2007・26
Beyond the epistemological dichotomy of technical efficiency and social
legitimacy in institutions:The emergence of an electrical transaction in
Japanese manufacturing industry

Matsushima Noboru
Urano MitsuhiroBeyond the epistemological dichotomy of technical efficiency and social legitimacy ininstitutions: The emergence of an electrical transaction in Japanese manufacturing industry
Information and Communication Technology (ICT), particularly with the diffusion of theInternet, stimulates electrical transaction. A large part of the discussion conducted mainly
by economists, has advocated the technical openness of the electrical transaction as“electrical market”, which is expected to reduce asymmetric information and the other costs
incurred, to be more flexible to environmental changes and also to increase innovation.
However, contrary to these expectations, the Japanese electrical market has not beensuccessful in this respect. Although many electrical markets were established in the 1990s,
most of these have already shut down. Some extremely contend that electrical transaction
itself should not correspond to keiretsu—the institution of Japanese manufacturing firms.
In our work, we focus on an electrical transaction that was established by NC Network
Co.—a venture firm founded by the suppliers of keiretsu. The firm initially aims to support
cooperation between suppliers beyond the partition of their parent manufactures. Their
network is one of few successful electrical transactions in Japanese manufacturing industry,
which has more than 13,000 registered members. An important aspect to be noted is thatthe transaction organized by NC Network Co. isn’t employed the logic of the openness ofelectrical markets. Instead, it is consistent with continuous changes through the history ofkeiretsu. Keiretsu has reformed its rules and procedures by means of seeking the efficiency
of divergent interests, neither its relationship has been already adjusted. Therefore, NC
Network Co. is perceived as a current representation of the institutional arrangement in theJapanese manufacturing industry.

In this paper, we attempt to theoretically examine the above mentioned situation as
the dissolution of the epistemological dichotomy between technical efficiency and social
legitimacy in institutional theories. On the one hand, economists have consideredorganizations as institutional instruments to achieve technical efficiency. On the other
hand, sociologists have considered technical efficiency (or technology) to be an external
factor of institution or occasion of institutional change. We believe that therearrangement of keiretsu and the emergence of the electrical transaction are
endogenously led by technical pursuit of self-interests, which are latent conflictive
interests within institutions.

1. The epistemological dichotomy of technical efficiency and social legitimacy
In the point at theoretical issue of “technology”, we can propose a couple accounts of1

institutions functioning as the arrangement of social rules and procedures. (a) One position
regards institutions as technical instruments for accomplishing efficiency. (b) The otherposition considers institutions as socially legitimated on the contrary to being a function ofefficiency optimizing. These two opposing positions of the “technology” seem contradictory.
However, there exist thoughtful studies to sophisticate the theoretical relationshipbetween these positions as complementary (eg. Friedland and Alford, 1991; Holm, 1995;
Tolbert and Zucker, 1996; Roberts and Greenwood, 1997). Nevertheless, we would insist thatthese studies have been upon the deep epistemological dichotomy of technology and society.
The follow discussion illustrates that, as first, the both of a) economists and b) sociologists
has tried to sophisticate their account of technical or social elements of institutions, second,
their sophistication, however, has not consider the epistemological dichotomy of them, third,
we would reconstruct the “technology” in institution beyond the epistemological dichotomy.
1.1 The efforts for the sophistication of account from the both positions
Roberts and Greenwood (1997) is one of thoughtful studies that tried to sophisticate theaccount of technical or social elements of institutions. Their aims were integration between
the transaction cost theory (new institutional economics) in economics and the institutional
theory in sociology.
a) As first, they summarized that the transaction cost theory demonstrates the manner inwhich new organizational design is adopted in order to minimize the transaction cost causedby bounded rationality (and monitoring costs caused by opportunism) in the market.
However, previous studies had overlooked the fact that the design selection of anorganization should be also limited in the bounded rationality. Roberts and Greenwood(1997) criticized these assumptions as “hyper rational,” and proposed that one should
expand the scope of bounded rationality to all the phases of organizational design, such as
the evaluation of current designs, the search for alternative designs, and the formation ofefficiency expectations.
Indeed, the pioneering researches in economics have attempted to solve this problem, forexample, the evolutional economics that encompass the affection of organizational routine orpath dependency (Nelson and Winter, 1982; North, 1990) and the comparative institutional
analysis that incorporates evolutional game into transaction cost theory (Aoki, 2001).
b) In addition, sociologists had never overlooked technical efficiency. Certainly, previous
influential studies of the institutional theory emphasized the feature of institution as the“myth” or “fashion” that were inefficiency effects derived from conforming the rules andprocedures to legitimated institutions (Selznick, 1957; Meyer and Rowan, 1977; Meyer, Scottand Deal, 1981; DiMaggio and Powell, 1983; Scott and Mayer, 1994). They have presumed

2

the social institutional legitimacy as oppose to the technical efficiency of traditional rationalmodels.
However previous studies such as that conducted by Meyer and Rowan (1977) or
DiMaggio and Powell (1983), illustrated that during initial phases, organizational actors
make rational decisions that are driven by a desire to improve performance, that is,
technical efficiency. Over time, however, new practices became legitimate as they spreadbecause they were infused with a value beyond the technical requirements of the task at
hand (Selznick, 1957, p.17).
As the other account of sociologist for technical efficiency, Scott and his colleagues argued
that organizations are affected by both constructed dimensions: technical features andinstitutional elements（Meyer, Scott and Deal, 1981; Scott, 1991; Scott and Meyer, 1991）.
Furthermore, according to Scott (2001), recent theoretical accounts for institution
evaluate technology as an occasion of institutional changes (eg. Barley, 1986). Technical(in)efficiency can also be integrated into the explanation for institutional change
theoretically which is not caused only by the technological objects such as tools or machines(eg. Seo and Creed, 2002; Greenwood and Suddaby, 2006).
1.2 The deep dichotomy of technical efficiency and social legitimacy in institutions
As discussed above, it seems possible to be compatible that both the positions on
institutions coexist. Roberts and Greenwood (1997) also declared these positions ascomplementary. However, their work did not carefully consider about the epistemology oftechnology, so that, their sophistication or declaration of complementarities have beenremain ambiguous.
a) On the one hand, there is no doubt that economists presume the achievement of
optimized equilibrium by means of competition in market, although they attempt to deal
with social aspects of institutions. For example, Nelson and Winter (1982) focused on thesocial aspect of institutions as organizational routines that are historically accumulatedwith the time span. However, their claim only introduced the concept of the absolute
efficiency of optimized equilibrium in the explanation of the selection phase of whichorganizational routine survives. Thus, according to Nelson and Winter (1982) , only one
surviving organizational routine complements the bounded rationality and achieves
optimized equilibrium survive, while the others are not selected. 1
On criticizing only one optimized equilibrium, such Nelson and Winter (1982) assumed,
Aoki (2001) insists many spontaneous orders can be constructed by using evolutional gameNorth (1990) has same issue. He classified ‘alocative efficiency’ which is optimized condition and‘adaptive efficiency’ which should be complement by designing institutions. Thus he discussed how we
can design the institutions complementing adaptive efficiency to achieve allocative efficiency.

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theory. The spontaneous orders are bright form the negotiation of agents who seek their own
efficiency maximization (p.3). 2 However, if you analyze his arguments carefully, you can findthat he also intends to design an institution that leads equilibrium by employing
comparative analysis. Thus, while he supports the existence of considerable equilibrium, heseeks meta-equilibrium that encompasses these other types of equilibrium.
Therefore it is not an overstatement to say that economists surpassed the limitations of
the economical analysis of technical efficiency that is also included in the concept of bounded
rationality. The “hyper rational” analysis depends on the epistemological assumptions oftechnology, and is not the scope of it as defined and applied by Roberts and Greenwood(1997).
b) On the other hand, it is obvious that sociologists have regarded technology as
antagonistic to institutional legitimacy in their aims to integrate technology or technicalefficiency into institutional theory. Certainly, as previously discussed, recent theoreticalaccounts for institutional change surely intended to explain the endogenous change process
to resolve “the paradox of embedded agency (DiMaggio and Powell, 1991; Seo and Creed,
2002, p. 226),” and not to explain exogenous changes caused directly by technological objects
or technical efficiency. They only defined the technology as an occasion of change process
analytically (Barley, 1986; Orlikowski, 1992).
However this is never the sociological account of technology. Grint and Woolgar (1997)
keenly pointed out that even if they used the technology only “analytically,” they can easily
fall into “technicism” where social changes are overwritten upon the essence of technologicalmatter divided from social matter. Zucker (1991) also promoted attention to that
Neo-institutionalism ends the only taxonomy of each institution theory without
consideration of micro process of institutionalization.
1.3 Beyond the epistemological dichotomy in institutional theories
The confusion resulting from the epistemological dichotomy between technical efficiency
and social legitimacy requires us to examine the fundamentals of the theoretical treatmentof the technology.
a) Technology as an economic concept is conceived from the extent to which the firm
efficiently converts input (resources) to output (products or services) at the abstract level.
In more detail, Aoki (2001) contends that agencies, such as political agency as have power, should
design institutions suitable to spontaneous order historically constructed by many agencies. So there
exist considerable equilibrium as evolutional game and many institutions. Therefore he warns not toimport the institution from other institutions, because institutions have linkages and complement
each other. Ultimately, he amplifies the concepts of path dependency. Spontaneous order, which is
historically accumulated, determines the institutions. And once institutions are constructed,
institutions seldom change. Thus, he insists that each institution evolve continuously according topath dependency.

