Applying <i> Zaibatsu </i> Principles in the U.S.

John Doerr speaks barely enough Japanese to be able to order sushi instead of sashimi , but his vocabulary turned out to be big enough to ingeniously redefine his business.

Doerr is a partner at Kleiner, Perkins, Caufield & Byers, the astonishingly successful venture capital firm that funded such companies as Genentech, Tandem Computer, Compaq Computer, Lotus Development Corp., Sun Microsystems and Cypress Semiconductor--all leaders in their market niches. “We don’t just try to launch successful companies,” says Doerr. “We try to launch successful industries.”

A few years back, the firm held its first “Presidents’ Club,” gathering together all its entrepreneurs to give them the chance to meet each another. Doerr surveyed the room and was struck, Zen-like, with his Japanese epiphany: “This,” he announced to the crowd, “is the Kleiner Perkins zaibatsu .”

Actually, Doerr says, “I was just shooting off my mouth,” but it was a pretty good shot. While Kleiner Perkins is by no means a zaibatsu -like enterprise the scope or scale of a Mitsui, a Mitsubishi or Sumitomo, it isn’t just a venture capital firm. The partnership simultaneously serves as a merchant banker, introducer to suppliers and customers, headhunter, joint venture matchmaker, structurer of R&D; limited partnerships, and it offers its top entrepreneurs a chance to co-invest in the firm’s special zaibatsu fund.

Where other companies have gone consortia-crazy--remember U.S. Memories, Sematech and MCC?--Kleiner Perkins is rapidly evolving into an American-style zaibatsu , with increasingly elaborate networks of formal and informal ties.

“ Zaibatsu isn’t the best word,” cautions Chalmers Johnson, the Rohr Professor of Pacific International Relations at UC San Diego and a leading scholar of Japanese industry. “It has the same connotation as ‘monopoly capitalism’ and ‘big business screwing little business.’ ” Indeed, Japan’s zaibatsu were formally outlawed after the war. These days, Johnson reports, Japan’s industrial groups use kinder and gentler words to describe themselves: keiretsu (“lineage”) or kigyo shudan (“corporate grouping”).

“Basically, these groups came into being in the Meiji era (late 19th Century) as brilliant devices for the rapid importation of advanced technology into a country with scarce capital,” says Johnson. “They are unbelievably adaptable and, serendipitously, a perfect fit for high-technology industries where the life cycles are so short and the R&D; costs are so high.”

This “developmental conglomerate” structure not only offers the benefits of diversification but also, if the relationships are smoothly handled, provides opportunities for creative interactions.

“The zaibatsu promotes the combining of utterly diverse technologies, what the Japanese call ‘fusion research,’ ” Johnson says. “The very nature of the organization produces collaborations between utterly diverse parts of the organization.” Which is why a Sony comes up with the Walkman and Watchman, and gobbles up a CBS Records and Columbia Pictures, and a Hitachi can cost-effectively produce for both mass-market color TVs and high-end, high-resolution computer monitors.

Indeed, Johnson describes International Business Machines, with its huge scale and tight relationships with key vendors and customers, as a classic American zaibatsu (even though the company would never describe itself that way).

Similarly, while Kleiner Perkins treats each of its companies as individual entities, a Sun Microsystems actively talks to Cypress Semiconductors and Lotus Development Corp. talks to Businessland. The real value added here won’t be found in the legalistic conventions of formal joint ventures but in the tacit and implicit understandings of personal relationships. For all the hype and hoopla surrounding “strategic alliances” and “research consortia,” the reality is that companies don’t collaborate; people do.

“It’s in those informal networks that real candor can occur and the right kind of exchanges can take place,” says James F. Moore of GeoPartners, a Cambridge-based management consulting firm that has been a consultant and close observer of these issues for such companies as AT&T-Sun; Microsystems and Jim Henson Productions-Walt Disney. “My view is, build the informal first and the formal will follow. Too often, the corporate strategists and financial people are quite far from informal realities. You can’t put together a formal relationship and not nurture the informal.”

This means that trade associations and companies should become more aggressive about creating informal forums to discuss their mutual concerns and their future investments.

“We’ve far overemphasized formal structures at the expense of the informal,” says Everett M. Rogers, the Walter H. Annenberg Professor of Communications at USC, who is completing a book on American research consortia. “We’ve missed it even in Silicon Valley, where informal relationships have always been one of its strengths.”

Although R&D; consortia like MCC and Sematech have their place, says Rogers, “I think they’re limited; collaboration is a state of mind,” not just a legal contract allocating intellectual property rights. Indeed, says GeoPartners’ Moore, “people tend to come into consortia worried about leakage; the basic stance is that, ‘I’d like to get something out of this but that I don’t want my key stuff to leak out.’ In a zaibatsu , there’s a long-term interest in making the pie bigger for everyone.”

Let’s not limit this to high technology. Should a Kohlberg Kravis Roberts & Co., a leveraged buyout firm with billions in holdings, view itself as a zaibatsu or just as a financier? The real issue here isn’t just to build an industrial structure that makes money but to build one that also adds value.

Whatever their flaws, the Mitsuis and Mitsubishis of the world aren’t asset shufflers; they’re enormously clever trading companies that are just as effective at leveraging informal relationships as mass-producing goods. The zaibatsu , says Kleiner Perkins’ Doerr, “is a powerful concept,” and he reports that other venture capital firms are emulating this approach.

Essentially, the message here is to recognize that our traditional notions of companies no longer work in the context of global competition. Our antitrust laws need to be refashioned in accordance with these new realities. What’s more, announcing a joint venture--like, say, Mitsubishi and Daimler-Benz--is little more than an expression of intent. Indeed, as marriages and affairs amply demonstrate, informal relationships can be far more influential than formal agreements. The real challenge is shifting from “managing the company” to “managing the relationships between the company and its key suppliers and its most valued customers.”

At Kleiner Perkins, the idea of a zaibatsu has redefined the traditional notion of venture capital. The result is one of the most successful--and wealthiest--arrays of technically skilled companies in the world, bar none. That is the sort of model that other American companies might profit from.