Honda Value Chain Analysis - Rover Alliance

1.0 Introduction

In the case study of Faulkner (1996) and Potter (1996), the strategic alliance between over and Honda was started in 1979. Before entering into collaboration with Honda, Rover, being owned by British Leyland Motor Corporation (BLMC), suffered from major losses in terms of profits and market shares. Rover’s product lines were not attractive enough to its buyers and the major problem was due to its poor reputation for quality aside from below capacity factories, making quite difficult to react to the intense competition in the world automobile market. In 1979, Rover’s top management decided to look for a partner and they approach to Honda. Honda at that time had limited presence in Europe and wanted access into the European market. Incidentally, they have something for each other. Honda’s production expertise, good reputation in quality; and Rover possesses an understanding of European tastes.

The strategic alliance between both companies was formed in 1979 and gradually evolved from a limited licensing agreement into a multifunctional relationship including joint development and production and a 20 per cent share exchange between two companies. Rover shared its knowledge to European taste of cars and so Honda has improved Rover’s understanding of quality products. Both companies’ initial objectives were established from the strategic alliance relationship. Honda sales of cars in Europe had increased from a negligible amount to 700 million in 1990 and accounted 1.2 per cent of the European market. On the other hand, Rover, after years of loss making, moved steadily into profit from 1986 onwards and its regenerated reputation for high quality of cars was achieved by introducing the series of Rover 800, 200, 400, and 600.

In 1988, British Aerospace (BAe), acquired Rover Group from the British government and it does not have impact on the relationship with Honda. However, unexpectedly, BAe sold Rover to BMW in 1994 for 800 million and 900 million of net debt and off-balance-sheet finance as it has became tired to finance the unprofitable development and losses. Honda and Rover’s relationship was formally ended with a net payment from BMW to Honda of 116 million for Honda’s 20 per cent stake in Rover Group.

2.0 Internal Analysis (Value Chain)

2.1 Primary Activities

Inbound Logistics:

The joint supply network of Rover and Honda provides its production process with greater stability compared to its competitors. By maintaining a good relationship with its suppliers, they may adopt “Just-In-Time” (JIT) manufacturing philosophy for handling raw materials to reduce in-process inventory and carrying cost (Hirano, 2009).

Operations:

From the Honda Alliance, Rover learnt Honda’s lean manufacturing techniques, using high degree of automation levels (robotics methods of manufacture) to ensure high efficiency while minimizing the resources required for production. Rover’s product life cycle for new models has reduced through the Japanese flexible manufacturing system. In addition, these improvements followed by the Japanese total quality control attitude to manufacturing tend to regenerate Rover’s reputation as a quality performer.

Outbound Logistics:

Rover can ensure timely delivery of finished goods by shipping in batches through Honda’s “Just-In-Time” (JIT) lean production. It reduces its waiting period to the minimum and improves production efficiency (Liker, 2004).

Marketing & Sales:

Rover and Honda need to market their products based on customer’s needs and wants. In the world of automobile market, competitions were intense. Rover may employ experienced car sales representatives for better customer experience, including recommendation to customers interactively and customization availability. Marketing strategy such as intense promotion of new product releases by developing commercial advertisements. It is also essential that Rover and Honda’s websites offer a wide variety of product information and specifications.

Services:

After-sales service is very important. Customers may get their cars serviced at an authorized Honda or Rover dealer, employing certified technicians. They may also provide a coffee shop in the service station for customers while waiting for their cars being serviced.

2.2 Supporting Activities

Technology Development:

Rover enjoys the access into Honda’s technologies, primarily on engine. Rover and Honda saved development costs due to the alliance and with the expertise of Rover’s four-wheel-drive; they gain the access into high technology of new products, for example, Honda Crossroad, and CRV later on.

Human Resource Management (HRM):

Honda had a philosophy based on customer satisfaction and customer improvements. They employ professional salespeople, helpdesk operators and technicians through Rover’s network in UK and Europe and Honda’s in U.S. In addition, Rover trains their staff of the quality and manufacturing techniques specifically lean manufacturing from Honda.

3.0 Porter’s Five Forces

Competitive Rivalry

Rover and Honda’s portfolio were relatively small in global terms against global manufacturers: General Motors, Ford, Toyota, Volkswagen and Nissan. The increased of competitors like Volkswagen, General Motors, Volvo, Ford and other Japanese manufacturers in the world of automotive industry has become more intense. In order to stay competitive, Rover 600 and the new Honda Accord were introduced in the late 1993 to meet customers’ needs. However, the attractiveness of a product in the car industry is the level of technology advancement, for example, in order to invent a fuel economy engine system; company may need to allocate a huge amount in R&D and purchase expensive equipments and materials. In other words, only huge competitors with huge capital can survive and stand up in the market. Companies are trying to add-on value into their products and differentiate with other competitors.