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Technological objects are also attributed to the efficiency of resource conversion. The
technological efficiency is conceived as universal criteria limited on the transaction inmarket. However, the efficiency economists presume has not yet been certified. Indeed,
economists have been conscious of it, and therefore, the major textbooks note that thetechnical efficiency in the market is only a hypothesis (eg. Milgrom and Roberts, 1992;
Douma and Schreuder, 1991). 3
Nevertheless, their limited definition or recognition of efficiency is not sufficient for the
analysis of actual economic activities because we would found different conclusions andimplications of the some analysis based on same criteria of efficiency. The findings indicatethat the existences of various values of economists are inevitably incorporated in theirefficiency criterion. 4 In other words, seeking efficiency itself is rooted on some social
legitimacies, so as it is not regarded as a constraint from both sides of bounded rationality(efficiency) and legitimacy, such as Roberts and Greenwood (1997) depicted.
b) Sociologists also must explain technical efficiency and technological objects fromsociological accounts. When they analyze institutional changes, they must treat thetechnology as a problem of “paradox of embedded agency” within institution, not fromfactors external to the institution, such as occasions of change. To pursue technicalefficiencies, which done by divergent interest groups in institutions, accelerates to unfold
incompatibility that is endogenously derived from internal institutional contradictions andnot the exogenous appearance of new technology or inefficient existing criteria. As
mentioned in SST, the technology is employed (intentionally or unintentionally) in thepolitics of interests within institutions (Winner, 1983; Beck, 1994).
We presently do not need to distinguish between the differences of economists’ andsociologists’ accounts for technology in institutions. Technical efficiency is not defined
universally such economists do but is socially legitimized and reflected the divergent valuesof interests groups (include economists themselves) in institutions. Concurrently,
institutional change is not triggered by technical inefficiency or the appearance of newtechnology but caused by pursuit of the efficiency from the divergent interests and unfolding

For example, in the first chapter of Milgrom and Roberts (1992) that is one of the most notabletextbooks of economic, they represent technical efficiency is merely hypothesis that someone assumes.
Nevertheless, almost no economist has questioned the premise of it when analyze indeed. Douma andSchreuder (1991) also pointed out that to suppose evolutionary selection is predominantly derived
from efficiency implies economic criterion is not exclusive one that economists have assumed. The
extent to which efficiency give account for real world must be assess as a result of empirical study. For
example, although sociologists’ account has a point concerning that school or public sector does not bow
to pressure from evolutional selection, almost every economist agree most economic transaction has
bowed to great pressure from efficiency per se.
4 Rawlinson (1977) pointed out the definition of important concepts such as efficiency reflects
differences in human values, unless organizational economists are claiming unbounded rationality forthemselves while attributing bounded rationality to everyone else (pp.95-96).
3

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incompatibility derived from contradiction in institutional arrangement.

The unfolding the incompatibility of institutional contradiction
Pursuit of the efficiency from the divergent interests
Institutional arrangement as social order
Constitute of social rules and procedures
Divergent, latent conflictive interests in institution
Figure1. Technical pursuit of interests and endogenous change process of institution

The following discussion illustrates the continuous changes through the history ofkeiretsu, the institution of Japanese manufacturing firms, which was especiallythought to be the source of the competitive advantage of Japanese manufacturingindustry in the 1980s, and is conceived only as an inefficient fashion since 1990s. In our
point of view, however, (1)on the one hand, we can observe the institutionalarrangement and its efficiency criteria of institutions in each era, (2) On the other hand,
they have been constituted and legitimated around the divergent interest groups ininstitution, particularly the manufacturers and their suppliers seek their own
self-interests. (3) Their technical pursuits of self-interests based on the legitimatedcriterion makes incompatibilities unfold endogenously and these lead to reform rules
and procedures and these arrangement in institutions. Moreover, we will examine theleading-edge case, an electrical transactions organized by NC Network Co. that areperceived as the representations of Japanese manufacturing institution of the current
or at least, the nearest future.

2. Continual institutional changes and the emergence of electrical transaction in theJapanese manufacturing industry
As it has pursued theoretical examinations, our work looks upon an institution as
something that is configured based on various interests that are coordinated in the existing
institutional arrangement. Institutions are viewed neither as optimized rules nor as illogicalpractical frameworks. Our work also explores the purposes of divergent interests in an effort
to highlight contradictions within the institutional arrangement from the perspectives of6continual processes where institutional rules and procedures, as well as their arrangements
and criteria of efficiency, are altered. 5
This approach is primarily used to bring an institutional myth in the Japanesemanufacturing industry to light (2.1, 2.2, 2.3). This myth was regarded (especially byeconomists) as one that strongly defined Japanese companies in the 1980s. The roughest
definition of keiretsu is the long-term business relationship between manufacturers as
prime contractors and suppliers as subcontractors. 6 In the relationship based on theselong-term business ties, close communication would enable Japanese manufacturers toencourage their suppliers to create more sophisticated technologies. These technologies
would enable the manufacturers to produce goods of a higher quality and to sell them at alower price. However, in reality, these images were just part of the keiretsu characteristics
in the 1980s. This paper explores this idea from the perspective of continual institutionalchanges in the historical process of keiretsu.
In addition to historical examination, our work also focuses on electrical transactions
which have been emerging in a unique way in recent years, as a representation of changes inkeiretsu in Japan (2.4). Keiretsu was looked upon as an advantageous system for Japanesecompanies in the 1980s, but many people became skeptical about the structure after the
1990s, when Japan’s economy slowed down. During the same period, a popular economic
issue was electrical markets, or open transactions on the internet. In our country, manyelectrical markets were launched in the early 1990s. However, one after another, theseelectrical markets almost closed down. These closings may explain why electricaltransaction, including open electrical market, was incompatible with Japanese institutions.
However, considering that Japan’s keiretsu is in the process of continual changes, we denysuch a hasty conclusion. In fact, unique electrical transactions are emerging as an early signof Japanese model while many electrical markets are failing. These pioneering cases can beconsidered a current representation of continual changes in keiretsu.
Following each historical period, we illustrate, as first, general look at the institutionalarrangement outlining the relationship between manufacturers and suppliers in theJapanese manufacturing industry. Next, examine what interests formed those relationships,
Much of the evidence explored in this paper has already been analyzed by economic and businessscholars (many of whom follow economic guidelines). However, these preceding studies usedfragmentary evidence for analysis and did not formulate complete consistent theories. This paper
seeks to consistently organize the evidence from preceding studies and explore the comprehensive
theoretical framework for the evidence. Refer to Miyamoto（2007）for specific preceding studies and theevidence that the scholars noted.
6 The prime contractors are major companies, and subcontractors are small and medium-sizedenterprises. This paper calls them manufacturers and suppliers, respectively. Strictly speaking,however, the larger companies are given several different names in line with the times. Notably, after
the rapid economic growth phase, their main work was to assemble the parts delivered by their
suppliers into complete units. As their work involved less manufacturing, they were called assemblers.
57and, last, explore how the pursuit of divergent self-interests made changes in theinstitutions necessary.
We pays attention to the following seven points (Table 1) in relation to the rules andprocedures forming the ties between the manufacturers and their suppliers. Each of thesepoints is hypothetically considered to show institutional content in keiretsu. With the intent
of organizing complicated implications in the arrangement of each time period, we divides
the arrangement into sub-arrangements, including “organizational management based on
the division of labor between manufacturers and their suppliers,” “technologicaldevelopment structure,” and “inter-organizational collaborative ties or networks.”
Nevertheless, the most important fact in our entire analysis is that the institutionalarrangements of all the periods incorporate the diversified interpretations of stakeholders,which yield much room for the necessity of changing the institutional arrangements
themselves.
Table.1 Constitutions of institutional arrangement
Postwar period (2.1)

High growth period (2.2)

Oil crisis period (2.3)

Criteria of technical efficiency

Pursuitofmanufacturing

stablePursuit of multifunctional
products

Rules
and
Proce
dures

(1) Leading role fortechnical
development(2) Dealt items

Manufacturers’
direction

total

Meetingdemands
fordiversified
product
specifications
Manufacturers’ initiative

Non-core parts

Core component units

System parts(3) Dealing styleOrdering
parts
forsuppliers on an optional
basis
Drawing-supplied
method (Taiyozu)

Ordering
parts
particular suppliers(4)Communication
methodLarger role of suppliersfor

Deals with the techniquesof particular suppliers

Drawing-approved method

Drawing-approved method(system parts)
Multifaceted method(Shoninzu)(Shoninzu)(5)Evaluation
method(6)Technicaldevelopment method

QCD(component unit)
VA/VE

Manufacturers’
technical support

Manufacturers’ support forcapital investment

Technical
exchanges
among suppliers(7)Interorganizational
relationManagement
integrationbymanufacturers’ capital
participation

Mergers of suppliers in thesame sector

Networks of industrial
agglomerations
andtechnical
collaboration
amongsuppliersindifferent sectors

