Careful Analysis of the Honda Motor Company - Essay Example

?Business Strategy Table of Contents Part A 3 Part B 5 References 8 Appendices 10 Appendix PESTEL Analysis 10 Appendix 2: Porter’s 5 Force Analysis 11 Appendix 3: SWOT Analysis 13 Appendix 4: The VRIN Analysis 14 Appendix 5: Value Chain Analysis 15 Appendix 6: Strategic Position, Strategic Purpose & Business Strategy 16 Appendix 7: International Choices of Honda 23 Part A This section of the study aims at identifying the strategic purposes that led Honda to the place where it stands now. There has to be certain motivating factors or strategic purpose which leads to progress. Honda Motor Company is a Japanese multinational company which was initiated by Soichiro Honda and Takeo Fujisawa in 1948, in the city of Hamamatsu (Honda Motor Co., Ltd., 2013a). Careful analysis of the case study on Honda Motor Company shows that the company was never driven by the strategic purpose to survive in the domestic marketplace of Japan; rather, the company always thrived for excellence in the international marketplace. For example, in the initial years, the company realised they needed to manufacture efficient, lighter and powerful engines which could not only meet the demand of local customers but also attract international customers (refer to the Honda case study). SWOT analysis in the appendix 3 is showing that technological capabilities are the major strength of Honda and the company has used its strategic purpose to excel in international market. As mentioned in the PESTLE analysis done in Appendix 1, the Japanese government has created a significant amount of exchange restriction on Honda in order to prevent it from entering the USA market. In such circumstances, Honda has decided to increase penetration in the USA motorcycle market with its 50cc super cubs. The company targeted everyday Americans who want small capacity motorcycles and Honda was successful in catering to their demand. In the early 1960s, Honda used the export mode to penetrate in the automobile market of North America but in later years, the company decided to set manufacturing facilities in USA and decrease its export portfolio (by the end of 1996, total the American investment of Honda had touched $3.8 billion) (refer to the case study). The value chain and VRIN analysis done in Appendices 5 & 4 shows that technological resources have helped Honda to achieve competitive advantage in many cases. For example, the company has doubled its technological capabilities in the research and development section in North America, which has resulted in manufacturing Accord SE-i that is brilliant in performance but $10,000 cheaper than the competitors’ car with the similar capacity (refer to the Honda case study). The strategic purpose of Honda can be understood by analysing its organisational structure which reflects its mission, vision and value system. Honda has stated its value as “proceed always with ambition and youthfulness” (refer to the Honda case study). Senior executives and the chairman of the company prefer to work together in manufacturing units in order to create the sense of belongingness among workers and ensure that the company is delivering technologically superior and quality products to customer. Such level of integrity and resilience has helped the company to revert the negative situation when export of cars from Japan to USA also dropped from 3.4 million to 1.7 million in 1992 in comparison to 1987 (refer to Appendix 6). Although the road to enter the international market was not an easy ride for Honda because the company faced a diminishing trend in demand in the USA market in the initial years, but later on product innovation such as its 50cc motor cycles, light duty trucks (T-360), sports truck (S-500), CVCC engine (compound vortex controlled combustion) (Frank, 2003), or development of SED (sales, production, engineering and development) system has helped the company to become one of the market leaders in both the domestic and international markets (refer to the Honda case study). To be particular, Honda followed the product diversification strategy as mentioned in the Ansoff matrix in order to achieve competitive advantage. The company treated each of its product portfolios such as motorbikes, trucks, passenger cars, sports vehicles in racing course etc individually and targeted each product for a specified customer segment (refer to Honda case study). According to the analysis presented in Appendix 6, Honda has extensively used the differentiation strategy and, in some cases, the cost-leadership formula in order to penetrate in the North American market and other international markets. However, the company has faced a challenge to implement the same strategy in order to penetrate in the European market due to macro-economic pressure. Part B In the previous sections the discussion was on the strategic purpose of Honda Motor Company, which was behind its growth, development and expansion. However, in this section of the study the discussion would be especially related to those international locations where Honda would have been more successful or where Honda would have ventured. According to Hamel and Prahalad (1990), companies must focus on ‘what we do well’, which signifies that the core competencies should be utilised to gain competitive advantage. Honda has been the choice of its customers because of its excellent engineering and good