The successes of Honda in overcoming the crisis

For much of the past decade until 2007, the global auto industry experienced a boom. There was an unprecedented demand for automobiles as consumers had more disposable income and an appetite for cars. However, the good times did not last forever. In 2008, the industry was jolted by its worst ever crisis in memory. This was mainly triggered by the global economic recession, but other factors played a role as well. Consequently, many car makers suffered from declining sales and large losses. What went wrong and how did the automobile industry bounce back? These are some of the issues that will be examined by this report. Also, the report focuses on the successes of Honda in overcoming the crisis.

2.0 LIMITATIONS OF THE REPORT

There are two main sources of data for any research. They are primary data and secondary data. Primary data is obtained by the researcher through questionnaires, interviews and so on. Secondary data is the reliance of preexisting data for research. Due to the lack of time and limited scope of this study, the researcher relied entirely on secondary data. The problem with using secondary data is that it might not be exactly suited for the needs of the research. This is the major limitation of the report.

3.0 SCOPE OF THE REPORT

This report examines a few critical areas which are:

3.1 Critically evaluating the global auto industry in the three most recent years

3.2 Analyzing and comparing the strategies used by key players

3.3 Critically reviewing the leadership styles of key players

3.4 Examining the extent of CSR in the auto industry

4.0 BRIEF OVERVIEW OF THE GLOBAL AUTO INDUSTRY

The global automobile industry is very competitive and fragmented. The consumer is virtually spoilt for choice as there are automobiles to cater for every taste and budget. However, this is not good news for car makers as they have to position themselves in creative ways. As of March 2010, the top three global auto makers are Toyota, General Motors and Volkswagon. Even though Toyota’s image is somewhat tarnished by the recent car recall scandal, it still commands a strong lead over the rest. Since the crisis of 2008 to 2009, we see signs of improvement as car sales are increasing. Yet, there is much turbulence ahead and the industry may still experience some shocks in future.

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5.0 APPLICATION OF THE STRATEGIES

5.1 Business Level Strategy versus Corporate Level Strategy

Business level strategy is defined as an organizational strategy that seeks to determine how an organization should compete in each of its businesses (Robbin and Coulter, 2005). In contrast, corporate level strategy is an organizational strategy that seeks to determine what business a company should be or wants to be.

At the heart of business level strategy is the role of competitive advantage. This is what sets a company apart from its competitors and gives it a distinct edge. Sustaining competitive advantage will be based on the interplay of the five forces in an industry. According to Porter (1990), these five forces are the threat of new entrants, the threat of substitutes, the bargaining power of buyers, the bargaining power of suppliers and rivalry among firms. By performing an industrial and internal analysis, a firm can then identify its competitive advantages so that it can pursue the right strategy.

There are a few major business level strategies. The first is cost leadership in which the company becomes the lowest cost producer in the industry. This requires a tight cost structure and incentives systems based on meeting strict quantitative targets (Griffin and Putsay, 2007). A differentiation strategy is where a firm offers unique products that are prized by customers. This requires good R&D and the recruitment of highly skilled and talented employees. The third business level strategy is the focus strategy. Here, the firm pursues a cost or differentiation advantage in a narrow segment of an industry. Finally, some firms have no strategic advantage. Termed “stuck in the middle” by Porter (1990), they are firms which are unsuccessful at developing competitive advantage as a cost leader or through differentiation. Such firms find it difficult to achieve long term success.

A company has three major corporate level strategies. They are growth, stability and renewal (Dess et al, 2008). The growth strategy is employed to increase the company’s business by expanding the number of products that are offered or the markets they serve. This strategy is employed so that the company can increase its sales, market share or the number of employees. Companies grow in a number of ways, for instance through concentration, horizontal integration, vertical integration or diversification.

A stability strategy is a strategy at corporate level that is characterized by an absence of major changes. This means the company may serve the same customers, maintain its market share and return on investment (David, 2009). While this may seem very odd and contrary to a business’s goals, it should be remembered that some companies are stretched to the limit and any further expansion will take its toll on limited resources. Similarly, some industries are in a stage of low or no growth so trying to grow is an exercise in futility.

