The Crisis Affecting The Automotive Industry Business Essay


The 2003-2008 energy crisis have an impact on the automotive industry due to the increased prices of automotive fuels ( Source: ). These have discouraged consumers to chose sport utility vehicles (SUVs) and pickup truck which have low fuel economy. (

The Americans " Big Three " automakers , General Motors,Ford, and Chrysler had focused on building SUVs and pickup trucks due to their popularity and high profit margins. However the energy crisis have changed the whole situation when sales begun to slide. The Big # had to rethink their strategies of building big cars. The situation was made worse with the credit crunch in 2008 (Source: This had placed immense pressure on the prices of raw materials, which inevitably caused production cost to increase.

When the car companies experienced double digit percentage decline in sales, the companies were forced to implement creative marketing strategies to entice reluctant consumers. In fact all major acr manufacturers, including the Big Three, Toyota and Honda offered substantial discounts across their lineups.

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The recent economic crisis of 2008-2009 has provided an impetus to a massive structural change in the auto industry, setting the stage for growth over the next decade. Given the high barriers to entry and the need for scale economies (in operations, supply chain and marketing), the global auto industry landscape is expected to be ruled by global automakers and suppliers based in the six major auto markets - China, India, Japan, Korea, Western Europe and the U.S. (Source : )


There are limitations with regards to the preparation of this report. The first clear limitation is this report has been prepared based solely on secondary data. This means some of the data used could be slightly outdated and some could be unreliable. The writer is unable to use primary data as it is not possible to interview the management of the auto companies concerned. It is also a matter of financial and time constraints.


Three types of corporate strategy are mentioned by Johnson and Scholes ( 1999).

Corporate level strategy - what kind of business or businesses that that firm is involved or supposed to be involved and then level of integration these businesses should be with in relation to one another.

Business strategy - it refers to how each business would like to achieve its mission or goal in its chosen area of activities. The strategy is about developing the kind of products or services to meet market requiretments and the the customer expectation at the same time achieving the objectives of the organization. The corporate planning at the tactical level will consists of the allocation of fund or resources for the complete operations. It is means-oriented and is mainly involve administrative and persuasive in its operation.

Functional strategy - this is about how the corporate and business strategy are supported by different functions of the business.It also examines how marketing, production, finance, and other functions support the corporate and business strategies. Therefore this corporate planning is at the operational level and is means-orientated and most of the activities are concerned with the ability to undertake instructions and directions.

Historically the big three domestic manufacturers have had the largest share of the

U.S. auto market (Rothstein, 2006). The main reasons for their dominance include the ability to remain competitive in the face of changing driving forces such as increasing competition from foreign manufacturers, changing customer needs and preferences and evolving government regulation, while simultaneously executing a broad differentiation strategy predicated on a complete line-up of automobiles.

This kind of winning strategy would ensure a competitive ability to service the needs of the respective area of the automotive market and thus able to confer a sustained competitive advantage.However it became obvious that by the eighties in order to protect their domestic market shares from foreign competition, the reliance on Fordist organizational practices such as vertical organizational structures ,command and control type of management systems , bureaucratic approach and compensation based on seniority had to be changed (Pulignano and Stewart, 2006;Katz, Kochan and Keefe, 1987). Thus the industry as a whole started follow and use Japanese practices like team work, few job classifications, an active continuous improvement culture (Kaizen), outsourcing, just-in-time inventory management, quality circles, and lean manufacturing (MacDuffie, 1994; MacDuffie, 1995).

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The dominance of U.S. automobile manufacturers was threatened by Japanese, German and Korean manufacturers by the late nineties .These manufacturers had built manufacturing capacity in the U.S. and threaten the local US manufacturers .Therefore any manufacturer with the ability to quickly bring products customers wanted to the market, and able to increase productivity and the quality of products, at the same time able to control costs by leveraging globalization to capture economy of scale effects, having the capability to increase manufacturing flexibility while capturing learning curve effects, also to efficiently managing supply chains will definitely have the necessary competitive advantage.