quality mechanism, as these were its core competencies, but was chosen less in terms of features. Going back to the 1980s when Honda invested in Europe, it went into joint investment with British Leland. According to the Honda case study, the record of Japanese automotive companies entering the European market was not very positive because the European market already had an excellent bunch of automotive manufacturers. Moreover, these European automobile manufacturers were already producing high quality and excellently designed cars. Apart from this, another reason was that the European market, unlike the American market, was highly fragmented and every country and their people had a different culture, preference, and accordingly had a different taste, which Honda failed to recognise. The number of choices that the European customers had, made them powerful enough and they started making choices. However, Honda followed its own policy and did not follow the strategy of understanding customers’ preferences and demands to design bikes or cars, because in the Japanese market Honda’s products were innovative, which was not so in Europe (Mishra, 2012). In the context of this study, Honda must be enthusiastic about entering in an international market from which it can earn revenues in a profitable manner instead of competing in the European market where opportunity for the Japanese player has been eroded due to stringent government norms. It has been already mentioned in Appendix 7 that Honda should use its core competency of expertise in motorcycle designing and in the later period of time, it should offer its automobile products to international customers. Although there are several modes of entry such as joint venture, export, foreign direct investment and licensing available to Honda, the study will suggest that Honda should use the similar kind of entry mode of starting with exporting and then move to establishing manufacturing unit, which they had used to enter the North American market. In some cases, the company might think about strategic partnership or joint venture with local players where specialised expertise will be needed. The company should try to increase its penetration in the Middle East, China, India, Russia, and Latin American countries. Although the company has entered in the Indian market through a joint venture with Hero Motors, the deal is over now. Hence Honda should focus on individual capacity building by setting manufacturing plants (see Appendix 7). Vanderheuvel (1997), Taylor III (2008) and Leonard-Barton (1992) have pointed out that companies such as Honda should customise their products in accordance with local needs in order to penetrate in the regions such China, the Middle East, Russia and Brazil. According to the case study, as opportunity in Europe is not looking bright for Honda, the Japanese giant needs to look at the emerging market such as BRICKS (Brazil, Russia, China, India and South Africa) in order to achieve sustainable and profitable business results. A recommended mode will be exporting in the initial stage or joint venture and foreign direct invest in cases where exporting is not a profitable option. Honda has gathered enough knowledge and resource capability which can help them to cater to local market demands. References Ahlstrom, D. and Bruton, G. D., 2009. International Management: Strategy and Culture in the Emerging World. Connecticut: Cengage Learning. Amick, B., 2005. Motocross America. Minnesota: MBI Publishing Company. Berger, A., 2011. Global Corporate Strategy - Honda Case Study. Munich: GRIN Verlag. Botten, N., 2007. CIMA official learning system management accounting business strategy. Burlington: Butterworth-Heinemann. Calder, K. E., 1995. Strategic Capitalism. New Jersey: Princeton University Press. Chary, S. N., 2009.Production & Operation Management. 4th ed. New York: McGraw-Hill Education. CIA, 2013.East & Southeast Asia: Japan. [online] Available at: [Accessed 21 March 2013]. Cubbage, C. and Brooks, D. J., 2012. Corporate security in the Asia-pacific region: crisis, crime, fraud, and misconduct. Florida: CRC Press. Dlabay, L. R. and Scott, J. C., 2010.International Business. 4th ed. Connecticut: Cengage Learning. Frank, A., 2003. Honda motorcycles. Minnesota: Motor Books International. Graham, T., 2008.CIMA official exam practice kit management accounting business strategy: 2008 edition. Oxford: Elsevier. Hill, C. and Jones, G., 2009. Strategic Management Theory: An Integrated Approach. Connecticut: Cengage Learning. Hitt, M. A., Ireland, D. and Hoskisson, R. E., 2010. Strategic Management: Competitiveness and Globalization, Concepts. 9th ed. Connecticut: Cengage Learning. Hitt, M. A., Ireland, R. D. and Hoskisson, R. E., 2010.Strategic Management: Competitiveness and Globalisation, Concepts. Connecticut: Cengage Learning. Honda Motor Co., Ltd., 2013a. Promoting entry into the car business. [online] Available at: < http://world.honda.com/history/challenge/1962autoproduction/text/05.html> [Accessed 22 May 2013]. Honda Motor Co., Ltd., 2013b. Let’s Build a Sportscar! [online] Available at: < http://world.honda.com/history/challenge/1990thensx/text01/index.html> [Accessed 22 May 2013]. Kourdi, J., 2009. Business strategy: A guide to taking your business forward.2nd ed. New Jersey: John Wiley & Sons. Leonard-Barton, D., 1992. Core capabilities and core rigidities: a paradox in managing new product development. Strategic management journal, 13, p. 111– 25. McLaughlin, T. A., 2006. Nonprofit Strategic Positioning: Decide Where to Be, Plan What to Do. New Jersey: John Wiley & Sons. Mishra, A. K., 2012. The real Honda story. Forbes, [online] Available at: < http://forbesindia.com/blog/business-strategy/the-real-honda-story/> [Accessed 22 May 2013]. Paul, J., 2008. International Business. 