A renewal strategy is a corporate level strategy that is designed to address organizational weaknesses that are leading to declining performance (Lynch, 2006). Generally, there are two renewal strategies. The first is retrenchment strategies, which are short run renewal strategies used in situations when performance problems are minor. In contrast, a turnaround strategy is used when the company faces serious performance problems and it needs to be completely overhauled.

5.2 The Managing Dichotomies by Honda Motors

Honda is unique in the sense it is unconventional in its strategic management (or at least according to Western concepts of strategic management). According to Western strategic management theories, it is assumed that there is a trade off when one of two mutually exclusive options is chosen instead of another based on the competing forces in existence. This is referred to as reconciling dichotomies. Honda has repeatedly shattered this notion as can be seen in one of its dichotomies, which is the product related core competencies versus process related core competencies.

A core competency is defined as an internal capability that is vital to a company’s strategy (Porter, 1990). Honda is famous for its core competencies, especially its engine. Called the compound vortex controlled combustion (CVCC) engine, it was a breakthrough in engineering. The problem with engines up to then was that pollutants would be formed from internal combustion engines. Attempts to eliminate one pollutant invariably led to the proliferation of another and it was assumed that nothing could be done about it. Honda refused to accept the status quo and came up with an ingenious and at that time unorthodox solution. It came up with an internal catalytic converter in the engine that removed all pollutants after combustion, an idea that is now used in most engines. In this respect, Honda showed its ability to reconcile the concept of design and function. This ability endows the firm with a competitive advantage.

Similarly, Honda is able to achieve process related competency in terms of the time it takes in new product development. Generally, Western auto makers require at least five years to design and produce a new car model. Other Japanese companies require at least three years to do so but Honda can do it two years. How this is done is based on the company’s right the first time concept. Accordingly, activities or processes must be error free so that time on subsequent tasks is not wasted rectifying mistakes in earlier processes. Furthermore, this represents an opportunity cost and an operating cost for the company. When costs are lower, profit margins become higher and the company has the luxury of lowering its selling prices so that they are priced more cheaply than rival products. The right the first time approach translates into better inventory control and further cost savings.

Honda approaches new product development by employing SED teams who work on a project from start to finish. Honda also has a specific model replacement system in which all parts of each model are systematically phased out and replaced in four years. Consequently, the company is able to shift from one product to another seamlessly and with few glitches.

6.0 THE RULES OF MERGERS AND ACQUISITIONS

6.1 Brief Explanation

In recent years, buying existing businesses in their entirety has become a very popular way of investing. In practice, this type of investment is typically effected by one firm (the bidder) buying sufficient ordinary shares in the other firm (the target) to be able to exercise control or even to have complete ownership. Yet, there is some confusion about the terms ‘mergers’ and ‘acquisitions’. Where two firms are of similar size and there is an agreement between the two sets of management as to the desirability of the outcome, then it tends to be referred to as a merger (Lynch, 2006). Otherwise, the term acquisition tends to be used.

6.2 Analysis

Theoretically, a firm will become a bidder when it sees an opportunity to make an investment with a positive incremental net present value. It is likely to perceive such an opportunity in either one of the following situations. One, where it considers that the incremental cash flow from the investment when discounted at a rate consistent with the level of risk associated with the cash flow are positive or two, where the reduction in the level of risk associated with the bidder’s existing cash flows causes the appropriate rate for discounting those cash flows to fall, thus increasing the net present value of the existing cash flows of the bidder (Ross et al, 2007).

6.2.1 Too Much Debt and the Risk of Bankruptcy

A risk when acquiring another firm is in terms of financing. If a company has excess surplus cash then this would not be a problem. However, some firms finance their acquisitions through the issue of debt. Debentures have their part to play but have serious disadvantages from both viewpoints. They create binding contractual obligations on the bidder both as regards to interest and capital repayment (McLaney, 2001). To the equity holder of the target, they represent a distinct change of investment, a change to a risk/ return profile which they may find unacceptable. Switching back to equities would involve them inconvenience and cost. Hence, a company may find itself with too much debt and this would increase the risk of bankruptcy, especially when the merger is a failure and drains the company’s cash.

