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Porters Five Forces And The Value Chain Techniques

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Published: Mon, 5 Dec 2016

The Porter’s Five Forces is an analysis used by companies to determine the competitive intensity and the attractiveness or profitability of a market and to make a qualitative evaluation of their strategic position. Porter referred to these forces as the micro environment, they are the essential forces the affect the company’s ability to make profit, earn a return on investment that could be better than what is in the average of the sector it is operating in and satisfy its customer’s needs. Michael Porter explains 5 Forces as follows. (Porter, 1980)

The Five Forces are:

The threat of the entry of new competitors (how easy or difficult it is for new companies to enter the industry):

Here the entry of a new company to the market is difficult because it is not a small business. Selling cars needs a lot of capital and investment in order to start. Honda was a threat to the American market when it opened its first plant in Ohio and according to the case The British and European Markets were also involved. This emergence of the foreign competitor needed new technologies and better operations management skills have started to take over the market share of these countries. (Mair, 1997)

The intensity of competitive rivalry (is there a competition between the firms):

Here the competitive rivalry is high, since Honda is not the only company that is well known and hard to compete with, but innovation might be a competitive advantage as well as firms putting too much advertising. Also because the cost of competition is high, the automobile industry is considered to be an oligopoly because I believe the automobile manufacturers know that price based competition does not always lead to an increase of the size of the market share, but they were innovative by offering financing and long term warranties to keep their customers. (Mair, 1997)

The threat of substitute products or services (is it easy for a product or a service to be substituted especially at a cheaper price):

Here Honda might face a problem of substitute not only when customers buy new cars, but we also need to consider the customers use of public transports, bikes, airplanes and if the price of petrol gets too high. This might be an advantage for Honda since it is considering the fuel consumption and the green environment. (Mair, 1997)

The bargaining power of suppliers (are there too many sellers or just few, how strong is their position in the market)

Honda has power over its suppliers, not only because of the existence of many suppliers of car components and raw materials but also because according to (Mair, 1997) ”Honda intervenes directly in the internal activities of its component makers when it believes it is necessary” it arranges the purchase of some components and raw materials like steel and aluminum. This long term relationship with its partners and its suppliers will reduce Honda’s cost and make it have control over the quality. These suppliers are very sensitive to demands and requirements of the automobile company since it orders big quantities.

The bargaining power of buyers(how strong is the position of the buyers),

Consumers have a high bargaining power in terms of choice since information is open to everybody through the internet, car magazine and advertising. Most of the automobile manufacturers innovate by creating more stylish designs, better car features and technologies and better fuel economy. But these consumers could also have a low bargaining power in terms of volume as they never purchase huge quantities of cars. I believe Honda maximises its business efficiency by combining fuel economy, technology, safety and price but also focuses on customer satisfaction, reduce their complaints and satisfy their needs from the purchase to the after sale services.

The Five Forces of Porter is a simple and a powerful tool to analyse you power situation in a market. This tool is very relevant to Honda not only with a clear understanding where its power lies but also to help the Honda Company understand both the strength of its competitor’s position and the future position it wants to be moving into.

Porter’s Value Chain Techniques:

The value chain framework is a model that Michael Porter has set to help analyse specific activities through which firms can develop, produce, sell, create value and build its own competitive advantages. (Porter, 1988)

According to (Porter, 1988) the value chain consists of the support and primary activities:

The Primary activities of Honda are (Mair, 1997):

-The inbounds logistics (receiving, storing, inventory).

-Operations Management the process of transforming inputs into outputs for Honda SED teams operate from the start to the finish of the process, and uses machinery that can use large lot production.

-Outbound logistics are the activities required to deliver the finished product to the customers, it includes transportation, distribution management

-Marketing and sales are the activities that are essential to get the buyers to purchase the product Honda has strong Brand Name, provides ease of use website to consumers to create awareness for their products and shows detailed explanation about the new developments and technologies to attract the customers.

-Services are the activities that maintain the products value. Honda has high customer contact, ability to negotiate prices and secured websites which protects customer’s details and long terms warranties.

These Primary activities of Honda are supported by (Mair, 1997):

-Procurement of raw materials, machines: Dual sourcing creates a competition between its suppliers.

-Technology Development is used to support the value chain activities such as systems used to support the receiving of goods and calculate the capacity of raw materials.

-Human Resource Management are the activities associated with recruiting, forming, retention and promotions of employees and managers.

-Company Infrastructures include developing the free flow assembly for product efficiency.