4th ed. New Delhi: PHI Learning Pvt. Ltd. Prahalad, C. K., and Hamel, G., 1990. The core competence of the corporation, Harvard business review. Rugman, A. M., 2009. The Oxford Handbook of International Business. 2nd ed. Oxford: Oxford Handbooks Online. Smith, B. and Raspin, P., 2011. Creating market insight: how firms create value from market understanding. New Jersey: John Wiley & Sons. Steele, J. and Iliinsky, N., 2010. Beautiful visualization. California: O'Reilly Media, Inc. Taylor III, A., 2008. Honda (Pg 2). CNN Money, [online] Available at: < http://forbesindia.com/blog/business-strategy/the-real-honda-story/> [Accessed 22 May 2013]. Vanderheuvel, C., 1997. Pictorial history of Japanese motorcycles. Devon: MBI Publishing Company. Waed, 2012.Strategic Positioning. [online] Available at: [Accessed 01 April 2013]. Ward, J., and Daniel, E., 2012. Benefits management: How to increase the business value of your IT projects. 2nd ed. New Jersey: John Wiley & Sons. Appendices Appendix 1: PESTEL Analysis Pestle analysis is a strategic management tool which is used to evaluate the external business environment of a country (Botten, 2007; Graham, 2008; Smith and Raspin, 2011). The case study highlights the operation of Honda in the Japanese market; hence a thorough analysis of the external business environment of Japan in the context of Automobile industry will be carried out. Political Factors: - Japan is a constitutional monarchy and follows a parliamentary government (Cubbage and Brooks, 2012). The country has high political stability. However, the government has imposed certain trade regulations. For example, there is a strict restriction on the import and export of raw materials used for automobile manufacturing. Economical Factors: -Economic factors play an important role in the success of an industry. The economy of Japan is said to be highly stable and the country is currently witnessing an economic boom. The current GDP of the country is $5.984 trillion and per capita income is $36,200 (CIA, 2013). The figures clearly reflect the robust nature of the economy of the country. The strong economy of the country is a positive indication of further growth of Honda in Japan. Social Factors: - The total population of the country as of 2012 is 127,368,088, (CIA, 2013). The major religion of the country is Shintoism which nearly accounts for 83.9 %, while Buddhism and Christianity accounts 7.14% and 2 % respectively. The major language is Japanese. The literacy rate is 99 %. In addition studies suggest that people of Japan are extremely passionate about cars. Hence the societal factors of Japan are extremely favourable for Honda’s business. Technological Factors: - Technology is a crucial factor for every business. The importance is more when it comes to the automotive industry. Honda depends heavily on technology to manufacture its products and market its products. In addition, technology is playing a critical role in the research and development function of the company. However, the favourable factor is that Japan is a technologically developed country and offers a strong technical infrastructure for companies doing business in Japan. Environmental Factors: - With increasing awareness of environmental sustainability, car manufacturers are forced to come up with products which are eco, friendly. Moreover, due to global warming, the Japanese government has imposed several restrictions on the use of petroleum products. This is why Honda has come up with eco, friendly cars such as Honda Hybrid. Japan has a different weather pattern and climate, which can negatively affect the engines. Hence, the weather of Japan can be a possible threat to the company. Legal Factors: - There are strict regulations imposed by the Japanese government on the automobile industry. Most of them are related to the safety of passengers, and welfare of the employees. In addition, there are some restrictions on import and export products to USA. Appendix 2: Porter’s 5 Force Analysis Porter’s 5 forces model is another strategic management tool used to analyse the attractiveness of an industry. In this context of the study, Honda belongs to the automobile industry of Japan; hence the automobile industry of Japan will be evaluated. The analysis is presented below: - Force Density Properties Bargaining Power of Buyers High The principal reason behind this is the availability of a large number of car manufacturer and marketer in Japan Bargaining Power of Suppliers Low Suppliers of raw materials of the automobile industry are in large numbers. However, there are certain accessories which can be imported from some other parts of the world, but due to stringent trade regulations; companies are bound to dependent on local suppliers. Threat of New Entrants Low The initial investment required to set up an automobile business is very high. In addition, there are several formalities needs to be fulfilled for getting the license of doing automobile business. Threat of Substitutes High The substitute of a car can be public buses, trains, metro