In the management literature usually the core issue is the relationship between organizational practices and the proficient execution of strategy. It is often noted that market leaders are able to separate from followers in competitive markets due to their ability to successfully adopt strategy-supportive practices (Galbraith and Kazanjian, 1986, Balkin and Gomez-Meija, 1990, Rajagopalan, 1977). The strategy researchers have shown in the knowledge transfer and strategic literatures that companies seeking to proficiently execute a low cost provider strategy have to implement a specific set of best practices and likewise for firms pinning their competitive approach on a differentiation strategy (Porter, 1980, Porter, 1996)

The corporate level strategy is mainly concerned with the scope of an organization's activities and the way of matching these to the organization's environment, its resources and the values and expectations of its various stakeholders.


The approach by Honda towards the individual- group dichotomy in the strategic decision making process is similar to Honda's approach to innovation in management .For Honda's President Kawamoto his reform involved the collective or group versus the individual and then vertical structure versus the horizontal structure. Then the approach of reconciliation in which the two poles are eventually made compatible with each other.

This is typical of Kawamoto's "changed tacks" approach from a group based to individual based trajectory and this can be considered as classical example of dichotomy reconciliation, Honda style.

Honda's strategic thinking is different from the Western style of simple trade off and it will not accept Western idea that failure to select clearly one or the other poles that can lead to indecision.

Honda's solution to the group -individual dichotomy is to progress flexibly with a ' tacking ' motion along a well - defined and fairly narrow path .Therefore the reconciliation sought is always one which incorporates ' the best of both worlds ' .

Honda's approach to organizational structure is to avoid what many big organizations have encountered which are commonly termed "big business disease" a vertical hierarchical structures. Honda had adopted a more process oriented horizontal linkages and this will enable Honda to maintain the small firm vitality and communication that are important to innovation and dynamism.

Honda's organizational structures are like web, combining or mixing individual and group processes, both horizontal and vertical structures ,formal and informal positions to the extent that it is quite impossible for anyone entering the firm from outside to understand precisely what Honda's organizational structure is .

In generally the paradox of deliberateness and emergence is where deliberate strategies normally give the organization with a sense purpose in way operation is carried out, and the emergent strategies indicate that the organization is learning from its environment gradually. Thus this can led to dichotomies of strategies. But Mintzberg (1994) and Whittington (1993) says that this may not necessarily so, and Mintzberg indicated that many firms in present's highly volotile business enviroment need to be purposeful and resourceful at the same timew. In this respect he came out with the term "deliberately emergent". Whittington also agreed as he classifies deliberate strategies under the classical school of thought and emergent strategies under the evolutionary school of thought and both of them share the same outcome of profit maximization. Although the strategies may be to a certain extent different but the actual philosophy of the strategies are the same


A global-scale recession adversely affected the economy of the United States during the second half of 2008. In 2008 and 2009 the widespread crisis in the United States auto industry was due to a results of many years of declining automobile sales and very scarce availability of credit .

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As the results in the drops in automobile sales during 2008, each of the "Big Three" U.S. automakers: General Motors (GM), Ford MotorHYPERLINK "" Company and Chrysler having cash shortages and thus requested emergency loans in order to address the problem.Thus by April 2009, the situation turned from bad to worse and both Chrysler and GM were faced with possibilty of imminent bankruptcy and liquidation. In order to prevent massive job losses that can cause destabilizing damage to the whole manufacturing sector, the U.S. and Canadian governments decided to provide the unprecedented financial support to allow the companies to restructure via Chapter 11 bankruptcy.

Chrysler had emerged from bankruptcy owned primarily by the United Auto Workers union and by Italian automaker Fiat S.p.A.while General Motors exied from bankruptcy as and as a new company with majority share owned by the United States Treasury. They terminated agreements with many of their dealerships and GM also discontinued manufactured several of its brands as part of bankruptcy proceedings. Ford Motor Company avoided bankruptcy partly due its stronger financial standing .Foreign automakers like Honda and Toyota were less affected as compared to US automakers ( Source : access on 1/9/2010)


The traditional Mergers and Acquisitions (M&A) motives such as, market entry, growth, improved efficiency, diversification and risk reduction have been described extensively in the academic literature (Hitt et al, 1996). M&A may stimulate innovation for a number of reasons. The know how in technological field is often tacit and can therefore not be easily transmitted from one firm to another (Larsson et al. 1998). One of the way to reduce or totally avoid any high transaction costs, some of the firms may be inclined to engage in an acquisition in order to solve problems related to the transmission of tacit knowledge (Bresman et al, 1999). Furthermore, M&As may raise the overall R&D budgets of companies involved. This allows them to reap economies of scale and enables them to tackle larger R&D projects than each individual firm could have done. In this way fundamental research may receive more attention, leading to more advanced technologies being developed.