2.1

Formation of keiretsu after World War II (1950–60)

2.1.1

Institutional arrangement in the postwar era

In order to gain a clear understanding of the historical processes of keiretsu, we begin byexamining the formation of keiretsu after World War II. In this period, keiretsu sought topursue the criteria of efficiency as the “stabile manufacturing.” Japan’s small-scaleindustrial structure and volatile fluctuations in supply and demand were significant factors

8directly linked to the formation of keiretsu at this time. The special procurement boom fromthe Korean War was a symbolic event that intensified this instability. In this situation,
manufacturers desperately needed a mechanism to secure stable manufacturing operations
and put much energy into forming keiretsu as an institution to facilitate this process. It was
based on various rules and procedures formulated between the manufacturers and their
suppliers.
At that time, (1) manufacturers directed almost all of the processes from productdevelopment to manufacturing. 7 They manufactured core parts themselves and dealt with
their supplies only when (2) non-core parts were needed. The manufacturers had deals with
(3) their suppliers on an optional basis. 8 When placing orders for parts with suppliers, themanufacturers drew up basic plans for various parts. These plans were based on the total
design outlining their completed products. The manufacturers then drew up (4)drawing-supplied (drawing to be supplied) portraying the detailed image of these basic plansin accordance with the manufacturing process. The transactions were evaluated according to(5) Quality, Cost and Deliver (hereinafter referred to as QCD) on the basis of parts. 9
Suppliers responsible for the technical development of manufacturers’ parts were assistedby those (6) manufacturers in the form of technical support. Manufacturers’ advantageous
positions were also reflected in organizational management. The manufacturers were thelargest stockholders of their suppliers’ corporations and constructed management
integration through (7) capital participation. 10
2.1.2

Rules and procedures formed by the interests of manufacturers and suppliers in the

7 The word processing is often used in terms of product quality, and production is used in relationshipto quantity and costs. This study uses the term manufacturing from the comprehensive perspective ofadding assembling to processing and production. To place a stronger focus on quantitative aspects,
however, the paper uses the word production.
8 The business deals with suppliers on an optional basis do not refer to deals that are not based on
ongoing relationships. More specifically, the manufacturers had deals with any suppliers thatcooperated in continued transactions, not with suppliers that had particular technologies. However,
the manufacturers, while maintaining a certain level of ongoing business ties, halted deals with
suppliers that failed to meet the necessary manufacturing quality or imposed extreme restrictions on
the volume of trade. That was why keiretsu in those days was rather unstable, even if it was intended
for ongoing deals.
9 QCD is an important notion that is used even today for the management of manufacturing processes
in many ways. At that time, however, quality was evaluated in terms of whether parts were
manufactured strictly in accordance with the drawing-supplied. Costs were assessed in terms of how
efficiently these manufacturing operations proceeded. The evaluation of deliver was conducted interms of whether parts were delivered by the due date.
10 Seemingly, “business deals on an optional basis” and “business integration through capital
participation” are conflicting ideas. In fact, however, the formation of these rules is usually conductedbased on a certain time scale and does not pose any contradictions. Manufacturers provided their
suppliers with technical support while placing orders for non-core parts. During this process, themanufacturers learned which suppliers could adhere to the manufacturing quality demanded by the
manufacturers through their technical support. The manufacturers then entered into management
integration through capital participation.

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postwar era
The institutional arrangement that seeks manufacturing stability can be regarded as anarrangement that coordinates the interests of manufacturers and suppliers in accordancewith the previously mentioned rules and procedures.
The manufacturers’ primary purposes in forming their institutional arrangements in the
postwar era were to utilize outside organizations in securing stable manufacturing
operations with their limited resources in small-scale markets. The manufacturers, many ofwhom were still small businesses at the time, had the capability of manufacturing only core
parts. To handle fluctuations in supply and demand, they had to outsource the
manufacturing of (2) non-core parts to (3) outside suppliers on an optional basis. Such orders
were easy to place. Therefore, keiretsu during this period was (1) directed by manufacturer
in every aspect of manufacturing, including product development and technicalimprovement. Because the manufacturers directed all facets of manufacturing, they needed
to instruct their suppliers on what parts to manufacture and how they should be produced.
The manufacturers employed the (4) drawing-supplied method by preparing original
detailed designs on the necessary parts and then handing those designs to suppliers. The
manufacturers expected their suppliers to manufacture the parts that strictly conformed tothe drawing-supplied method and placed orders only when those particular parts wereneeded. Second, another idea behind the institutional arrangement was to ensure thequality of products that was manufactured by suppliers with lesser technical skills. Despite
the manufacturers’ detailed designs, the (4) drawing-supplied method did not always meanthat their suppliers could maintain the quality standards that the manufacturers expectedfrom the resulting products. In order to cope with this problem, the manufacturers adopted
the evaluation method using (5) QCD to their suppliers. The manufacturers also needed toprovide their suppliers with (6) technical support in an all-out effort to improve the qualityof manufacturing operations. As part of the support programs, the manufacturers’ engineers
inspected the on-site operations at suppliers’ factories to ensure that there were no defective
components. The suppliers’ technical standards were maintained and improved throughthese (1) manufacturer-led programs. The third aspect of the institutional arrangement
involved the manufacturers protecting their suppliers from their competitors. The
manufacturers conducted (7) capital participation for business integration to prevent othercompetitors from luring away suppliers whose technical foundations had been enhanced
through the (6) manufacturers’ assistance programs.
It is important to note that the suppliers, as well as the manufacturers, facilitated thearrangement of these rules and procedures. The suppliers’ principal advantage in forming
such an institutional arrangement was that keiretsu allowed them to secure operational

10

stability. Many suppliers experienced difficulties in securing raw materials amidst the
postwar confusion. They were hindered by not only the delayed delivery of raw materials
from their business partners but also by the unreliability in the quality of materials. These
problems forced the suppliers to suffer unstable operations and uncertain fund management.
In these situations, keiretsu enabled manufacturers to make all the necessary
arrangements (1) on manufacturer’s direction, including securing raw materials to meet the
QCD requirements, and to facilitate the operational stability of suppliers. The second
benefit of this institutional arrangement for the suppliers was that they could make theutmost use of their existing general-purpose techniques to respond to orders frommanufacturers. Small and medium-sized suppliers produced (2) the non-core parts that
could be manufactured by their multipurpose machines, and this situation wasadvantageous to the suppliers. The (4) drawing-supplied method, where manufacturers
made all the essential, detailed directions from designs to manufacturing methods, also
eased the burden on many suppliers did not employ engineers with drafting skills. The third
benefit was the improvement of manufacturing skills and the maintenance of facilities. In
those days, most suppliers were small and medium-sized enterprises run as familybusinesses, and the suppliers did not have adequate levels of manufacturing skills andfacilities. In this difficult situation, suppliers found much incentive in (6) manufacturers’
technical support programs and business integration through (7) capital participation that
was a perfect source of plant and equipment investment.
2.1.3

Unfolding incompatibilities of the institutional arrangement in the postwar era

Both manufacturers and suppliers were subsequently affected by some contradictions of
the institutional arrangement when they both pursued their own self-interests inaccordance with a set of rules. Manufacturers found the following three drawbacks in thearrangement. First, the manufacturers grew weary of directing all the detailed designs
while dealing with only non-core parts with their suppliers. After having achieved theirstable supply of products in the market, the manufacturers expanded their operational scale,and there were growing demands for various specifications of products. Amidst the increasein production, the manufacturers could no longer attain an adequate level of stablemanufacturing just by consigning (2) non-core parts to (3) their suppliers on an optional
basis. The growing demands for various product specifications made it necessary for the
manufacturers to draft more product designs and imposed a heavier burden on the (1)manufacturers to direct the entire manufacturing process from designing to manufacturing
based on the (4) drawing-supplied method. Second, the manufacturers could not offer
additional (6) technical support to their suppliers as the technical standards of suppliers

11rose. The improvement of suppliers’ manufacturing skills through the manufacturers’
technical support programs made providing higher levels of technical support necessary. In
the situation, the manufacturers found providing technical support to be a heavy burden on.
Third, keiretsu no longer worked well enough to induce suppliers to make efforts for an
improved operation. The (7) capital participation of the manufacturers caused cozy andcollusive relationships with their suppliers over a long period of time. In addition, theevaluation system with the (5) QCD method covered only the quality control of individual
parts and lacked comprehensive criteria for a comparative evaluation of the different kindsof parts. As a result, these loose situations undermined competitive relationships amongsuppliers.
From the supplier standpoint, the following three disadvantages in the institutionalarrangement became apparent. First, the suppliers could not enjoy as much operational
stability from keiretsu as they had in the initial phase. The suppliers put much energy into
capital investment despite great costs because they had to build up their manufacturing
capabilities to meet manufacturers’ requests for improving (5) QCD. In spite of the suppliers’
efforts, the manufacturers had engaged in contracts with suppliers (3) on an optional basis,and the small amount of orders was not enough to make up for the suppliers’ capital
investments. Second, suppliers did not have enough occasions to utilize their inproved
manufacturing skills that they had refined through long-time experience. The suppliers
attained more sophisticated manufacturing skill sets through manufacturers’ technicalsupport programs. However, they could not gain adequate credit for their higher standardsof expertise where the manufacturing of (2) non-core parts was evaluated with the (5) QCD
method. Their technical level could not be fully utilized under the contract specifying the
manufacturing of parts in accordance with the (4) drawing-supplied method implemented by
the manufacturers. Third, the manufacturers’ technical support was no longer adequate.
The manufacturers’ initial support for laying the (6) foundations for manufacturing
operations and the (7) capital participation for plant and equipment investment was
intended to help young suppliers with their technical base. However, as suppliers built
manufacturing facilities and enhanced their operational levels, manufacturers’ technicalsupport programs became inadequate for keeping up with the standards of suppliers.
2.2