Overall, the force of competitive rivalry is high.

Bargaining Power of Suppliers

The powers of suppliers are determined by the size of automotive companies. For instance, if the automotive manufacturer is huge in capital terms, they may opt to purchase materials from international suppliers, thus reducing bargaining power of suppliers (Muthusamy & White, 2006). However, sometimes due to the increased of competitions in a specific region, manufacturers are more likely to receive materials from local suppliers to reduce the production turnaround time. Suppliers then have the power and advantage to increase its price. For companies with the practice of “Just-In-Time” (JIT) manufacturing philosophy, establishing a good relationship with their suppliers is very important as to receive materials on time to avoid any delay on response time.

Overall, the supplier power is moderate.

Bargaining Power of Buyers

The bargaining power of buyers is said to be high. The internet is a global market; customers have the access into market information such as price, specification and etc. They may simply switch to other brands which satisfied them even better. Also, Carr and Garcia (2003) emphasize that the over-capacity in Europe provides customers with wider choice and buyers demand for even better quality in current products. On the other hand, specifically, luxury car manufacturers have a relatively high bargaining power against buyers as their customers tend to rely on them to produce their preferred products. For example, Aston Martin, which tailored to individual preferences.

Threat of Substitutes

Natural gas like oil is becoming less in global terms. As a result, passengers taking public transport have been increased due to the hike in fuel prices. Other factors such as traffic and road congestion, the costs of parking, and possible car accidents have an impact on customer’s purchase decision. As such, the force of products being substituted is high.

Threat of Entrants

The threat in automotive market is very low. Those without an established strong brand like Volkswagen, Ford, etc. are not likely to survive in long term. The alliance of Rover and Honda saves their development costs significantly passing the benefits to customers by bringing down the price. Nevertheless, the capital requirement for setting up an automotive business is extremely high in terms of materials, factories, and etc. Thus, the force of new entrants to the industry is relatively low.

Summarized of key findings from Porter’s Five Forces

The competition amongst the automobile manufacturers is intense. Rover was too small to survive alone and had insufficient volume to service such as wide model range since alliance with Honda. Through the analysis above, the well established image of Rover and Honda is an advantage, thus not necessarily for them to worry about the competition directly from new entrants.

4.0 SWOT Analysis

Strength:

• Global brand
• Honda was worldwide known of high reputation for sound engineering, high quality and productivity and Rover expertise in 4WD technology.
• Wide range of products
• The joint development effort enables Rover and Honda to have a wider range of products offering to consumers, such as the 800, 200, 400 and 600 series.
• Shorten product life cycle
• Rover’s product life cycle for new models was shortening considerably from seven to nearly five years.
• Development costs reduced
• The sharing of resources; expertise and R&D between Rover and Honda have saved a significant amount of development costs.
• Sales performance
• The regenerated reputation of Rover has lead to strengthening its sales performance. In 1993, the production of Land Rover was running ahead capacity while other car makers were suffering reduction in volumes.
• Quality policy
• Honda was well-known with its total quality control. Rover benefits from the learning and always focuses on product innovation and performance.
• Shared resources and expertise
• The shared resource and expertise from Rover and Honda, particularly British and Japanese, create a unique image to gain competitive advantage.

Weakness:

• Low presence in European market
• In 1990, Honda’s sales accounted only 1.2 per cent of the European market, while Rover’s accounted for 3.1 against
• Heavy reliance on Europe and UK market
• Most of the Rover’s productions were mainly for Europe and UK market. There will be no backup for the company in the event if any downfall in the Europe and UK market.
• Alliance breakup
• Rover constantly seeking ways to keep the alliance “alive” by collaborating in major projects.

Opportunities:

• Expansion into China and India
• Utilizing the expertise and financial support from Rover and Honda, there is a possibility for them to expand their market into China and India.
• Introduction of new differentiated products
• Combining the British styling (Rover) and Japanese styling (Honda), they gain an access into development of differentiate products. Honda Crossroad, CRV, for an example, the joint development efforts combining Honda’s specialized engines and Rover’s 4WD technology, lowering customer’s purchasing power while increasing their sales.

Threats:

• Strong competition
• Rover and Honda face challenges from other car makers, specifically Volkswagen, General Motors and other major Japanese manufacturers.
• Foreign exchange fluctuations
• Whether the currency is strong or weak, it does affect the performance of both companies. For instance, the discrepancy of currency value will affect prices, which will lead to decreased comparative competitiveness.
• Acquisition of Rover by BMW
• The alliance formation of Rover and Honda was envy by many manufacturers. BMW, who eventually acquired Rover, was a threat to the alliance.
• Hike in fuel price
• This will impact on the customer purchasing decision significantly as substitute for cars is always there, such as public transport.
• Change in consumer behaviour
• Nowadays, certain countries were suffering over-capacity. Too many competitors and range of products, however, in the event if the trend of getting second hand cars happens, inevitably, car makers including Honda and Rover will suffer loss of profits.