Also, a larger budget enables a company to enter into more research projects, thus spreading the risk of innovation. Furthermore, firms having complementary knowledge can combine their specific strengths and develop new technologies or products that each partner on its own would not have been able to create (Gerpott, 1995). This may have two effects: either an innovation emerges which would not have been possible without the collaboration or an innovation is realized much faster than when the partners would not have collaborated. Finally, companies are rarely efficient at all aspects of innovation management. Companies are likely to employ different innovation management techniques. An exchange of best practices within the merged entity will raise R&D productivity: i.e. with the same budget more new technologies can be developed.

On the other hand M&As face some grave barriers to innovation as well. The most

obvious one is that mergers require so much time of so many individuals involved that

it diverts management attention away from innovation. This may be a short run effect,

but in quite some cases the organizations of the partners have not yet integrated, many

years after the merger was announced. Furthermore, the failure rate of mergers in

general is high. Even when the merger is successful in terms of the integration of

R&D departments, in other business areas the merger may not be a success, prompting a disintegration of the company. For example Daimler and Mitsubishi which did not work out in the end.

In the past decade automotive industries faced a strong force towards consolidation .The DaimlerChrysler merger created a new giant and the acquisition of Volvo by Ford and the alliance of Nissan Motor and Renault were sign of this trend. The reason for this radical move to consolidation is the strong belief that in the future there is only space for tiny boutiques and giant sellers.

But Honda was and is not willing to choose between these two strategies and try to survive in the middle between the ' goliaths' and the ' dwarfs'( niche players) in the market.In order to outperform the competitors Honda introduced the flexible manufacturing systems .In this way Honda can produce up to 8 models in 1 production systems and by doing so Honda strives to manufacture as cost - efficiently as possible .The positive side effect is that Honda is able to respond quicker on market changes than their competitors .Not a trade off made between these two elements but Honda combines both of them .


The trend in 2009 - 2010 may see stronger moves towards more environmentally-friendly technologies and a continued polarization away from mid-sized vehicles towards either premium or low-cost autos.There are stricter regulatory requirement to place a much greater emphasis on fuel efficiency and consumers expectations are different . At the same time, legislative and other pressures are creating a divergence in geographical markets around the world in terms of the type of engine preferred locally - i.e. gasoline, diesel, electric or hybrid. This move is adding to the cost and complexities of production, as different engines may be required to fit the same vehicle models, depending on where in the world the vehicle is to be sold.The implication is that economies of scale from vast production volumes may no longer be the most significant factor in cost control. Rather, access to best practices and the latest available technologies will become a bigger factor in driving M&A and alliances, the latter being a popular means of sharing R&D capabilities.


On February 16, 2005, the Kyoto Protocol with mandatory limits on Green House Gases

(GHG) emissions by industrialized countries came into effect. Ratified by 141 countries,

which account for 55% of GHG emissions, the focus naturally fell on the automobile sector, the largest consumer of fossil fuels18. In automobiles, where 98% of the energy requirement was met by petroleum, CO2 was the most significant GHG emitted (2.4 g of CO2/litre of fuel burned). In addition, vehicle air conditioners leak hydrofluorocarbon- 134a (HFC - 134a), a GHG that was 1300 times as potent as CO2. The situation was expected to deteriorate with a projected vehicle stock of more than 800 million by 2030. The automobile industry particularly located in developed economies of US, EU and Japan, supported the development of new cost-effective technologies offering improved energy efficiency with lesser GHG emissions. The auto-makers were taking voluntary initiatives to make cleaner fuels.