Institutional changes during the high growth period (1960 to 1975)

2.2.1 Institutional arrangement spread in the high growth period
In the high-growth period, keiretsu sought to pursue the criteria of efficiency as “meeting
demands for diversified product specifications.” As the previously mentioned descriptions
about the conflicting factors that surfaced in the postwar keiretsu have shown,12

manufacturers faced a new challenge of meeting demands for diversified productspecifications in their product development, despite the manufacturing stability attained in
the postwar institutional arrangement. This task became more important amidst the growthof consumer needs in the rapid economic development phase and the accelerating trends ofexporting Japanese goods to overseas countries. In this situation, the transformation of thekeiretsu primarily sought to meet demands for diversified product specifications.
During this high growth period, an institutional arrangement different from that of the
postwar period was established in order to handle the demands for diversified productspecifications. Product development and improvement in manufacturing skills were directedby (1) manufacturers’ initiatives. However, the parts that the manufacturers formallyassigned to suppliers were now the (2) core component units that were combined in the
manufacturing process. 11 In regard to business relationships, intensive deals with (3)particular suppliers were conducted. Communication for deals also changed from thedrawing-supplied method to the drawing-approved method where (4) detailed designs were
entrusted to the suppliers’ discretions, though the manufacturers continued to draft the
total product and basic parts designs 12 . In response to this change in the design process, theevaluation method for deals was revised to the (5) VA/VE 13 method where the prices andfunctions of unit components were assessed in a numerical value. To improve the suppliers’
technical development, the manufacturers provided them with limited (6) financial support
for special manufacturing facilities to process the unit components that they ordered. In
addition, manufacturers and their suppliers were more independent from each other in theircapital relationships, and (7) mergers were repeated through competition among suppliersin the same business category.
2.2.2

Rules and procedures formed by the interests of manufacturers and suppliers in thehigh growth period
The institutional arrangement during this period was configured by the manufacturers’
and suppliers’ aggressive responses towards diversified product specifications. 14 For the first
Component units are combinations of multiple parts, as in the example of car wipers. The
combination of these parts is decided in terms of how easily and how efficiently they are manufactured.
12 Basic designing refers to the structural designing of parts based on the overall design of completed
products. The designing of parts consists of the basic design and the detailed design in line with
manufacturing processes.
13 VA/VE (Value Analysis / Value Engineering) is to evaluate parts from the perspective ofValue=Function÷Cost. The essence of VA/VE is to maximize the part’s function while minimizing its
prices. However, if other competitors have products with the same function, the key difference is in
their prices. In reality, there are many cases where suppliers manufacture the parts, which weretypically manufactured by high-cost machinery. Such manufacturing is more inexpensively
accomplished by press work or through one process, which was separated into two before, in theutmost effort to reduce costs rather than pay attention to function.
14 By 1964, about 10% of the domestic production had been allocated to foreign exports. However, the1113

point, the manufacturers could dedicate themselves to developing essential technologies tomeet the public demands for diversified product specifications by allowing their suppliers todraft detailed designs for unit components. The manufacturers still (1) took the initiative indrawing up overall product designs and basic parts designs. For the manufacturing of (2)packages of core unit components and the drafting of their detailed designs, themanufacturers could entrust those tasks to (3) particular suppliers with good past records inthe (4) drawing-approved method. This approach enabled the manufacturers to put theutmostenergyintodeveloping

essential

technologies

that

would

contributetodifferentiating their completed products from those of their competitors. 15 Second, themanufacturers could not provide adequate levels of technical support for manufacturingexpertise that their suppliers had come to expect from them. Instead, the (6) manufacturers
helped their suppliers with their costs for the special facilities and metal casts that theywanted their suppliers to use. The manufacturers also paid for new materials forexperimental use with the intent of recruiting good suppliers with solid track records. Third,in order to boost competition among suppliers, the manufacturers encouraged several
suppliers to compete with one another on a core unit component basis and introduced the (5)VA/VE method for the comparative evaluation of costs. This approach is called multiple

assessment policy 16 , so as to simplify procedures for the comparative evaluation of several
decent suppliers. The manufacturers encouraged (7) suppliers in the same business category
to merge in order to select the best suppliers.
In the meantime, suppliers first sought a larger amount of orders to make up for the costsof their capital investments. From the supplier standpoint, the multiple assessment policy
based on the (5) VA/VE method gave them the perfect opportunities to join other groups ofkeiretsu and as a result, gain (3) large amounts of orders from manufacturers. Second, thesuppliers aggressively competed for orders for (2) core unit components, intending to makegood use of improved manufacturing skills that they had developed through long-time
experience. The (4) drawing-approved method on a unit component basis allowed the
suppliers to draft detailed designs of core unit components directly linked to manufacturing
techniques based on their own initiative. By brushing up their skills for detailed designs, theincrease of exports triggered trade friction. Local manufacturing established for easing the friction
affected the differentiation by manufacturing techniques, which made it necessary to develop
techniques that would facilitate differentiation by function.
15 Manufacturing skills depend more heavily on designs, facilities, and craftsmanship and are often
brushed up on through on-site operations. In contrast, essential techniques refer to ones that will be
useful in differentiating product functions and are usually developed at research laboratories.
16 Some economists point out that the competition among suppliers based on the multiple assessment
policy was a strong driving force for the development of keiretsu. However, the multiple assessment
policy was launched both during and after the high growth period and cannot be considered a catalyst
for the development of keiretsu during the postwar period.

14

suppliers could gain huge profits while attaining the (5) VA/VE levels that the
manufacturers expected from them. Third, the suppliers made active efforts to develop theirown unique manufacturing skills and increase capital investments by (7) frequently
merging with competitors in the same sector and expanding their business scale. In regard
to installing special manufacturing facilities that were requested by their manufacturers,
the suppliers were granted (6) financial support from their manufacturers. In addition,orders that were inappropriate for unique manufacturing skills (many of the orders were fornon-core parts) were outsourced to the secondary suppliers that had failed to merge withother suppliers. These secondary suppliers formed the hierarchical structure amongsuppliers.
2.2.3

Unfolding incompatibilities of the institutional arrangement during the high growth

periodIn the pursuit of their own self-interests, the manufacturers and suppliers unfold
incompatibilities in the rules and procedures during this period. The manufacturers faced
the following three problems. First, their drafting skills declined. As the manufacturers
placed orders for (2) core unit components with decent suppliers, the manufacturers paidless attention to their own manufacturing skills. This situation made it difficult for the
manufacturers to draw up overall product designs and basic parts designs that were in linewith the manufacturing standards of suppliers. That is, the manufacturers had difficulty
taking the (1) their initiative in developing expertise related to manufacturing operations,and the (4) drawing-approved method on a unit-components basis did not work well any
more. Second, the manufacturers and suppliers were affected by technical discrepancies. As
mentioned above, the manufacturers completely depended on their suppliers for the
manufacturing of (3) core unit components. They could instead commit themselves toaggressively developing essential techniques that would be effective for the differentiation of
their completed products. However, this situation implied that the manufacturers would
eventually lose their skills for manufacturing operations. There were frequent cases where
the suppliers’ manufacturing techniques improved, but it was particularly difficult for the
manufacturers to apply the essential manufacturing techniques that the suppliers had
developed. The imminent challenge was to reconcile product development with the
manufacturing techniques. 17 Third, the competition stimulus model focusing on prices had
an adverse effect on product manufacturing. The manufacturers launched the relativeevaluation system using the (5) VA/VE method. This method focuses on prices and was
Manufacturing techniques and essential techniques are not independent from each other; they aresometimes interdependent. For example, improving technical levels for manufacturing car
suspensions is inseparable from the development of essential techniques for shock absorbers.
17

15

intended to boost competition among suppliers. Yet this approach caused some suppliers to
disregard various factors other than prices, which led to a decline in function and quality.
In the meantime, suppliers were affected by the following three difficulties. First, by
getting ahead in competition, the suppliers attained the maximum amount of orders frommanufacturers. The deals with (2) core unit components through the (4) drawing-approved
method gained large profits for the suppliers with better manufacturing skills. However, thesuppliers were constantly exposed to ferocious competition in the comprehensive evaluation
system with the VA/VE method. Many of them found it difficult to differentiate themselvesfrom other companies by focusing on factors other than prices. Inevitably, price competition
intensified, and the suppliers could not earn enough profits even if they won (3) large orders
from manufacturers. Second, the suppliers did not have enough information about whatkinds of manufacturing techniques they should develop. To acquire (3) large orders frommanufacturers, the suppliers had to incorporate the manufacturers’ manufacturing
techniques into their own detailed designs. However, the suppliers were only assigned thetask of drawing up the detailed designs for (2) core unit parts and were not in a position toknow what manufacturing skills would be required in the future. Third, the suppliers did
not have an adequate system level to develop manufacturing techniques that would be
required in the future. The manufacturers bore the payment only for (6) capital investment
for special processing facilities that they originally needed. The manufacturers’ financial
support was no longer enough. In addition, the manufacturers’ intensive efforts to develop
new essential techniques for product differentiation created new production skills that could
not even be handled by (7) mergers among suppliers in the same sector.
2.3
2.3.1