rail, and cycles to some extent. The costsassociated for availing these substitutes are also less Existing Rivalry High With the presence of established players such as Toyota, Lexus, Nissan and Suzuki the competition is intense (Steele and Iliinsky, 2010). Appendix 3: SWOT Analysis The SWOT analysis of Honda is presented below: - Strength The biggest strength of the company lies in its strong brand name and rich history. The company offers a wide range of products and services. In addition, some of its products are eco-friendly, which allows the company to showcase their responsibility towards the environment. Honda has a worldwide presence. Integrated design can also be cited as one of the major strengths of the company. Weaknesses The operating cost of the company is comparatively higher than its rivals. The company only targets upper middle class and higher class, which prohibits them to earn value from lower middle class. Opportunities The biggest opportunity of the company is to expand in the other countries Manufacturing fuel efficient and eco friendly cars. Threats Intense competition within the industry. Strict government policies. Appendix 4: The VRIN Analysis VRIN framework is a strategic analysis tool used to determine the resources which provide sustainable competitive advantage (Ward and Daniel, 2012). The case study revealed the capabilities of the company lies in Honda’s strong brand name, it’s R&D function and after sales service. The VRIN framework of Honda is represented below: - Capability Valuable Rare Imitable Non-substitutable Conclusion Brand name Yes No No No Competitive advantage R&D Yes Yes No No Sustainable Competitive advantage After sales services Yes No No No No Competitive advantage. The analysis clearly points out to the fact that the research and development function of the company is providing a competitive sustainable advantage to the company. Appendix 5: Value Chain Analysis It is a technique by which identification and exploitation of external and internal linkages are done. The value chain analysis of Honda is presented below: - Inbound logistics Honda acquires the raw materials from Japanese suppliers. However, some parts are also imported. The company has maintained close integration with the suppliers, ancillary units and vendors. The company has adopted just-in-time production system which has helped them to reduce transactional and logistical cost. Operations The company pursue lean manufacturing in order to increase the efficiency of production. In addition, just in time system and supply chain also help the company to increase its productivity. Outbound Logistics The company distributes its end products through delivery channels such as car dealers and stockers. The logistics department is however outsourced to third party vendors. Marketing and Sales The company has initiated several marketing campaigns such as advertisements, showroom display among many others. The company sells its products with the help of authorized distributors. After Sales Services Honda is known for its world class after-sales services. The company has a wide network of service centres across the country. In addition, it also ensures availability of spare parts. Appendix 6: Strategic Position, Strategic Purpose & Business Strategy Strategic position is the way a company positions itself in the market place in order to fulfil its objectives and goals. In simple words, strategic position is a strategy by which company compete with the rivals and serve customers. It has been observed that most of the business houses develop a well thought strategic position for them. In addition, the companies also take certain steps to communicate those strategies to its employees so that each member of the organization works towards a common goal. On the other hand, strategic purpose defines the purpose of the existence of a business. It tries to address questions such as why the organization, and for whom it exists. There are different ways by which an organization expresses its strategic purpose. For example, it can be exhibited through statements of mission, vision objectives and values. Hence, from the above discussion, it is obvious that both the strategic position and strategic purpose are two different elements but have high resemblance (Calder, 1995; McLaughlin, 2006). The strategic position as well as the strategic purpose of a company can be expressed with its mission, vision and value statements. Hence, through both the elements a company tries to portray its intentions to the stakeholders. Figure 1 – Strategic Position and Purpose (Source: Waed, 2012) Challenges and Solution In the last task, several analysis tools have been used to identify the market position of Honda. From the analysis it was identified that the company is facing some problems related to the political scenario. In the mid 90s there was huge political pressure on Honda. The US government at times has also banned the production of Honda cars in the USA. The pressure on the Japanese automobile giant further ignited when the American press joined the protest. There have been serious turbulences for the Japanese automobile manufacturing companies in the USA and the same also reflected in their overall sales volume. Apart from that, most of the European countries along with the USA have restricted the import of the Japanese car into their countries. Also the Japanese companies found difficulties