What's a virtual keretsu?

Virtual keretsu: if you haven't heard that piece of e-speak from a consultant yet, you soon will.

Paul Mason


Virtual keretsu: if you haven't heard that piece of e-speak from a consultant yet, you soon will. It's a term used to avoid answering this question: are business-to-business marketplaces creating huge cartels and driving down margins in the supply chain?

Keretsu is the Japanese term for the country's massive conglomerates. These lumbering, debt-heavy giants are often family-owned and lack the flexibility needed for e-business.

But at a debate organised by the Guardian last week, entitled "Is anything new in the new economy?" virtual keretsu was the buzz phrase of the day, closely followed by the term, "ecosystem".

Silicon Valley consultant Geoffrey Moore argued that "new economies favour virtual integration over vertical integration". Instead of one company providing the whole product, the Internet allows an alliance of companies, each providing best-of-breed components, to collaborate for mutual gain.

The one word nobody wanted to use was "cartel". But all alliances have to have structure.

The structure being touted today is the business-to-business marketplace. And some of these look a lot like cartels.

"Virtual keretsu" is a brilliant example of language getting in the way of rational thought. The only economic justification for a horizontal conglomerate in real life is to leverage its physical size as a unified corporation - for example to gain cheap credit, kill new entrants to the market and maximise economies of scale. A loose alliance of partners can never do that in the same way as a single corporation.

And why would you want to create a horizontal alliance encompassing shipyards, music companies and house-building firms? It is hard to imagine such a partnership generating any online synergy.

So virtual keretsu is a meaningless term that should be banned from your strategy discussions.

But what about "ecosystems"? Cisco has an ecosystem of technology alliances in the spheres of production it does not want to be in. It outsources most aspects of manufacturing, so that its products arrive in your loading bay untouched by the hands of a Cisco employee. It sees into the operations of its alliance partners via Web-enabled supply and distribution chains.

This clearly works for Cisco. But what of its partners? Andrew McAfee of Harvard Business School says: "By virtue of its market dominance, Cisco was able to compel many, if not all, of its suppliers to join the digital communities that it established, thereby creating the equivalent of an e-marketplace."


This brings us to what is probably the world's biggest "ecosystem" - Covisint. This was formed to aggregate the supply chains of five big auto manufacturers, and started trading on 3 October. It expects to channel $240bn between the car giants and their supply chain, slashing procurement costs.

Covisint's start date was delayed while the Federal Trade Commission and its EU equivalent investigated the charge that it is an e-cartel. Many supplier firms are asking: is it just a way for auto-giants to gang up and screw down margins?

The commission allowed the exchange to start trading last month, prompting "Covisint is not a cartel" headlines. But the commission, in fact, reserved judgement. It said that the lack of detail about operating rules and terms of access meant a final judgement had to be reserved.

Few observers question whether the new Internet business alliances will actually cut production and procurement costs.

But the jury is still out on whether it can do this without producing cartels that simply distribute existing value upwards to the big corporations, while driving down the margins of small and medium-sized enterprises

A McAfee, conference paper entitled Economic Impact of the Internet Revolution, manufacturing, 9 September 2000, available from economy.berkeley.edu

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