In the US, despite the political machinery's refusal to ratify Kyoto Protocol, many individual states were enforcing their own fuel economy19 standards. The State of California mandated reduction of GHG emissions by 30% during the period 2009-2016. Seven other states also joined the fray. The Energy Policy Conservation Act enacted into law by the US Congress in 1975, established Corporate Average Fuel Economy (CAFÉ) standards for passenger cars and light trucks. CAFÉ referred to the sales weighted average fuel economy expressed in miles per gallon (mpg) of a manufacturer's fleet of passenger cars or light trucks with a gross vehicle weight rating of 8500 lbs or less manufactured for sale in the US, for any given model year. As of 2005, the CAFÉ standards stipulated a mandatory standard of 27.5 mpg for passenger cars, and 21.0 mpg

for light trucks. The penalty for failing to meet the standards amounted to US$ 5.50 per tenth of a mpg for each tenth under the target value times the total volume of those vehicles manufactured for a given model year. Since 1983, auto-makers had paid more than US$ 500 million in civil penalties. The European manufacturers had paid fine in the range of US$ 1 million to US$ 20 million annually. The Alliance of Automobile Manufacturers, a trade association of nine car and light truck manufacturers including BMW Group, DC, Ford, GM, Mazda, Mitsubishi Motors, Porsche, Toyota and Volkswagen, founded in 1999 in the US, strived to enforce the commitments on environment.

In response to the US President's climate change policy framework, announced on February 14, 2002, the Alliance laid down the initiatives for sustained economic growth by financing new, clean energy technologies and participating in Department Of Energy's (DOE) Business Challenge

Honda is working to reduce the use of four heavy metals considered to have adverse

effects on the environment (lead, mercury, hexavalent chromium and cadmium). In the

production of the Insight and other vehicles released in FY2009, Honda able to meet the

targets in reduction set by the Japan Automobile Manufacturers Association.In this respect. Honda is exploring and checking the viability of implementing air conditioners that use no HFC134a, and is monitoring new technological developments. By eliminating the use of PVCs in both the interior and exterior of resin parts, Honda reduced the content of chlorine in automobile shredder residue to less than1% in all new models released in FY2009. ( Source : http :// access 30th Aug 2010).


The U.S. culture is high on individualism, has a power structure that is male

dominated, is fairly short-term oriented, is characterized by equality between societal

roles, and is tolerant of new ideas, practices and customs ( Hofstede ,1980)

The dominant American cultural dimension of individualism and masculinity has

been conceptualized as important factors in the creation of the traditional Fordist/bureaucratic organizational structure that has been implemented in the U.S.

automotive manufacturing sector for most of its history (Pulignano and Stewart, 2006).

For Japanese organizations the common characteristics are the process of evaluation and promotion of employees are generally slow , always an implicit control system, non-specialized career paths are usually non specialized and always a collective decision making, collective responsibility, secure and lifetime employment and wholistic concern (close relationship between employer and employee) (, Ouchi 1981, Pascale and Athos 1986, Lincoln 1989, Buckley and Mirza 1985).These characteristics are different from a typical American organization.

My choice will be similar to Honda approach on management dichotomy to select or the ' fusion ' of the suitable management approach between Western Style of Management and Japanese Style of Management to suite that particular situation .For example if the management issues are encountered in an Asian corporation then I may review and resolve the issue more towards the Asian perspective and if it is in Western management enviroment then likewise I will choose to resolve from the Western perspective .


This case explains how organizations are confronted by tensions between opposite demands that need to be dealt with .These tensions are usually managerial dichotomies.

In the case while Honda managers accept the existence of tensions /dichotomies, they also constantly seek to find the innovative ways of reconciling them.Therefore they do not see tensions or dichotomies as false opposites (puzzle) or as mutually exclusive demands (dilemma). Nor do they accept that meeting one demand is always at the expense of meeting the other (trade off).Honda managers believed that the opposites can be bridged (paradox) and that this transcending of tensions required some thinking.

Therefore this case attempt to explain how Honda can appear to support opposing theoretical perspectives at the same time.The case describes that while many companies when faced with strategic and other managerial choices select one option or trade off one for another but Honda instead has acquired a strategic capability to reconcile management dichotomies and hence achieve solutions to management challenges that are not being considered by other companies.