in making investment in USA and Europe. In the meantime, there were also rapidly increasing retail competition and price cutting of automobile products in Japan. The export of cars from Japan to USA also dropped from 3.4 million to 1.7 million in the year 1992 in comparison to 1987 (Amick, 2005). The new strategy of Honda paid off to a large extent, as the company succeeded to make dramatic improvements in the business process. The strategy of Honda to carry out joint production in USA played a crucial role in reforming the US market. In addition, the decision of the company to restructure their organization hierarchy was also a brave decision. In the mid 1990s, the scenario changed completely. Hence in simple words, the company’s decision to commence international operation was also a major step towards the growth (Chary, 2009). Cost Differentiation Strategy of Honda The cost differentiation strategy is one of the generic strategies proposed by business houses to maintain and achieve competitive advantage over the competitors. There are generally three different generic strategies proposed by Porter. The strategies are segmentation strategy, cost leadership strategy and differentiation strategy (Hitt, Ireland and Hoskisson, 2010; Hill and Jones, 2009). A company pursuing either of differentiation or cost leadership strategy holds the opportunity to target broader market. On the other hand, companies pursuing segmentation strategy has limited market scope. However, there are large numbers of companies which employs a combination of both cost and differentiation strategy. Honda employs cost differentiation strategy to gain an upper hand over rivals. The company manufactures a range of products which includes 4 wheelers, 2 wheelers, trucks and busses. Even within the aforementioned categories, the company has a number of variants. Moreover, the offerings of the company are also unique in terms of its design. However, the biggest advantage of the company is that it offers the products at a low price in comparison with the competitors. Hence, the company uses a mix of both cost leadership and differentiation strategy. It has not only allowed the company to remain productive, but has also allowed them to gain access to a mass customer segment. This benefit of this strategy also reflects in the company’s overall sales. Figure 2 – Market Share and Sales Figure Cash Generation (Market Share) Honda CBR Honda Civic Honda City Honda Sports Car ATV Power Equipments Motor Cycles Mountain Bikes Robots Solar Cell Honda Growth Share Matrix Sustainable Competitive Advantage of Honda Sustainable competitive advantage can be defined as the long term advantage which cannot be easily imitable by rivals. In addition, sustainable competitive advantage can also be defined as an advantage that the company has over its rivals for a longer period of time and competitors also find it difficult to surpass those advantages. There are several ways in which a company can gain a competitive advantage and using the porter’s generic strategies is one of them. In the similar way Honda has also achieved sustainable competitive advantage. Honda is one of the very few companies from the automobile sector, which has been able to gain sustainable competitive advantage in the market place. The most important factor towards Honda gaining sustainable competitive advantage was the company’s business strategy. Honda has always pursued a mix of differentiation and cost leadership strategy. According to Porter, businesses houses can gain sustainable competitive advantage by adapting to one of the three generic strategies (Kourdi, 2009). Similarly, the company has been able to gain sustainable competitive advantage by implementing a mix of cost leadership and differentiation strategy. With this strategy, Honda has been continuously making a profit and thus attained sustainable competitive advantage. Although, these strategies are effective but at times it does not provide the desired result for every business. Corporate Choices of Honda Corporate strategy is regarded as the direction which an organization takes to achieve the objectives of the business. However, due to the uncertainties of business environment, it has become necessary for companies to anticipate and adapt to the changes for operating and sustaining in the market place for a longer period of time (Hitt, Ireland and Hoskisson, 2010). As a result of that, companies nowadays formulate and pursue flexible strategies. The development of the corporate strategies takes into account the scope and purpose of the activities of the organization and also the nature of business. Apart from that external factors such as business environment, the position of the company in the market place, and the intensity of competition it has to face are also considered while formulating the corporate strategy. In case of Honda, the strategies of the company, in order to ensure its long term presence and remain profitable are increasing investments, market expansion, new product development as well as integrating technology for operational purpose. As a result of this, the company was able to increase its productivity (Berger, 2011). These choices paid off for the company to a great extent and it fostered Honda to strengthen its distribution network. Although the strategy helped the company to diversify its product line and expand business, overall sales dropped marginally (Ahlstrom and Bruton, 2009). The figure above makes it clear that the Honda witnessed reduces the sales volume for its full size cars, minis and trucks and buses, even after making the new strategic choice. One of the positive outcomes of this strategic choice for the company was that, it allowed them to create value for the stakeholders. Honda: Success as a Corporate Organization A shift in the strategic choice for the company has allowed them to unearth new avenues and dimensions of business. The new strategic choice for the company also allowed them to diversify the product line and cater to overseas countries. However, the only negative outcome for pursuing this strategy is decreasing sales volume. The decreasing volume of sales was also becoming a cause of concern for the company and for that reason further investment in the field of research and development was not possible. Despite that Honda was able to position itself as a successful corporate citizen. With this approach, the company was able to make good market positions for them in the European as well in the US market. In the late 80s, the company succeeded to become the fourth largest car manufacturer in USA. One of the major drivers of success for the company was the decision of Honda to diversify product line into motor cycle, power equipments and automobiles. Moreover, this strategy also allowed the company to target different type of customers and allowed them to operate in both B2B (Business to Business) and B2C (Business to Consumer) channels. The dealers of the company were also enthusiastic about the same and they supported the company which allowed the company to strengthen their financial status. Hence from the above discussion, it is obvious that Honda as a corporate organisation is successful to a great extent. Appendix 7: International Choices of Honda International marketing is a buzzword and business houses around the world consider it as a way to survive in the market and experience growth. Migration, investments, the reduced international trade barrier and well defined legal frameworks are the major drivers of international marketing. Moreover, conducting business in the international marketing also allow companies to cater to a different customer segment. With a large number of benefits, it is therefore necessary for a company to choose the most suitable mode of entry in the foreign soil. In the context of this study, Honda is also enthusiastic about making its presence in foreign countries. The principal intention of Honda towards making international expansion was to showcase their expertise in motorcycle design. There are several modes by which a company can enter into a foreign market. The most common ones are exporting, licensing, joint ventures and a wholly owned subsidiary. In an exporting mode a company export to the target country from its home country. On the other hand licensing involves providing rights to a company of the target country to perform the business. In a joint venture mode a company jointly operates with a company of the target country and wholly owned subsidiary is having a subsidiary company in the target country. Considering the characteristics of the aforementioned entry modes, it is believed that joint venture is the most appropriate entry mode for Honda. Moreover, it will also minimize the market risks of the foreign country. In terms of design, the company only relied on motorcycles with powerful engines and state of art design, which was the reasons behind the initial entry failure of the company. Soon they realized that the key driver towards the success of the company lie in the lighter and efficient engines (Dlabay and Scott, 2010). Finally, the company succeeded to design a product that suits the needs of the global consumer. Moreover, the company also considered the importance of fuel efficiency. With these products the company considered USA and Europe as the most potential markets. The international strategy of the company was formulated keeping in mind about the preferences of developing nations such as India and China. In both the markets the company considered joint production and marketing venture. This strategy has allowed Honda to minimize foreign market risks and comply with the rules and regulations of the target country. In order to cite an example, the Japanese giant, Honda have tie up with other automobile companies such as General Motors, Ford, and Chrysler among others (Rugman, 2009). Honda: Success as an international Organization Honda faced numerous difficulties at the initial stages of the international expansion. However, as soon as the company understood the actual requirements of the global customer, it started to operate efficiently in most the markets. The company pursued vertical integration which allowed them to operate at the highest level of value network. In this context, Honda pursues backward integration, where its power equipment’s division acted as one of its biggest suppliers. Honda also faced numerous issues in the process of internationalization, but has been able to overcome most of the issues. Therefore from the above discussion, it is evident that as an international organization, Honda has been extremely successful. The sales figures of the company away from its home country also reflect the same. Moreover, the company also went on to win several awards in the international arena as well (Paul, 2008). Read More