4. 1 TOWS Analysis (Strategic Position)

• Strengths and Opportunities (SO)

Honda as a global brand together with Rover’s quality performer image enables the access into foreign markets like Asia. The joint resources including technology knowledge, financial support, and R&D provide them the opportunity to create products which consists of a stylish design and high performance and create competitive advantage.

• Strengths and Threats (ST)

Customers nowadays are more concerned about the fuel efficiency of the car rather than its performance. This is mainly due to the hike in fuel price and also the economic recession taking place in most of the countries. Rover and Honda need to develop an engine system to create cars with best fuel economy. Honda Civic Hybrid is a very good example of the above said, it features a gasoline-electric engine system, which reduce the fuel consumption and “go green” at the same time.

• Weaknesses and Opportunities (WO)

Rover, instead of relying heavily on the UK and European market, they should develop their business in some other countries since they have little presence all over the world. Also, there were alternatives for Rover besides working as a “slave” for Honda; they should develop their own engines through the learning from Honda’s knowledge. Otherwise, they may also form alliance with other car manufacturers, such as Kia, to improve their V6 engine technology.

• Weaknesses and Threats (WT)

Rover need to understand the market and analyze the strengths and weaknesses of different competitors. Then, they need to create a competitive advantage in order to stay strong in the market. Let’s say Rover and Honda had a little presence in the European market and were difficult for them to move forward, they should consider other markets or penetrates their well-established market like UK and US by increasing market shares from competitors through a comprehensive marketing strategies.

5.0 Analysis of Current Strategies Employed

Rover’s major problem was its poor reputation for quality. Undoubtedly, the strategy “joint venture with Honda” undertook by Rover’s management team was successful. Rover’s factories were not operating at an optimal level at that time and coincidentally, Honda was trying to enter European market but lack of financial resources, thus they have something for each other. The alliance is said to be successful, and many manufacturers were impressed with the outcome from Rover and Honda.

Assuming if the strategic alliance was not formed and they work separately, they may not be able to survive in UK and European market, especially for Rover. The joint operations, developments and sourcing for components keep Rover and Honda from competing with the giants of the motor world like Volkswagen, Ford and General Motors.

In the author’s viewpoint, Rover was only part of Honda’s “empire”. Not surprisingly, Honda will still able to compete in the automotive world even without Rover. Japanese car makers like Honda, for an example, have growth ambitions and they certainly did not come purposely to revive Rover’s business in 1978. In other words, Honda had achieved their objectives to establish in European market, thus alliance with Rover could only provide little benefit in going further, therefore this was also the main reason why Rover broke the alliance and sold to BMW (Zesiger, 2000).

6.0 Recommendations

6.1 Market development to China by Honda through strategic alliance with the local car manufacturers

Among a number of countries, not surprisingly, China is the countries that attracts global player due to its continued strong economic growth (Hsu, 2009). Honda was already a strong player in U.S. market and well established in UK and Europe, the author recommends that Honda may expand the size of their business to China or India markets.

• Suitability

According to Hays (2008), China’s automobile industry is attractive and there are still lots of growth potential. In addition, a large number of competitors are available in China’s market, through joint venture, Honda and the local manufacturer may develop innovative products from combined resources. Despite of the aforesaid growth opportunities, China does not suit Honda characteristics. To illustrate, Honda was famous with its high quality products, if they were to establish themselves in China; it is inevitable that they have to reduce their cost by lowering its product’s quality in order to stay competitive with other manufacturers.

• Acceptability

Since the break-up of alliance with Rover, Honda’s stakeholders, especially the management team and shareholders, would not take the risk of transfer of knowledge and know-how to its alliance partner, or potentially so-called “competitor”, like in the case of Rover. Customers may not attract to Honda due to non-competitive price. Honda had make a statement announcing that they will not follow what other car makers doing, to produce a low-cost vehicle for the customers.

• Feasibility

Based on the case study, Honda is not in the position of capable to expand their market at that time in financial term. It would be problematic for them to borrow to finance the expansion.

6.2 Market penetration in U.S. by Honda

Since Honda was not able to dominate and performing well in the UK and European market, due to their strong competitors like Volkswagen, Ford, General Motors, etc. Honda should adopt the strategy of market penetration in U.S. by gaining and increasing their market share in the automobile industry.

• Suitability

Honda had already well established in U.S. at all times. It does not make much difference to focus their business in U.S.

• Acceptability

Shareholders are more interested towards long term investment with higher returns.

• Feasibility

Market penetrating requires lower cost than expanding into new markets. Moreover, they already have experienced workers who able to create and manage the business in U.S.