6.2.2 Potential for Product Synergies

There are many reasons why a firm may want to buy over another. One of them is synergy. In theory, mergers can bring real benefits to shareholders due to genuine increases in positive cash flows or risk reduction. These benefits are often referred to as arising from synergy, a ‘two plus two equals five’ syndrome with the whole being greater than the sum of the parts (McLaney, 2001).

Another reason for mergers and acquisitions is risk spreading and reduction through diversification. Merging two firms with different activities will reduce risk since the returns from the different activities are unlikely to be perfectly positively correlated with one another. Though this fact is frequently put forward as the justification for such mergers, in the context of maximization of shareholder wealth, it is invalid in itself. This is because such diversification could be undertaken by individual shareholders at little or no cost. Their wealth will not be increased by having this done for them, because the security market prices seem to assume that such diversification will already have taken place (Ross et al, 2007). This could create conflicts between shareholders and management.

6.2.3 Access to New Technologies and Emerging Markets

A third reason for mergers and acquisitions are access to new technologies and emerging markets. Furthermore, they result in the economies of scale that a larger business could yield. Such economies may be in a wide variety of areas. For example, a larger buying power may lead to lower prices being paid for raw materials, larger production runs may become possible leading to savings in the setup costs and other overheads (Rugman and Hodgetts, 1995). Combining administration and accounting activities may lead to savings in the associated costs. The effects of these would tend to decrease total cash outflows. In addition, the firm would also stand to gain access to new technologies and emerging markets through diversification.

7.0 THE RULES OF CSR

7.1 Brief Introduction

Corporate responsibility refers to the set of obligations the organization undertakes to protect and enhance the society in which it functions (Griffin and Pustay, 2007). There are three broad areas of corporate responsibility which are organizational stakeholders, the natural environment and general social welfare. Corporate responsibility is directed towards organizational stakeholders because these are the people and organizations that are directly affected by the practices of an organization and that have a stake in its performance. Most companies that strive to be responsible to their stakeholders focus on three main groups which are employees, customers and investors. Other stakeholders may then be selected based on their relevance or importance to the organization and the company tries to address their needs and expectations too.

7.2 Analysis

The stakeholder theory considers the impact of expectations of the different stakeholder groups to determine corporate responsibility. This is expressed by Drucker in his views on business ethics in that management is ultimately responsible to itself and society at large. These sentiments were re-echoed later by Freeman (1984, cited in Enquist et al, 2006) who said it was not just a matter of social responsibility or business ethics, but ultimately the very survival of the company hinges on it. Stakeholders are ‘groups from whom the organization has voluntarily accepted benefits, and to whom the organization has therefore incurred obligations of fairness’ (Galbreath, 2009). A firm’s traditional stakeholders are its shareholders, employees, creditors, customers and the government. However, the scope has been expanded in recent years to include non-governmental organizations and the community as a whole.

Over the last three decades, we have witnessed a fundamental shift from the classical view of corporate responsibility to the socioeconomic view. This is the view that management’s corporate responsibility transcends merely making profits but also encompasses protecting and improving the welfare of society. This position is based on the conviction that companies are not independent entities responsible only to shareholders. They also have a responsibility to the society at large that allows their creation through various laws and regulations and supports them by purchasing their products and services. In addition, supporters of this view believe that business organizations are not just merely economic institutions. Society expects and even encourages businesses to become involved in social, political and legal issues.

Corporate responsibility is utilized as a management tool for managing the information needs of the various powerful stakeholder groups and managers use corporate responsibility to manage or influence the most powerful stakeholders in order to gain their support which is vital for survival (Freeman et al, 2001, cited in Gyves and O’Higgins, 2008). The key issue here is identifying the concerns of the various stakeholder groups which are often different, and how to satisfy them (Harrison and Freeman, 1999). Hence, the corporation is driven to act in a more ethical manner to avoid antagonizing powerful stakeholders. Scholars have cited five major strategic responses to institutional pressure for corporate responsibility, which range from the timid to the hostile. The first strategy is to acquiesce, which is to accept corporate responsibility values, norms and rules for the organization. The second approach is to compromise by partially conforming to corporate responsibility requirements while modifying it to suit organizational needs. The third strategy is to avoid or resist all corporate responsibility initiatives while the fourth method is a more active form of resistance to corporate responsibility initiatives through outright defiance. The final approach is by manipulation, which is by attempting to change global corporate responsibility standards. As can be expected, the last approach can only be employed by the largest and most powerful corporations.