Institutional changes during the post-oil crisis period (1975 to 1990)
Institutional arrangement during the post-oil crisis period

In the period of the post-oil crisis, keiretsu sought to pursue the criteria of efficiency as“meeting demands for multifunction.” During the high growth period, the institutionalarrangement was intended to meet demands for diversified product specifications.
Alternatively, the institutional arrangement during the post-oil crisis period sought to meetdemands for multifunctional aspects of products amidst the vibrant development ofessential techniques by the manufacturers. 18 As part of the rules and procedures established
for institutional content to pursue this multifunctional capability, (1) suppliers played a

18 Against the backdrop of this situation, the amount of domestic manufacturers’ manufacturing
decreased. For example, the automobile industry was affected by trade friction during and after the
1980s, and the growth of local manufacturing caused a reduction in exports. During this period withthe limited
amount of manufacturing, highly functional products with high profit rates were of vital importance.

16

larger role in technical development. They also worked with (2) system parts 19 by utilizing
essential techniques that would be significant for the functional differentiation of completed
products, not packages of unit parts in relation to manufacturing processes. As thesignificance for completed products grew, deals between manufacturers and suppliers
supposedly expanded. Their transactions included not only unit parts for which the
manufacturers drafted both complete product and basic parts designs but also the suppliers’
technical levels that included total product design processes. 20 The manufacturers had deals
with suppliers with (3) higher technical standards. As a communications process, the (4)drawing-approved method was even applied to system parts from the perspective of parts’functions. In regard to the evaluation method for these deals, (5) a multifaceted approach
was employed to assess the technical levels of suppliers instead of assessing the unit pricesof parts. The technical development of the suppliers was ascertained through (6) their
networks. In addition, the suppliers often had (7) meetings for the purposes of technicalexchange in industrial agglomeration and conducted cross-sectional technical collaborations.
2.3.2

Rules and procedures formed by the interests of manufacturers and suppliers during

the post-oil crisis period
The institutional arrangement during this period was partly established due tocoordination efforts

betweenmanufacturers andsuppliersinpursuitofhighlymultifunctional products. From the manufacturer’s standpoint, the first priority was toincorporate suppliers’ manufacturing skills into design processes. The reasoning behind thisact was the manufacturers’ problems with total product and basic parts designs in line with
manufacturing processes. These problems were due to the manufacturers’ dependence on
suppliers for manufacturing techniques. When ordering (2) system parts that would
contribute to the differentiation of completed products, the manufacturers could notcomplete total product and basic parts designs on their own. That was why the
manufacturers, while explaining overall concepts behind their products in the (4)drawing-approved (for system parts) method that illustrated product functions, invited
guest engineers who worked for (1) their suppliers to participate in the total productdesigning. This effort would apply the suppliers’ manufacturing skills to the designing
processes, that is so-called “front loading”. Second, the manufacturers encouraged their
suppliers to actively commit themselves to developing essential techniques in the pursuit of

19 System parts refer to parts encompassing various essential techniques, such as the ABS and car
brake systems. The combination of parts is decided in terms of their functions. Generally speaking,system parts are categorized more than unit components.
20 This study refers to the term technical levels as meaning the comprehensive technical capacity,
including both manufacturing skills and the essential techniques that are closely linked to them.

17multifunctional products. A problem that occurred during the high- growth period was that
manufacturers’ aggressive development of essential techniques resulted in wider
discrepancies in suppliers’ manufacturing skills. This discrepancy occurred because
essential techniques and manufacturing skills were inseparable. Paying sharp attention tothis point, the manufacturers sought to make good use of (3) essential techniques related tothe suppliers’ manufacturing skills for functional aspects that would have a great impact on
product differentiation. Third, the manufacturers intended to inspire suppliers witheminent technical standards. The VA/VE method focusing on prices eventually incitedexcessive competition among suppliers and caused them to neglect technical development
and quality improvement. On the other hand, within the (5) multifaceted evaluation system,a main focus was shifted to incentive technical fees from cost competitiveness, and the
manufacturers tried to recruit excellent and skillful suppliers by using this method.
Meanwhile, the suppliers found it of vital importance to pursue their self-interests byhelping manufacturers with their active efforts to create multifunctional products. First, it
was imminent for suppliers to break away from excessive cost competition. Dealing with (2)system parts that encompassed essential techniques useful for product differentiation were
(3) dealt included suppliers’ skills. Therefore, orders for those parts were more appealing to
suppliers than the manufacturers’ comparative evaluation methods that focused on prices.
In addition, some superior suppliers developed their own unique research and development
facilities as an approach to the (4) drawing-approved method (for system parts) intended for
improving product functions. Second, orders for the system parts that encompassed
essential techniques enabled suppliers to gain information about what kinds of techniques
they should develop. In placing orders for the (2) system parts, the manufacturers invited
their suppliers’ engineers to take part in on-site operations so that they could apply (3) theirskills to designing processes. These occasions provided the suppliers with the perfectopportunities to learn the future course of development that the manufacturers wereseeking. Based on the advance knowledge and information, the suppliers could anticipate
the manufacturers’ plans in the development of necessary production skills as well as therelevant essential techniques that the manufacturers would need in the immediate future.
Third, suppliers often had technical exchange meetings beyond keiretsu and businesscategories. The suppliers needed the essential techniques related to the manufacturing
skills that the manufacturers required in their pursuit of highly functional products. In
order to address this issue, the suppliers had (6) meetings to exchange information 21
through (7) their networks of industrial agglomerations and cross-sectional technicalFor example, welding suppliers consulted with painting suppliers for technical advice and tried
rust-resistant welding methods. Collective efforts by neighboring suppliers living within a range ofa bicycle ride were just like experiments conducted at the same laboratory.

21

18

collaborations. In this situation, the hierarchical structure of keiretsu among suppliers
gradually changed into the mountains range pattern where different groups of keiretsu andcross-industrial parties joined. At that time, technical collaboration with home electricalappliance suppliers 22 was particularly animated with the intent of gaining essential
techniques linked to electronic devices that many manufacturers had started to develop.
2.3.3

Unfold incompatibilities of the institutional arrangement during the post-oil crisis

periodHowever, the manufacturers faced crucial problems due to their total dependence on
suppliers for the development of essential techniques, such as designing system parts. First,
the dependence on particular suppliers for designing operations had an adverse effect. By
working with (1) suppliers with better manufacturing skills, manufacturers could
supplement their insufficient technical operations when they were involved in total productand basic parts designing. However, this means that the (3) manufacturing skills of theparticular suppliers were only reflected in the designing operations. 23 The manufacturers,
therefore, had to avoid depending excessively on particular suppliers for total productdesigns from the perspective of securing prominent manufacturing skills and essential
techniques of other suppliers. Second, the manufacturers did not enjoy the large advantages
that they had previously experienced from long-term relationships with particular suppliers.
(3) Dependence on suppliers for product design induced the manufacturers to consign (2)system parts based on the (4) drawing-approved method to some excellent suppliers.
However, the multiple assessment policy of the manufacturers allowed the suppliers to havedeals with other groups of keiretsu, and some suppliers had begun to use the system partsfor deals with other groups of keiretsu. That was why excessive dependence on suppliers fortechnical development made it difficult for the manufacturers to secure their productdifferentiation from their competitors. In addition, (6) the suppliers’ active technicalexchanges through (7) networks of industrial agglomerations and cross-sectional
collaborations even allowed essential techniques useful for product differentiation to leakout to other groups of keiretsu. Third, cozy relationships between manufacturers andsuppliers recurred. Their collusive ties during the postwar period were resolved by thecomparative evaluation system based on the VA/VE method. This method focused on prices

The collaborative actions enabled some suppliers in the automobile industry, for example, to succeed
in developing essential techniques that included high-level electronic skills, such as
electronic-controlled fuel injection devices and car stereos.
23 In those days, the manufacturers usually contacted the salespersons of trading companies andmeasuring instrument manufacturers when looking for suppliers that were in other groups of keiretsu
or in different sectors. That was why manufacturers had only limited sources of information foraccessing other suppliers.
22