Here Honda uses the right first time principle by reducing bottlenecks and making its processes error free, so that the following tasks that depend on the previous tasks are not delayed but the waiting time. This will increase the chance of sells opportunities to customers whom would not like to wait. This makes Honda focus on its production efficiency by not wasting time and have more accurate control over its inventory. (Porter, 1988) identified many cost drivers related to value chain activities such as economies of scales, learning, firms policy of cost or differentiation, geographic location, regulation, taxes etc. A firm develops a cost advantage by controlling these drivers better than do the competitors.

Process of Reconciling Dichotomies at Honda Motors

According to (Dictionary, 2010) a dichotomy is a split into two mutually exclusive parts that are contradictory means that no part can belong instantly to the other part. According to (Mair, 1997) western manager’s deals with dichotomies in 2 ways: they choose one dichotomised pole then they look for ways to trade-off between the second dichotomies but they sacrifice the benefit of one of them. Honda uses these dichotomies in innovative strategic management thinking, from the dozens of dichotomies at Honda; it combines both vertical and horizontal integration methods. Another dichotomy of the individual group is the ability to admire and guarantee the success of its employees by creating a kind of competition among them; this created a self- motivation and individualism.

According to (Mair, 1997) another dichotomy is that Honda has a diversified production along a build in quality – low cost. Honda does not only have an image of a designer of a sporty and innovative cars but also offers wide range categories offering classical models like Civic and Accord which already have a market position, for example for the western market, it sets a complete model change where it re builds all the design process from the beginning with every component redesigned for a new model. Honda also has the reputation of combining high quality cars with low fuel consumption and the low cost-vs. – High quality car since it has a powerful core capabilities like their production processes and their product design. The Car manufacturer company is very interested in making new low pollution power sources for its vehicles like the electric and the solar power for example. It is investing in its internal resources as its engineers, labour skills and R&D to meet its objectives and win new market positions. It is focusing both on positioning itself on the market, as well as developing internal resources Honda positions itself in the market by analysing its core competences against its competitors and taking into consideration the consumer needs.

Western managers accepted many of Honda dichotomies reconciliation methods as assuming trade-offs between product quality versus cost and delivery. As I stated above high quality and less waiting times costs more. But the Japanese developed the right first time model that revealed that it is better the just in time production organization. The right first time reduces time wastage by having minimal stocks and reducing delivery lead times too. Honda has reconciled the dichotomy of the two processes market positioning versus developing internal resources to achieve its objectives. (Mair, 1997)

A pressure for global integration of activities versus pressures for local responsiveness:

The Pressure for Global Integration of Activities

Honda is not only acting locally but also globally and is very internationalized since its regional sales break down according to (Mair, 1997) a 1997 snapshot of Honda Activities, sale by value are 34% for Japan, 42% for North America, 11% for Europe and 13% for other countries, it aims for standardised products and standardised processes because it is a massive cost saving approach. The companies should plan globally for low cost production for example the use of economies of scale in some location to minimize cost of the finished product. Honda also has access to raw materials and has control over its suppliers, this could be an advantage to the company that will help it adapt to the location and the market. For example Honda’s product specification in universal but they customize their cars to fit different markets to be globally integrated. In 1994, Honda’s North American distribution of sales was slightly less than the American car manufacturer Ford with a 53.2% share to Honda and 53.3% to Ford. (Table 3, Bordenave and Lung, 1998)

The Pressures for Local Responsiveness:

Honda takes all different consumers need, demands and tastes into consideration. The local responsiveness might include the differences in marketing condition, distributions and promotion strategies, the availability of substitutes also have a pressure for the local responsiveness in the Japanese market. Honda develops models for world different markets. For example the civic and accord models that Honda made in Europe in the mid-1990s were significantly reengineered for the different Japanese market. Honda responds to its market demand by having a geographic distribution of production up to 54.1% according to world production and sales of new passenger cars in (Mair, 1997), it is still far behind its best competitors Nissan with 64.5% and Toyota with 72.2% at the top. (table3, Bordenave and Lung, 1998), an example of obvious local responsiveness Honda offers right sided driver seats for countries that drives this way for example Japan and the UK.

Question 2: A and B

Understanding of Whittington’s Classical and Processual Schools of Thought in the context of strategy development at Honda Motors.

According to (Whittington, 2000) strategy is categorized in four basic generic approaches: Classical, Processual, Evolutionary and Systematic. I will be explaining and examining Classical and Processual schools of thought in the context of strategy development at Honda Motors.