Proponents of corporate responsibility argue that it brings numerous benefits. The most commonly cited benefits are increased profit; access to capital from socially responsible investment; reduced operating costs/increased operational efficiency from product/process offsets (Tench et al, 2007); enhanced brand image and reputation; increased sales and customer loyalty; increased productivity; increased ability to attract and retain employees; potential reduced regulatory oversight; reducing and managing risk; distinction vis-à-vis competitors (Gyves and O’Higgins, 2008).

7.3 The Future of CSR

Once viewed as unnecessary window dressing, CSR has now become a respectable component of many auto firms’ activities. Companies such as Honda, Toyota and Chrysler all demonstrate strong commitment towards CSR activities and other companies are spurred on to follow suit. It is obvious that CSR is a means to achieving competitive advantage and as the public becomes more socially aware and environmentally conscious, CSR among auto companies can only rise.

8.0 LEADERSHIP

8.1 Brief Description

Leadership is the process of influencing a group towards the achievement of goals. Leadership is complex and intangible in nature. Good leaders are essential to the success of any organization but it is often difficult to identify the traits that make a good leader. Strategic leadership models refer to the leadership styles that contribute to organizational greatness. There are two broad categories of strategic leadership models – the Western model and the Japanese model.

8.2 Analysis

There are some similarities between the Western and Japanese strategic management models. For example, both use task oriented and relationship oriented models and there are striking differences in the way many individual executives run their companies. Yet, because the West (for instance America) and Japan have different histories, cultures and values, it comes as no surprise that there are differences in strategic management.

The attitude towards work processes differ in both approaches. Western factory workers are little more than human robots who must conform to the strictest operating procedures. In contrast, Japanese factory workers are given greater freedom and trust to perform the task the best way they can as employees are considered to have the best knowledge about how to do their work, not management.

Both Western and Japanese organizations have vertical structures, though Japanese firms have a flatter structure (Robbins and Coulter, 2005). Western business leaders typically have no concern about their subordinates, while Japanese leaders try to cultivate good relationships with their staff. Japanese leaders are more friendly and caring and do not like to shame employees in public. Employees are treated with respect and trust, which is in tune with Eastern philosophies of maintaining public harmony. In Western companies, each worker is responsible for a narrow range of tasks. In contrast, Japanese employees work in groups and there is collective decision making.

As a result, labour relations differ under both models. Western factories are highly unionized and there is often a bitter relationship between line workers and top management. Employees fight for better working conditions while employers try to keep labour costs low by trimming perks. In contrast, Japanese firms are characterized by providing ‘a rice bowl for life’ which is an appealing concept in an era where job uncertainty is prevalent. In doing so, Japanese firms actually cause their employees to work harder so as not to betray the trust and faith the employer has in them.

Industry organizations are also different. Western firms are separate from one another. Inter firm relations are distant. In contrast, in Japan there is a prevalence of Keiretsu families. Kiretsus are massive, vertically integrated corporations in Japan (Rugman and Hodgetts, 1995). There are three main types of kieretsus: banks, manufacturing companies and industrial companies. Toyota is an example of a manufacturing keiretsu. Kieretsus are so powerful that they often provide all of their own financing and operating needs from internal sources. Keiretsus have close inter-firm relations.

The Future

Strategic leadership is fluid and ever changing. What is acceptable and works in one context may not be feasible in another. In my opinion, though, the Japanese model is better. This method is better in motivating employees to work harder and do their best. Consequently, employees are more committed and have better job satisfaction. This is ultimately beneficial for the firm because employees are its main asset. A harmonious and happy workplace is more conducive to achieve better results than an environment where workers are constantly stressed and depressed. Therefore, I feel that I would adopt the Japanese approach if I were to run a company in future.

9.0 CONCLUSION

Honda Motors is an excellent company with a bright future. Owing to a combination of factors such as effective leadership, good corporate culture and a dedicated workforce, the company is able to build and sustain competitive advantage that will serve it well for years to come. The recent automobile industry crisis has been a test for the industry players and Honda has passed with flying colours.