19

with the intent of boosting competition among suppliers within keiretsu. During the post-oil
crisis period, however, the manufacturers introduced the ambiguous (5) multifaceted
evaluation system in an effort to induce their suppliers to help them with the developmentof essential techniques that were effective for product differentiation. This approach caused
the cozy ties between manufacturers and suppliers to be reshaped. As a result, themanufacturers were often obliged to strike deals with suppliers at their asking prices. 24
From the supplier standpoint, in contrast, this institutional arrangement caused
problems. First, the suppliers experienced extreme difficulties in properly developing
manufacturing skills and essential techniques at a development pace that matched that of
the manufacturers. At that time, the suppliers went beyond just subcontracting the
manufacturing in the (4) drawing-approved plans drafted by the manufacturers. Particularsuppliers’ engineers with (3) outstanding skills within keiretsu were invited as guests, (1) aspart of the manufacturers’ programs, to be involved with product designing operations.
Amidst the progress of these relationships, the suppliers believed that improving theirtechniques at the manufacturers’ pace was inappropriate and considered it vital to develop
their own unique manufacturing skills and essential techniques at a pace that surpassed
that of the manufacturers. Second, the suppliers were required to develop techniques thatwould create higher added value. In spite of the suppliers’ efforts to develop manufacturing
skills and essential techniques, if the manufacturers did not find added value within thosetechniques, the suppliers were not highly evaluated even with the (5) multifaceted method.
In this situation, deals concerning (2) system parts manufactured with (3) suppliers’ skills
became insubstantial, and the manufacturers often requested unreasonable cost reductions.
In response to this situation, the suppliers found it necessary to aggressively develop
connections with manufacturers and suppliers of other groups of keiretsu and in different
business sectors. Third, there was a growing necessity to organize technical development
among suppliers in different business sectors. In order to create higher-level added value fortechniques among suppliers in different sectors, the suppliers had to break away from thedevelopment framework for manufacturing skills and essential techniques through (6)industrial agglomerations networks among suppliers in the same business categories. To
facilitate the development of manufacturing skills and essential techniques among suppliersin different sectors, the suppliers needed to shift their foci to more (7) flexible technicalexchanges in different business categories from the existing technical development

24 Economists call this act “the reverse choice of suppliers.” In fact, suppliers had long hoped to
conduct the reverse choice. For example, the keiretsu system during the postwar period was a hotbedof collusion between manufacturers and suppliers, and there was some likelihood of reverse choice of
suppliers. However, the arrangement structured by the multiple assessment policy based on the clear
criteria of prices prevented these problems from surfacing.

20

structure.
2.4

Institutional changes by the electrical transaction during the post bubble economy

periodNext, we explore changes in the institutional arrangement that has been operational sincethe 1990s. Against the backdrop of these changes, the incompatible factors of theinstitutional arrangement during the post-oil crisis period gained significant publicrecognition after the collapse of Japan’s bubble economy in the early 1990s. To cope withthese problems, manufacturers and suppliers sought new business relationships whilepursuing their own self-interests. During those processes, both parties paid sharp attention
to electrical transaction in line with the progress of ICT.
However, both parties pursued divergent self-interests and aimed to use the same
techniques to configure completely different institutional arrangements. Both the suppliers
and manufacturers focused on the same model of electrical transaction, but the institutionalarrangements that each party pursued were strikingly different (Table 2). The following
section examines the electrical market where the manufacturers took the initiative inrealizing more open transactions (2.4.1). However, most of those markets had already been
shut down. Our work then takes a close look at NC Network Co., the electrical transaction
organizer that developed through supplier initiatives, and clarifies how manufacturers
formulated the institutional arrangement in the manufacturing industry (2.4.2).
Table2. Institutional arrangement aimed by electrical transactions

Criteria of technical efficiency
Rules and
ProceduresElectrical market on the initiative of
manufacturers during the post
bubble period
Pursuit of dealing with highly
functional system parts(1) Leading role fortechnical
development(2) Dealt items

Manufacturers’ initiatives(3) Dealing style

Open transactions of system parts(4) Communication
method(5) Evaluation
method(6) Technicaldevelopment method

Standardized interface(7)
Interorganizational
relationship

Based on spot transactions

Modules of system parts

Focusing on prices
Cross-border competition amongsuppliers

21

Electrical transaction on theinitiative of suppliers during thepost bubble period (NC Network)
Pursuit of diversified technicaldevelopment and high added-value
ordersSuppliers’ initiatives
Suppliers’ techniques useful forhigh added-value
Dealing with suppliers in different
sectors
Negotiation based on unique
technology
Focusing on suppliers’ unique
technologies and their networks
Technical consultation and ordering
operations among suppliers in
different sectors
Network among suppliers withunique technology

2.4.1

Electrical market on the initiative of manufacturers

As mentioned above, the manufacturers faced the following difficulties during the post-oil
crisis period. First, the manufacturers depended on particular suppliers for designing
operations and did not have access to the superior manufacturing skills and essential
techniques possessed by other suppliers. Second, the manufacturers no longer experienced
the large advantages they had previously enjoyed from the long-term business ties withparticular suppliers. Third, competition-free, cozy relationships between manufacturers andsuppliers recurred.
The manufacturers pursued the criteria of efficiency as “market transactions of highly
functional system parts” to solve these problems. More specifically, as first, themanufacturers tried to regain their initiative in designing operations and paid attention to
the three-dimensional CAD. In extreme terms, the simulation capability of thethree-dimensional CAD enabled manufacturers to replicate the manufacturing operations in
the design process without depending on (3) suppliers’ manufacturing skills. Regaining the(1) initiative in designing meant that the manufacturers could sever their dependence onparticular suppliers. Second, the manufacturers sought to procure better system parts in amore open way. On a related note, the manufacturers envisaged another potential of the
IT-driven model: the possibility of (3) open electrical markets amidst internet developments.
If the manufacturers could regain their leadership in design operations, they could create (2)modules of system parts based on the standardized interface and procure the necessary (4)system parts at any time from suppliers (6) all over the world in the form of (7) spottransactions. Third, the manufacturers considered encouraging competition amongsuppliers again. The manufacturers believed that an auction style should be employed thattook advantage of the electrical market and that the economical procurement of systemparts should be facilitated by using a (5) mechanism predicated on prices.
The manufacturers were aggressive about the launch of electrical markets in the late
1990s. The intent of the launch was to establish the institutional arrangement in accordancewith the previously mentioned self-interests. However, one after another, Japaneseelectrical markets launched on this principle closed around 2001, and most of them ended in
failure. The main reasons for this failure were to unfold incompatibilities in institutionalarrangement and the manufacturers’ improper configuring of the arrangement in line withthe suppliers’ self-interests. More specifically, initial uses of the three-dimensional CAD
were not as competent at simulating manufacturing processes as the manufacturers had
anticipated.

Indeed,thethree-dimensional

CAD

facilitatedsimulations

of

the

manufacturing processes to a certain extent. However, it was obvious that simulations could
not cover all the actual techniques that the suppliers had. Therefore, the introduction of the22three-dimensional CAD was not effective enough for the manufacturers to regain theirinitiative after their long dependence on their suppliers for manufacturing skills andrelevant essential techniques. Second, open deals in electrical markets were based onstandardized specifications of parts. However, with the exception of some system parts, thestandardization was almost impossible, especially with interdependent system parts such as
those used for automobiles. Third, the manufacturers had been demanding unreasonable
cost cuts from their suppliers after the burst of the bubble economy. The suppliers gradually
lost profits because of manufacturers’ strong requests for cost reductions. The suppliers
expected to be evaluated in terms of technical levels, not prices. The electrical market model
did not satisfy the self-interests of suppliers, and a smaller cost burden on the
manufacturers lessened the suppliers’ incentives toward commitment.
2.4.2

Electrical transaction on the initiative of suppliers

While the electrical market model directed by manufacturers failed, NC Network Co., theelectrical transaction organizer based on suppliers’ initiatives, succeeded in steadily
increasing its registered number of companies and became Japan’s largest coordination
website for electrical transactions with 13,000 registered companies. NC Network Co. put astrong emphasis on collaboration among suppliers beyond the walls of keiretsu and evenstrived for dealings far beyond the hierarchy comprised of manufacturers, primary suppliers,
and secondary suppliers (Figure 2). The specific services to realize this ideal are as follows(Table 3).

Figure.2 The aim of NC Network Co.
(http://www.nc-net.or.jp/ncnetwork/)

23

Table.3
EMIDAS

ExcellentandUniqueTechnology
Pick Up
EMIDAS on movie

Search AgentNC Network China

Forest of Technology

Service and contents provided by NC Network Co.

This is not a mediator of components or devices, but a searching engine ofmore than 13000 registered suppliers as potential partners for processingclassification. We can search partners for condition from processing large
classification to small classification. After we search, we can see thehomepages of suppliers that meet conditions we set. So we can search not acomponents or devices, but new partners.
This is the service to introduce suppliers’ skillful or unique technologies
with a picture and letters. We can also search for technology keyword. By
this service, suppliers disclose their skillful or unique technologies to draw
many orders.
This is the service to introduce suppliers’ technology and operating states of
their factory on movie. The movie is produced by NC Network Co., which
understands the specialty of suppliers and knows what information todisclose. By this service, suppliers disclose their skillful or unique
technologies to draw many orders.
This is the service to search the adequate supplier by NC Network Co. We
can search new partner via search agent. The agents of NC Network Co.,
who have experienced process manufacturing, can understand many
suppliers’ technologies and selected adequate partners.
This is the service to outsourcing the low added value devices such as
still-designed devices or simple structure devices to Chinese or South-East
Asian suppliers. To be different from EMIDAS, this service is the searchengine of components or devices. And the suppliers also receive high added
value orders through this service.
This is the bulletin board on which every registered member can ask fortechnical advices from various suppliers all over the category of industry.
Some orders occur on this serves in consulting the technical problem.

