Global strategic management in the automobile industry: Case study of Honda

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Executive summary

 

This whole study surrounds the global strategic management using the automobile industry as the business environment and Honda’s case has been discussed repeatedly to answer questions in there major fields: managerial dichotomies, strategic impacts in merger and acquisitions (M&A) and corporate social responsibility (CSR). In the first part, the topic of managerial dichotomies in different strategy levels is discussed with reference to the Honda’s successful experiences. And in the second part of this study, strategic factors that influence the global M&A activities are analyzed with case analysis of the most recent and disputable mergers between Volvo and Chinese automobile manufacturer Geely and suggestions are also provided to the both parties in the merger to achieve a successful merger. And in the last part of the study the focus has been given to the topic of CSR about the impact of CSR practices in term of financial impact and non-financial impacts and a personal view on the advantages of Japan leadership model over the western style leadership in the Asian business environment is stated.

 

List of figures:

 

Figure 1.0 Configuration of revenue by business sectors in Honda Motor Co., Ltd.…5

Figure 2.0 The Compound Vortex Controlled Combustion (CVCC) engine………….7

Figure 3.0 Asian countries’ Geert Hofstede Cultural Dimensions……………………13

Figure 4.0 Japan’s Geert Hofstede Cultural Dimensions…………………………….14

Figure 5.0 Maslow’s hierarchy of needs……………………………………………..15

 

 

Content page

 

Executive summary………………………………………………………………………………………….. 1

List of figures:…………………………………………………………………………………………………. 2

Content page…………………………………………………………………………………………………… 3

  1. Question one: strategy & managerial dichotomies………………………………………….. 4

1.1      “Business level strategy” and “Corporate level strategy”………………………. 4

1.2      Reconciling dichotomies at Honda Motors………………………………………….. 6

  1. Question two: global mergers and acquisitions (M&A)…………………………………… 8

2.1      Too much debt and risk of bankruptcy………………………………………………… 9

2.2      Access to new technologies and emerging markets………………………………. 9

2.3      Potential for product synergies…………………………………………………………. 10

  1. Question three: corporate social responsibility & competitiveness………………….. 11

3.1      Impact of Corporate Social Responsibility (CSR)……………………………….. 11

3.1.1     Organizational performance in financial area…………………………….. 11

3.1.2     Organizational performance in non-financial area……………………… 12

3.2      Japanese and Western strategic leadership models………………………………. 13

3.2.1     Cultural background……………………………………………………………… 13

3.2.2     Employee commitment………………………………………………………….. 14

Reference list:……………………………………………………………………………………………….. 16

Appendix 1 Honda’s net sales by business in 2010…………………………………………….. 19

 

 

 

1.        Question one: strategy & managerial dichotomies

 

1.1     “Business level strategy” and “Corporate level strategy”

 

Corporate strategy is defined as the pattern of decisions that determines and reveals corporate objectives, purposes or goals, produces the principal policies and plans for achieving these goals (Andrews 1997). Business level strategy is defined as a series of targets and actions the firm uses to obtain competitive advantages by developing core competencies in a particular business markets (Unknown 2009). The scales of strategy that business level strategy and corporate level strategy focus are different: corporate strategy functions is to determine the ranges of business that a company will operate while the business strategy will define strategies and goals that the company will adopt in a particular business to compete with the industrial competitors. Speaking from the goal of the strategies, corporate level strategy deals with the value creation for the whole company while the business level strategy deals with competitiveness creation to achieve the corporate target. In order to achieve these goal, in term of content corporate strategies usually concern with the subjects such as corporate mission, vision, structure and so on while business level strategies deal with subjects such as battle plan to product positioning and strategic partnership. Despite the differences that these two level of strategies have, empirical researches have proved the importance of both business level strategy and corporate level strategy in determining the financial performance of the company (Beard 1981).

