External Environment and HR Policies and Practices - Essay Example

? EXTERNAL ENVIRONMENT ANALYSIS Submitted By Introduction 3 External Environment Analysis 4 PESTLE Analysis 5 Political Effects5 Economical Effects 6 Socio-Cultural Factors 6 Technological Factors 7 Legal Factors 7 Eco-Environmental Issues 7 Porters Five Forces Model 7 Rivalry 8 New Entrants 8 Threat of Substitutes 8 Buyer Power 9 Supplier Power 9 SWOT Analysis 9 External environment and HR policies and Practices of Toyota 10 Future Trend and HR Practices 11 References 13 Introduction With globalization and ever accelerating pace of change most organizations have to deal with highly turbulent, complex and competitive environment. To cope with the challenging tasks posed by the environment organizations need to develop a sound understanding, for this purpose organizations conduct external environment analysis. External environment analysis is a difficult task but important activity which includes scanning, monitoring, forecasting and assessing. The main objective of external analysis is to identify the opportunities and threats in the environment. Identifying and exploiting the opportunities and minimizing the threats, which are hindering performance can help the organization achieve its strategic competitiveness (Hitt, et al, 2009). This external environment has its impact on business strategy and hence on the human resource strategy as well. This paper aims at conducting the external environment analysis of Toyota and studies its impact on the human resource policies and practices of the organization. This paper will make use of different matrices, methods and tools to conduct the industry analysis. Automobile manufacturing is a very significant industry which contributes to 10% of the world GDP. Globalization has resulted in increased pressure on the firms to achieve global competitive advantage. Automotive industry has recently witnessed large scale consolidation of organization resulting in mergers and acquisitions to capitalize the strengths of each market and organization. Most of the organizations in the automobile industry are doing business offshore. The automobile industry global competition is characterized by big three American and Japanese giants with the shift moving towards Japanese automakers which includes Toyota. Toyota is increasing its market share and becoming more dominant and less threatened by its competitors. An external audit of Toyota will reveal its opportunities and threats and its impact on the business and HR strategy. External Environment Analysis The external environment or the macro environment has a strong impact on the all activities and strategies of the organization. These factors include political, social, economic, legal, technological and eco-environmental factors. Two models are used to analyze the force and impact of these factors. These two models are called “PESTEL Analysis” and “Porters five forces”. An industry’s attractiveness is evaluated through Porter’s five forces model. According to the model the forces that affect an industry are the threat of entrants, threat of substitutes, bargaining power of buyers, bargaining power of suppliers and the level of rivalry among the existing competitors (Porter, 2008). The evaluation determines the attractiveness or unattractiveness of the industry and also helps in formulating strategies for obtaining competitive advantage. The attractiveness of an industry in turn determines the overall profitability of the industry measured through overall return on investment. It requires utilizing the existing industry environment to gain competitive advantage. Out of the five forces the strongest competitive force indicates the profitability of the industry and forms the most crucial part of strategy formulation. If the affect of forces is intense then the industry is said to be unattractive that is companies in the industry will not earn attractive return on their investments while if the forces are not intense then the industry is attractive and the companies in the industry earn substantial return on their investments. SWOT analysis is another more effective tool which provides the framework for the analysis of the business environment. It is considered more effective because in a way it combines the Porters five forces with the PEST analysis. The only disadvantage of this analysis is that it may lead to a very narrow assessment. It requires careful prioritization of strong opportunities and threats. Wrong selection may lead to weaker opportunities and threats coming in the analysis (Eastwood et al. 2006). SWOT analysis provides both internal and external analysis and provides a critical analysis of strengths, weaknesses, opportunities and threats. In our analysis we will make use of all the three models. PESTLE Analysis PESTEL is a part of external analysis in which impact of Political, Economical, Social and Technological, eco- environmental and legal factors are analyzed. PESTEL forces are beyond the control of firms in the industry. Identification of the influence of PESTEL variables is a helpful manner for summarizing the external environment in which a business operates. Based on this analysis companies decide how to respond to these external forces them which combined together form the opportunities and threats in the SWOT analysis. Toyota Motor Company (TMC) is based in Japan so most of the analysis also will be based on Japan. Political Effects Toyota being a global company has to face various governmental regulations. It has to abide by the laws and regulations of vehicle safety, fuel economy, noise and emission levels. Other political factors which effect the organization are tariffs and trade barriers such as taxes and price and exchange rate controls. Some other potential political risks include