Classical: The Classical perspective is a rational process of deliberate calculation and analysis designed to maximise long term advantage. It is a centralised, stable, rational and rational strategy which is built from top leaders and spread around all the departments. (Whittington, 2000)

Processual: The Processual Prospective is an emergent process of learning and adaptation. It adopts a sensitive view that aims at making sophisticated processes showing the fact that the environment is not ideal or perfect. It is similar to evolutionary approach in terms of doubting the value of a rational long term planning. (Whittington, 2000)

According to (Mair, 1997) Honda Motors has gone through many management structures, created by its various presidents and over time. The founder of Honda Company is Mr Sochiro Honda. He developed his strategy starting in Classical structure that was first like any business relying on maximising profit over long term advantage. But in the 1960s, the company moved to another process of learning and adaptation in Processual Prospective, when Takeo Fuijisawa have set a board room where the top executives might discuss to make a collective decision, make round table meeting between executives and front line supervisors to make a diagonal linkage and avoid the Vertical Hierarchy. Honda is a Pluralistic company, Profit maximization is not only its main goal, it has a free flow assembly line process which matches production efficiency and human dignity but also reduce stocks and reduce delivery time. (Mair, 1997) said that in 1991, Kawamoto created a new management structure to reconcile dichotomies as we seen in this article, like the Processual and Classical schools, the Right-First-Time versus Build-in-Quality.

Evaluation of how you might apply the two Schools of Thought to Honda Motors and my recommended school of thought.

Question 3: The Systemic Perspective and the Cultural Dimensions

According to (Whittington, 2000), the systemic perspective is defined as a deliberate process and pluralistic outcomes in which organizations consider the external environment as an open system. The relation of the company with the external environment is essential to its resistance, competition and vital for its survival. Companies needs to understand consumer’s needs, wants and tastes in order to make the right product for them, maximise sales and maximise profit to cover their costs. Companies should adapt to the different environment by adapting a flexible strategy that can be totally customized for the country or culture it is operating in. According to (Whittington, 2000) a systemic approach requires the creation of relationships between the system and its external or internal environment. Even if Honda is a Japanese firm and all its central management is in Japan, but with their communication and understanding of the external environment, it is selling all around the world.

(Hofstede, 1993) examines management behaviour by defining 5 cultural dimensions where he has shown the difference between the Japanese model and the Western model:

Power Distance (the degree where power is exercised among people e.g. manager-employee which the population consider to be normal)

Individualism versus Collectivism (Japan is a collectivist society where people would prefer to act as group or collectivists)

Masculinity versus Feminity (Feminity describes a more caring and softer behaviour of the society with the opposite of masculinity)

Uncertainty Avoidance (People prefer structured situation rather than hazardous situations.

Long term versus Short term orientation (Population prefers the long term and future orientation rather than thinking about the past)

According to (Hofstede, 1993) these cultural dimensions are essential to organizations in terms of understanding the cultural diversity and building connection with people from around the world. Product that will work in one location might not work in another.

Hofstede (1993) believes that some cultural dimensions influence a country style of leadership adopted by firms in the country and the norms and behaviours are set within the country’s territory. This Japanese theory has a centralized structure, collective decision making and responsibility, close inter firm’s relation and motivation for the employees by offering them a job for life. Having a decentralized structure encourages all the parts of the systems to decision depending on the environmental changes. This helps the success and achievements of the individuals based on its innovative strategic thinking of reconciling dichotomies. (Table 5, Mair, 1997)

Honda took both management models. It uses The Western because of high production and sales in North America but does not fit completely the Japanese model even if it’s a Japanese firm. According to (Mair, 1997), Honda has a decentralized structure that contributes to each part of the system to take decision in case of environmental changes. Therefore, the more internationalized the business is the more the cultures include the business of the car manufacturer company to gain experience, skills and bring new approaches to its core strategy. The Anti-Japanese model of Honda contradicts Hofstede’s theory and show that not all firms are obliged to let the cultural dimensions change their management style, unlike considering the typical Japanese management style which is totally affected by the Japanese cultural dimensions.

This explains that each system has the advantage of its own innovative strategy and experience of the market depending on its previous challenges and experiences in both the external and internal environment and that Honda has taken advantages from both models. It is a highly competitive company that reconciliates dichotomies by finding its ideal management style that can be adjusted on any environment change and this by having possession of labour skills, suppliers, customers and all its operations and structure.

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