The following section reviews the services described in the above table from theperspective of the following three problems that affected suppliers during the post bubble
period. First, as already illustrated, the suppliers could not develop adequate levels oftechniques at a pace that matched that of the manufacturers. Second, the suppliers found it
necessary to create high-level added value for their original techniques. Third, the suppliers
faced a new challenge of developing techniques among suppliers in different industrial
sectors.
In order to solve these problems, NC Network Co. launched the following services. First,
NC Network Co. provides the service that allows suppliers to search for certain techniquespossessed by (3) suppliers in various sectors. The search engine, EMIDAS, contains 13,000
registered suppliers. The suppliers can narrow their search from large classifications, suchas designing, machine manufacturing, and metal casting, to smaller classifications, such as
metal cast designing and industrial equipment, and eventually to a specific trade such aspress cast designing. The users can enter in specific requirements and be directed to
websites of suppliers who meet those requirements. This system does not have the
manufacturer-led electrical market structure where modules of system parts are searchedunder the standardized interface according to price. However, it does allow for searching for24manufacturing skills and essential techniques offered by suppliers. The prices and deadlinesof deals are coordinated (4) among suppliers at every transaction. This mechanism waspredicated on the principle of (1) suppliers’ initiatives.
Second, NC Network Co. has also launched services called the Excellent and Unique
Technology Pick Up and the EMIDAS on Movie. These services were launched in an effort toboost (2) orders for high-level added value by introducing (5) suppliers’ unique techniques tomanufacturers and suppliers in (3) different industrial sectors and allowing the
manufacturers and suppliers to have their evaluations. For example, some suppliers feature
the manufacturing operations with extremely tight deadlines while others promote theirown micromachining of aluminum materials. What is important about these actions is thatthe suppliers do not intend to push themselves forward into sales battles but provide theirtechnical information and wait for orders to be placed. This approach stems from the factthat manufacturers who are incapable of creating high-level added value with their
suppliers’ skills undervalued those techniques. The suppliers can acquire orders forhigh-level added value by offering technical information through NC Network’s services andwaiting for inquiries from manufacturers and suppliers in different sectors. This style ofmarketing can be called “aggressively passive sales,” where suppliers offer information
instead of techniques to manufacturers. In addition, the NC Network Co. has initiated theNC Network China service to outsource parts to suppliers abroad. This service is intended toenable the suppliers to consign low added-value orders to suppliers in China and othercountries through NC Network Co. so that they can pass off manufacturers’ pressures forcost reduction. This operation also targets Western manufacturers that browse through the
NC Network China in search of cheap Chinese suppliers to induce them to contract withJapanese suppliers for high added-value deals.
Third, NC Network Co. provides the bulletin board service called Forest of Technology tofacilitate networks for flexible technical exchanges among suppliers with (7) unique
technologies (6) beyond the walls of industrial sectors. If a supplier asks a question about
how to remove greasy stains from ceramics on this bulletin board, the company can get
answers from various suppliers, including those in different industrial sectors. Suppliers
intending to enter a new business field can resolve unfamiliar technical troubles to a certain
extent by utilizing this bulletin board system. They can sometimes gain new orders fromother suppliers via the information exchanged on the bulletin board. This kind of service
facilitates organizational ties among suppliers in terms of technical development. It is anextension of the transformation from manufacturers’ full technical support and capital
participation to mergers among suppliers in the same sector, networks of industrial
agglomerations, and even technical collaborations with suppliers in different sectors.

25However, if the electrical transaction organized by the supplier initiatives had not been
established as compatible with the manufacturers’ self-interests, mistakes similar to thosethat resulted from the electrical market created by the manufacturers’ initiatives would
have occurred. In fact, the electrical transaction launched by the NC Network Co. entailed toprovide services applicable to the manufacturers’ self-interests. More specifically, theinstitutional arrangement of the transaction has been configured to handle the
manufacturers’ past problems properly. These problems include the manufacturers’
inabilities to introduce better manufacturing skills and essential techniques due to theirdependence on particular suppliers, the minimal advantage of long-term business
relationships with particular suppliers, and the recurrence of uncompetitive, cozy
relationships with suppliers.
The first merit for manufacturer of the NC Network was that the manufacturers could
sever their dependence on particular suppliers for manufacturing skills for system parts andrelevant essential techniques. The services (1) made available by NC Network enabled the
manufacturers (3) to access information on manufacturing skills and essential techniquespossessed by suppliers whom the manufacturers had not previously contacted and who
worked various sectors. When approaching products that were manufactured by trial-level
new essential techniques, the manufacturers could use the NC Network as a supplementary
tool to search for suppliers who employed unique technologies. The manufacturers needed
these suppliers because the manufacturers lacked operational experience.
Second, the bulletin board service through which (6) suppliers could ask for technicaladvice was also utilized for the manufacturers’ technical consultations. While this service
was useful for the suppliers to develop their own unique technologies or look forsupplementary skills, it allowed the manufacturers to brush off adverse effects caused byties with particular suppliers. For example, if a manufacturer posts a technical question on
the bulletin board, (3) various suppliers, including those in different sectors, positively
provide alternative plans. These plans allow the manufacturer to search techniques otherthan just those of particular suppliers with whom the manufacturer already has arelationship. The manufacturers also use the NC Network model as the perfect tool tosearch for suppliers with (4) high-level techniques and (7) their networks. The
manufacturers can then contract these suppliers to manufacture total packages of systemparts. Paying attention to this point, NC Network Co. has launched Search Agent, 25 aservice that allows users to search for suppliers with the (2) necessary technologies in theplace of manufacturers. From the very start, NC Network Co., which was established with afocus on suppliers’ initiatives and on services for suppliers, did not pay attention to making
25

A main revenue source of NC Network Co. is service charges for Search Agent.

26

the suppliers’ self-interests compatible with those of the manufacturers. However, NC
Network Co. attempted several times and gradually shifted its focus to providing theelectrical transaction sites that met manufacturers’ needs.
Third, the services provided by NC Network allowed the manufacturers (5) to evaluate
suppliers’ technologies. The manufacturers had depended on particular suppliers fordesigning operations and were also obliged to order at the suppliers’ asking prices. In thissituation, the search engine service EMIDAS, where suppliers with solid technicalfoundations sought business opportunities, was not entirely helpful to the manufacturers. In
contrast, the Search Agent service was more attractive to the manufacturers because it
allowed them not only to search for suppliers with high-level technologies, as previously
mentioned, but also to place orders at reasonable prices in respect to technical standards.
As the previously mentioned descriptions suggest, the NC Network provided the electricaltransaction site structured to address suppliers’ self-interests and was also adjusted for
those of manufacturers. Therefore, the institutional arrangement is an important model forformulating the rules and procedures of Japan’s manufacturing industry, both currently aswell as in the near future. It also signifies that keiretsu will seek the criteria of efficiency as“diversified technical development and high added-value orders.”

3. Conclusion and Discussion
The theoretical point of our work is to explain the endogenous process of institutionalchange by the dissolution of deep dichotomy of technical efficiency and social legitimacy ininstitutions. We discussed this point by empirical examination on the continuous processes
through the history of keiretsu, where the technical pursuit of self-interests embedded ininstitutions requires reforming rules and procedures, changing institutional arrangement,
and renewing the efficiency criterion in institutions (Figure.3). So, our account for
institutional change is different from both accounts of the economist who presume(meta)equilibrium even if they are willing to encompass the social affection such asorganizational routine or evolutional game, and the sociologist who presume inefficiency of
institution even if they are willing to incorporate the efficiency or effects of technologicalmatter to explain institutional changes.

27

212

The processes of institutional change caused by manufacturers' interests
Organizational
Technological development Interorganizational
management based on the structure
collaborative ties ordivision of labornetworks
Outsourcing to buffer
Obtaining quality assurance Protecting suppliers fromvolatile fluctuations inin utilizing suppliers with competitors
supply and demand
relatively fewer technicalskills(4) Drawing-supplied(3) Ordering parts for
suppliers on an optional method (Taiyozu )
basis

211

(1) Makers' total
direction

213

To direct all the detailed
designs became weary

222

Allowing their suppliers to Paying for capitaldraft to detailed designs and investment to recruit good
suppliers instead ofdeveloping essential
technical support
technologies

221(1) Makers' initiatives(2) Non-core parts

The processes of institutional change caused by suppliers' interests
Organizational
Technological development Interorganizational
management based on the structure
collaborative ties ordivision of labornetworks
Making operation stabilize Making the utmost use of
Improving manufacturingexisting general purpose
skills and maintaing
techniques
facilities

Additional technical
There was less incentive forsupport for suppliers placed suppliers any longer toa heavy burden as suppliers make efforts for an
built up their skills
improved operation(2) Core component
units

Exposing suppliers toferocious competition bycomparative evaluation
based on the cost(3) Ordering parts forparticular suppliers(5) QCD(6) Makers' technicalsupport(7) Management
integration by makers'
capital participation

Operation became unstable There was less of a occasion Makers’ technical support
by a gradual processprograms became
for utilizing the improved
skills refined through long- inadequate
time experience
Merging with competitors
Receiving larger amount of Handling the detailed
designs to make good use of in the same sector in order
orders to make up for theto develop manufacturingcosts of capital investments improved skills
technology(4) Drawing-approved
method (Shoninzu )(component unit)(5) VA/VE(6) Makers' support for (7) Mergers of suppliers
capital investmentin the same sector