political instability or unrest, war, unsecure currencies and changes in legislation. Economical Effects Japan has the largest economy in Asia and stands second in world ranking. Even in the recent global recession its GDP is 5.073 trillion US Dollar. Current recent global recession has affected its GDP growth rate by1.2 % in 2008 and it diminished further by 5% in 2009. This decline in GDP has also affected the automobile industry and Toyota. Motor vehicles, machine tools and electronics are one of the major industries of Japan so any change in automobile industry has its impact on Japan economy. Global recession further affected Japan because it has to rely on the imports of raw material (The Economist, 2010). But with economy getting better now automobile industry also has showed signs of growth. Socio-Cultural Factors A global company like Toyota has to take into account the social, cultural, ethical and religious values of the countries in which they produce and sell cars. Toyota has to adapt its marketing and human resource strategy in each country according to their requirements. Japan is a highly populated country with total population of 128.69 million with unusually high population density of 343 people per square kilometer in 2005. It also has a very high population of registered immigrants amounting to 1.97 million in 2005. Such peculiar statistics has a definite impact on life style, availability of labor and various other factors which has strong impact on company strategy including HR strategy. Every country has its own set of socio-cultural factors and hence it requires flexibility in organizational strategy. Technological Factors Automobile industry requires heavy investment in research and development (R&D). Japanese industry is one of the fastest growing industries in the world hence Toyota has to match the requirement. Customers demand not only change in design but also in technology. Japan’s budget for research and development amounts to 130 million US Dollars (Borowski, 2010). Legal Factors As already discussed every global company has to abide by all the laws and regulations regarding fuel economy, emissions reduction and safety standards. Toyota has suffered great losses due to the legal factors when Toyota has to recall its cars which have design fault and safety issues. Eco-Environmental Issues A global company like Toyota has to take care of environmental issues as well such as proper channelizing of wastage disposal. Recently there have been environmental concerns with reduction of emission of carbon dioxide CO2 in plant productions and products. Toyota has come up with hybrid cars that are more environment friendly. Porters Five Forces Model Porters five forces model is one of the most commonly used and perhaps the most useful strategy tool for business. Porter’s five forces which constitute the external environment for the company will be discussed. This model analyzes the forces of these five competitive forces on a firm in a given industry. Although this analysis varies across market for different countries but it can be extended for global companies like Toyota to analyze the global competition across many countries (Drummond et al. 2005) Rivalry The most obvious rivalry or competitive firma are the firms competing directly in the country but global competition includes both domestic and foreign countries. In automobile industry competitors with similar resources and target market have formed mergers or what Porter calls “strategic groups”. The three American giants, “ Big Three”, GM, Ford and Chrysler has formed one strategic group and the Japanese giants Toyota, Nissan, Honda and Mazda form another strategic group. The formation of strategic groups has improved the competition analysis. It has become easier to suggest the likely direction of the companies (Johanson, 2006) Toyota has lost its standing as the world’s most attractive and biggest car manufacturer owing to world’s financial crisis and the image lost caused to the company due to recalls. Toyota has tried to regain and rebuild its image by heavily investing in R&D and has come up with eco-friendly cars in equivalence to its competitors like GM, Honda and European manufacturers etc. New Entrants The threat of the new entrant by porter mainly includes the old firms in new markets but it may also include the new firms in the industry. For a global organization like Toyota the threat of new entrant is very low. This is a highly capital intensive industry and large firms enjoy economies of scale. High technology and know-how is another important barrier for new entrants. Threat of Substitutes There are three types of substitutes direct product substitute, substitution of need and generic substation. The automobile industry and hence Toyota currently face no threat of substitute. There are no direct substitutes for cars and customers are not likely to substitute. Buyer Power The buyer power and supplier power are considered the countervailing power. When buyer power is strong it is able dictate its own terms and counter the strategies of sellers such as an attempt of increasing price by switching to other products or brands. This force works in the same way in global case. Bargaining power of new buyers is moderately high because of the high number of competitors in the automobile industry. The switching cost to customers and the need for additional information is negligible and customers are moderately sensitive to price. In case of Toyota the bargaining power of new buyers is high because on one hand Toyota has that good image of environment friendly reliable image but on the other hand the massive recall has tarnished their image. Supplier Power Supplier power is also countervailing if the number of suppliers is less it implies their power will also be strong on the