and acts accordingly without the constant supervision of the Hawthorne effect14

Private vs. PublicMitsubishi is a private corporation thus depriving the public of ownership participation but allowing them to benefit their stakeholders without expensing it to their public stockholders.Berkshire is a public corporation and provides more public reporting documents as a result and is therefore more public stockholder oriented.

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Corporate CultureMitsubishi- Ziabatsu (now Keiretsu), founded 1870. Employees before profits. Lifetime employment. Sociologically on par with a homogenous society.Berkshire- (1839 originally), 1964 in its current form. Profit and shareholder oriented. Prefers not to write insurance policies if premiums are too low and forgoes business to manage risk. Favors the shareholder at the potential expense of the employee. Prime example of a capitalist heterogeneous society.

The stakeholder model is a corporate culture that works best in homogenous societies. The corporation to a certain extent takes care of their employees from cradle to grave and many worker only work for one corporation for their entire lifetime. The stockholder model espouses ownership before employment and works better in heterogeneous societies where everyone employment is transient and people work for many companies throughout their career.16

Permanence as an Organizational AspectBigger is BetterStrength in numbersEconomies of scaleSynergies (again)DiversificationReputationPillars of the economy

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The Multi-National Organizationally both the Conglomerate and the Keiretsu have a presence in countries throughout the world. This presents issues:SociologicalCulturalReligious

By being so large and having such a great reach both the Conglomerate and the Keiretsu have to mind the norms of other countries and their people. Thus, respect for the cultural aspects of the employees in the keiretsu and conglomerate hold the entities together as much as respect for the profits.18

The Land of the Rising Sunmeets The Heartland

Although there are differences there are also similarities. Both entities keep their words, the Japanese are known for this and Berkshire in particularly has done deals on a handshake. Though one is cultural and one is corporate specific there are similarities between the two entities.19

ReferencesDavis, G.F. and Diekman, K.A., Tinsley, C.H., The Decline and Fall of the Conglomerate Firm in the 1980s: The Deinstitutionalization of an Organizational Form 1994 American Sociological ReviewWickstrom, Gustav, MD, Bendix, Tom, MD. The Hawthorne effect what did the original Hawthorne studies actually show? 2000 Scand J Work Environ Health

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