223

Skills for manufacturing
Drafting skills declined,
unable to draw up over all operations are lost so as tono longer apply the
product designs and basicpart designs in line with the essential manufacturing
manufacturing standards of techniques suppliers had
developed
suppliers

The competition stimulus
model focusing on prices
had an adverse effect on
product manufacturing andled to a decline in function
and quality

To get ahead in competition To intend to handle theMakers' support andand to win large orders
detailed designs resulted in mergers in the same sectors
from makers no longer
revealing lack ofwere no longer enough toprovide enough profits
information
develop manufacturing
techniques for the future

232

Incorporating suppliers'
manufacturing skills into
design processes

Inspiring suppliers witheminent technicalstandards

Breaking away fromexcessive cost competition

231(1) Larger role ofsuppliers233

Depending on particularsuppliers caused problems
for designing operations

Regaining initiative indesigning operations

Encouraging suppliers todeveloping essential
techniques(2) System parts(4) Drawing-approved(3) Deals with thetechniques of particular method (Shoninzu )suppliers(system parts)

Depending on particularsuppliers made essential
techniques flow out andbrought difficulties in
product differentiation
Procuring beter systemparts in a more open way

Cozy relationships between
makers and suppliers
recurred.

Getting information about
what kinds of techniques
neededInteracting with othersuppliers beyond the scopeof industrial sectors(5) Multifaceted method (6) Technical exchanges (7) Networks ofamong suppliers
industrial
agglomerations andtechnical collaboration
among suppliers in
different sectors

Improving suppliers'
techniques at the makers'
pace was not enough any
more to contribute to
manufacturing process

Makers did not always find Conventional ways of
exchange for technology no
added value within
suppliers' tequnique so as to longer brought technicaldevelopment to create
suppliers' tequnique was
not appriceated necessarily higher-level added value

Searching for certain
techniques possessed bysuppliers in various fields

Exchanging techniques
Receiving recognition offlexibly among suppliers
unique techniques indifferent industrial sectors with unique technologies
and fending off pressures to beyond the walls of
industrial sectors
reduce costs

Encouraging competition
among suppliers again

241(4) Standa- (5) Focus(1) Makers' (2) Modules (3) Opening oninitiatives of system transactio- rdized
interface
pricesparts
ns of
systemparts
Severing dependence onparticular suppliers for
manufacturing skills(6) Cross- (7) Basedon spotbordercompetition transactions
amongsuppliers

Searching for suppliers with Assessing the technicalstandards of their suppliers
eminent technicalstandards

242(1) Suppliers' initiatives (2) Suppliers'
techniques useful forhigh added-value(3) Dealing with
suppliers in different
sectors(4) Negotiation basedon unique technology(5) Focusing on
suppliers' unique
technologies and their
networks(1) Leading role fortechnical development(3) Dealing styles(4) Communication
method(5) Evaluation method

Figure.3(2) Dealt items(6) Technicalconsultation andordering operations
among suppliers in
different sectors(6) Technicaldevelopment method(7) Network amongsuppliers with unique
technology(7) Interorganizational
relationshipThe continuous processes of institutional change in the history of keiretsu

28

To spend the rest of spaces, we would discuss resolution concerning theoretical subjects
and further implications from empirical examination. First, our work employed four
historical periodization to examine the changes of institutional rules and procedures basedon the interests of both manufacturers and their suppliers in keiretsu. However we must
conceptualize institutional change as continuous process to the last. From the postwar
period to the present day, significant changes occurred in the power relationships between
manufacturers and suppliers throughout these processes. As this paper has depicted, in thedawn of the institutional arrangement during the postwar period, the manufacturers
enjoyed overwhelmingly advantageous technologies in both designing and manufacturing
and took the initiative in every aspect. Subsequently, the suppliers gained a larger role inmanufacturing operations, but the manufacturers continued to take the lead. The
manufacturers’ lead was why institutional analyses were analyzed from the manufacturer
perspective in most of the preceding studies that treat keiretsu as a significant trait of theJapanese manufacturing industry.
However, as our work has explored historical processes, we determined that the positionsof manufacturers and suppliers in keiretsu reversed. Expressing the power relationships as“suppliers and their customers,” not as “manufacturers and their suppliers,” is now
appropriate. During the period when the manufacturers directed the manufacturing
operations, they enjoyed a position as manufacturers and consigned parts that they did not
manufacture to their suppliers. In those days, keiretsu was organized on the initiatives ofmanufacturers. Afterward, suppliers took charge of the whole manufacturing operation, andthe manufacturers turned into assemblers. Particularly during the post-oil crisis period,
when the manufacturers could not keep up with their suppliers in technical development,
the suppliers took that position away from the assemblers. The blunder of information
digitalization efforts on the manufacturers’ (assemblers’) initiatives reflected this power
shift. Therefore, it is definitely inappropriate to discuss the significance and limitations ofelectrical transaction itself by just focusing on the failure of electrical markets. The
electrical transaction in the Japanese manufacturing industry should be looked at from a
broader perspective of continual changes throughout the long history of keiretsu. In thissense, the electrical transaction organized by NC Network Co. is a significant model inwhich to examine the current institutional changes of keiretsu.
Next, we should conduct thorough endogenous analyses so that a mixture of endogenousand exogenous factors will not affect our study’s outcome. Many of the preceding studies
explore the “paradox of embedded agencies,” in which agencies are embedded within
institutions and the institutions themselves changes. These studies did not explain
everything based on endogenous factors but presented comprehensive models that partially29

incorporate exogenous elements (e.g. DiMaggio and Powell, 1991 26 ; Oliver, 1992 27 ;Greenwood and Hinings, 1996 28 ). In regard to the empirical examination of our work,
technological and environmental changes involving manufacturing industries may beconsidered exogenous factors that affected keiretsu. For example, the postwar formation ofkeiretsu was spurred by the emergency procurement for the Korean War. 29 In the 1960s, thegrowing consumer demands and the growing amount of exports were important factors. The
expansion of local manufacturing to ease trade friction in the automobile industry in the
1980s and the collapse of the economic bubble in the 1990s can also be regarded as
substantial exogenous factors for institutional changes. However, we have pointed out thattechnical improvement and progress should be looked at from the viewpoint of practicaleffectiveness. In relation to environmental factors, the same institution is not always formed
under the same conditions. Exploring the endogenous formative process of keiretsu isnecessary. In addition, it is conceivable that exogenous impacts on keiretsu are embedded
within multilayered institutional changes (Holm, 1995).
Third, it is essential to examine the basis on which we theorize the relationships between
institutional changes and technologies. The empirical examination of this paper has shownthat institutional changes are inseparable from technological improvement and progress,
and in recent years, the number of IT models has accelerated. This association does notmean, however, that the institutional changes were caused by exogenous technical factors.
Technology is a tool for strongly driving the divergent self-interests of institutionalizedinterest groups and therefore, it promotes unfolding incompatibilities that resulted fromcontradictions in institutional arrangements endogenously. Information technology, which isrelated to language, will play a particularly large role in inducing reflective practice tointerests embedded in the time-space situation, which have been neglected (Woolgar andGrint, 1991; Matsushima, 1999; 2003). Fuller (2001) declares that the impact of information
technologies in terms of their action-oriented aspects polarizes existing knowledge andaccelerates institutional changes. The pursuit of the practicality of technologies will provide
the platform for theorizing about the relationships between institutional changes andtechnologies.
26 DiMaggio and Powell (1991) insisted none of the authors regards institutions as entirely immutable
or institutional change as a strictly endogenous process (p.30).
27 Although Oliver (1992) pointed out traditional studies of design change have identified exogenous
factors almost exclusively as precipitating initial change, she imports the concept of social pressures asexternal factors to explain institutional change.
28 Greenwood and Hinings (1996) proposed framework to understand institutions change. According totheir framework, institutional change has derived from both exogenous factors (market context,
institutional context) and endogenous dynamics (interests, values, power dependencies, and capacity
for action).
29 If a strong focus of attention is to be placed on a military factor, the keiretsu system can beconsidered to have been initiated during the Sino-Japanese War and World War II.

30

Fourth, the previously mentioned two viewpoints lead to reexamining the methodologicalmeaning of analyzing institutional changes. In institutional analysis, we usually look at aparticular system on the basis of a certain pattern of critical thinking (Scott, 2001 30 ).
However, this methodology does not mean that we should theorize that institutional changes
are caused by exogenous factors. If a researcher conducts an institutional analysis with afocus on a certain aspect of the subject, then the exogenous factors are the ones that havebeen strategically excluded from the scope of the institutional field for the analysis.
Therefore, theorizing on these exogenous factors that are excluded from the scope of theinstitutional field yields methodological contradictions in explaining institutional changes.
If any exogenous factors, such as technological and environmental ones, play an importantrole in explaining institutional changes, it is necessary to incorporate the phase of analyzing
those changes from an endogenous perspective into the analytical framework.
［2007.5.21 817］

He commented it is useful to distinguish, as a first step, between processes or factors exogenous to
the institutional system under study that trigger change versus forces internal to the system (p.187).

30

31

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