company. Bargaining power of suppliers is quite high because the inputs Toyota use is unique and differentiated and the number of suppliers for such unique input are very limited. The supply of skilled labor is also limited. This is capital intensive industry hence forward integration for suppliers is not possible which somewhat curbs their power. Toyota is using lean production system with TPS, TQM, JIT and Kanban which demands timely delivery. The supplier power is quite high. Not every supplier has the same power but the supplier of differentiated material is high. SWOT Analysis SWOT analysis identifies the company’s strengths, weaknesses, opportunities and threats by taking into account the external and internal environment the company is facing. SWOT analysis is very important for the strategic planning of the organization. It provides the frame work for identifying and exploiting the opportunities and minimizing threats present in the external environment by capitalizing on company’s internal strengths and minimizing weaknesses (Bohm, 2008). Toyota’s major strength is its lean production system (TPS) and its human capital. Toyota takes special care of its employees. The recall of 9 million cars which has design fault was the weakness of Toyota. Toyota has minimized this weakness with its conversion strategy from selling more cars to quality and increased customer assistance (Bommel, et al. 2010) Competitive advantage can be gained by matching strengths with opportunities and the conversion strategy will convert weaknesses or threats into strengths and opportunities. The major opportunity for Toyota is that subsidies for manufacturing electric car are planned and Toyota is pioneer in electric cars. The major threat for Toyota is the economic downfall and fluctuations in exchange rate (Gondek, 2011) External environment and HR policies and Practices of Toyota Analysis of the external environment of Toyota revealed that there is no or very low threat of new entrants and substitutes however the supplier power and the rivalry is high. PESTEL analysis is also favorable. Toyota has to develop its corporate strategy and HR strategy keeping in view this external analysis. The problem of recall of cars which has increased the power of the new buyers in the Porter analysis and the legal and political issues in the PESTEL analysis has been taken care of by restructuring the HR policies and practices. Toyota emphasizes on the cost minimization which was also reflected in the Policies of HR especially performance evaluation and reward system. This over emphasis on cost minimization led to the technical fiasco of Toyota. Where managers even after identifying the technical problem at early stage did not report to the higher management and tried to hide it under the carpet for the fear of getting the bad evaluation by the managers. They were putting profits in front of safety. To handle this issue and maintain better quality standards HR has modified its performance evaluation system. Many researchers attributed this problem to the social and cultural values of Japan as well. Japan has a culture of consensus and when conflicts are unavoidable they are sent behind the scene. HR of Toyota has not given any prior training to its managers for crisis management which further aggravated their problem and the issue was mishandled. These social and cultural differences in the external environment play an important role in the development of HR policies. HR must develop training programs to teach managers about effective conflict resolution and social and cultural differences. Legal issues identified in the external environment also must shape the HR policies. Toyota like all Japanese organizations works in the business friendly society. Lawsuits by consumer groups and other organizations are minimal. Hence Toyota’s corporate lawyers were unprepared for the lawsuit. HR must hire and train efficient lawyers to deal with legal issues around the globe Future Trend and HR Practices The main focus of External fit/alignment is connecting HR initiatives and the corporate objectives. For example if the company strategy is to achieve cost efficiency then HR policies and practices should reflect it by reinforcing efficient and reliable behavior in employees. If the company strategy is of differentiation and company wants to succeed through innovation and product development then HR policies and practices should foster and encourage creativity, flexibility and innovation. (Armstrong, 2006) Toyota like all other organizations who follow strategic approach first identifies the strategic position of the organization. Strategic positioning can be determined by answering questions like where the company wants to be in future. What values do they support? What is their futuristic vision? This strategic position is based on the scanning of external and internal environment and assessing organizational strengths and weaknesses as well as threats and opportunities. Based on this strategic positioning organizational structure is determined e.g. downsizing, merger etc. All Hr strategies are then based on this organizational structure. This is the philosophy and procedure which Toyota follows. (Hari Das, 2007) Toyota has tried to counter this weakness of car recall incident with its strength of “Toyota way”. It requires uninterrupted enhancement. This crisis is seen as an opportunity by Toyota to have an analysis of its weaknesses and galvanize and motivate the whole Toyota team to move forward and take the auto industry and Toyota to new and higher levels quality and safety standards (Liker, 2011). Toyota has come up as pioneers in the electric car and can utilize this opportunity of shifting trend to the alternative fuel to make up for the lost sale. 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