6.3 Horizontal integration between Rover and Honda

• Suitability

Honda and Rover have been working closely and successfully throughout the years since 1979. Major collaborative projects, such as Rover 600, Honda Crossroad, CRV, and Land Rover have proven success through its sales performance. The furthering of the alliance gives them the access into growth opportunities in terms of products innovation and technology.

• Acceptability

Honda concerns third parties like BMW have the access into joint secrets, or Honda’s know-how and management style and systems. Through the merger and acquisition, these concerns would be dissolved as well.

• Feasibility

Honda does not have the money to acquire Rover.

6.4 Rover continues the alliance/agreement with Honda until Honda is financially capable to takeover Rover

The main reason Rover was sold to BMW because Honda does not have the sufficient to finance the acquisition costs. Based on the case analysis, Honda, undoubtedly commenting that they are interested to takeover Rover Group, but due to the limited resources, they weren’t able to do that, instead, they purchased 20 per cent stake in Rover as a sign of good faith and promise for long term.

• Suitability

Honda’s technology and product innovation and design along with Rover’s expertise in four-wheel-drives, there are possibility of synergies emanating from this alliance.

• Acceptability

As mentioned in the third recommendation, Honda does not have to worry that their joint secrets will be released to third parties if Rover is part of Honda, formal and officially.

• Feasibility

Honda will be able to afford the acquisition costs once they moved steadily into profits.

6.5 Rover may be sold to the British government

Rover Group was initially owned by the British government. They were unfavourable to the government due to years of loss making. However, since the alliance with Honda, they have regenerated a reputable image for high quality and were no longer regarded as a “loser”. Rover, with the financial and regulatory support from British government, there might be a possibility to dominate the automobile industry in UK.

• Suitability

There is a possibility which British government concerns that Rover Group will not be able to work independently without the assistance from their partner, Honda.

• Acceptability

Rover was fairly strong in the UK by 1980. Not surprisingly, Land Rover and other series of Rover’s car have been gradually accepted by the UK customers as it integrated the innovative design of Honda.

• Feasibility

Strong financial supports from British government make this strategy works even better.

7.0 Winning Strategy

Strategy Option (4): Rover continues the alliance/agreement with Honda until Honda is financially capable to takeover Rover

Based on the study of Rover and Honda, the author identifies the reason of the alliance broke was due to Rover had a sense of insecure and less confident in the automotive market in 1990s and Honda was not capable of acquiring them at the time BMW approach (Brady & Lorenz, 2005; Potter, 1996). The author suggested that Rover continues the existing alliance with Honda until Honda is financially capable to takeover and the merger and acquisition are expected to provide them a tremendous growth in the current market, UK and Europe.

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The company cultures of both companies were unexpectedly successful. It is a trust and relationships build through years of partnership, and it only applies to Rover. Once they have merged, they can develop new strategic plans which give their employees, a clearer objectives, missions, and visions. For example, as being under one group, they can have full access into both companies’ resources, know-how, and other skills available without any restrictions. They can share their distribution channels and penetrates the UK and European market (Harrison, 2001). China and India, although were attractive, unfortunately, it does not in line with Honda’s philosophy of producing high quality products for a good end user’s experience. To illustrate, in order to stay competitive in these markets, ones like Honda have to adjust their products in according with customer preferences, which is low cost and leading to low quality.

Land Rover and CRV were the successful proof for them to merge together. The author suggested that the merged company should invest in R&D to integrate both companies’ know-how (engine and four-wheel-drive technology) to create something differentiate with their competitors (Schill, Bertodo & McArthur, 2007). The joint relationship would probably bring benefits such as cost-cutting in terms of development, manufacture, and distribution. The “JIT” manufacture technique, along with the shared resources; enable them to become more effective and efficient.

It would not be wise for Honda-Rover to expand their market in the meantime until they are strong enough to compete with the multinational giants: Volkswagen, General Motors and so on (Contractor & Lorange, 2002). In the event if the merged synergies provide them a substantial increase in profits, they may employ strategies like sponsoring auto racing like Formula One. This will not only increase their reputation but also gaining worldwide exposure.

It is advisable that they should not forget of their core values and abilities. Honda’s strength in designing innovative and stylish cars, while Rover’s expertise in developing four-wheel-drive technology. Competitive advantage may be created by combining the strengths. BMW X5 is a very good example; it shows the sign of privilege, high class, and the same time also stylish and high performance and quality.

Aside from the strategic plans, it is also important for the management to deal with its internal forces. Rover and Honda may have been working closely together for years, however, since now that they are formally under a same group, HR (Human Resource) interventions are required to take place by standardizing its company policy, pay scale, and especially the training and development function (Lavie, 2009). Rover’s employees need to learn better of Honda’s manufacturing skills, leadership skills, total quality management and other so-called “secrets” techniques.