 

 

 

Figure 1.0 Configuration of revenue by business sectors in Honda Motor Co., Ltd (Resource: Annual Report 2010, sees Appendix 1.0)

 

As shown in Figure 1.0, Honda has been investment in four major business: motorcycle business which marked the raise of Honda at the beginning of its business; automobile business which currently dominate the major revenue of the company symbolize the company in the world; power product business represent the company’s corporate strategies in attempting to seize the future trend of the businesses in which the company can develop its products and financial services business which was set up to finance the business activities such as leasing and lending service to support the sale of the automobile and motorcycles. The corporate strategy that Honda had made to step into the automobile industry in the early 1960s after it had become largest motorcycle manufacturer in 1955 domestically and the world’s largest in 1960 (Freyssenet, Mair, Shimizu & Volpato 1998, p110) prove to be a successful step which should also thanks to its basic product concept and business model to compete in the motorcycle industry that formed within the business strategy. What’s more with the excellent businesses coordination between different businesses that Honda operates as the two businesses share similar products and process technologies especially its engine technology, Honda excelled its corporate goals continually by combining the corporate and business level strategies.

 

1.2    Reconciling dichotomies at Honda Motors

 

The uniqueness of Honda model sources greatly from its innovative idea in dichotomy reconciliations. The content of dichotomy reconciliations refers to the utilization of a pair of contrasting business concepts in various fields such as corporate structure, marketing and management styles and make the two poles such as individual versus group compatible to each other to some extent to achieve more benefit to the company more than the use of either extreme pole.

 

Take the dichotomy of product-related core competencies versus process-related core capabilities in Honda’s automobile industry as an example, Honda obtains its competitive advantages both from advanced product technology and product process development. The most eminent core product of Honda is the development of its innovative internal combustion engines, the fundamental technology that most of its businesses are based on. Before the breakthrough that Honda made in low emission engines, it was believed that there was a trade-off among the different pollutants exhaled by the engine which means that attempts aiming to reducing one of these pollutants will cause the increases of other pollutants which renders the effort to develop a cleaner engine obsolete (Fuller & Pitt 1996). And thus the only way to reduce the emission was said to add the after-burning cleaning appliance to further collect the detrimental gas using chemical ways. The Honda engineers refused to accept such pessimistic theory and insisted in avoiding the pollutions before they are generated within the internal combustion process in the engines, after three years’ research and development effort, in the late 1972 the some called Compound Vortex Controlled Combustion (CVCC) engines proved to be a immediate success especially when the vehicle equipped with the CVCC engine become the first car to pass the 1975 emissions requirements of the 1970 Clean Air Act (Honda official website 2010). Another tradeoff between performance and economy of engines was also beat down by Honda’s later development of VTEC engines which through the adjustment of fuel and air input according to the driving conditions keep economy while maintaining the power of the engines.

Figure 2.0 The Compound Vortex Controlled Combustion (CVCC) engine (source: Honda official website 2010)

 

In Honda, focus is not only attributed to the technology innovation that brings core product competencies such as the development of CVCC engines but effort is also contributed to the building of competencies in the process. In the product development process, Honda is famous for its sheer speed which thanks to its effort to minimize the development lead time with average only 2 years from R&D to manufacturing while major western competitors still spend about triple time on this process. The product development process was speeded up under the leadership of Honda SED which represent the three major divisions of Honda: Sales, Engineering and Development. With the help from various specialists from not only these three departments but also from manufacturing and business finance with functional expertise, the SED team managed to communicate the new market trends within all the departments and generate and put the new concept into practice in a short period time. What’s more, the innovative automobile replacement model invented by Honda to carry out partial redesign of the some components of the car models time by time rather than spending a long period in preparing a totally new model has put Honda in a more advantageous place in competing with other rivals by speeding up the process from new car conception to production (Hartley, 1992).

 

Besides the product-related core competencies versus process-related core capabilities dichotomy, Honda also creates its innovative strategic management system by reconciling key dichotomies such as planning versus learning and market positioning versus development internal resources. But lies behind these aggressive actions is the company’s corporate strategic goal to offer new value to its customers (Annual Report 2010) and challenging spirit that deeply embedded in the corporate culture.

 

2.        Question two: global mergers and acquisitions (M&A)

 

With the ongoing global economy downturn, the dwindling auto market has put many companies in the automobile industry in a hard time and turn the previously sale growth into overcapacity and at the same time the world is witnessing a trend of increasing global mergers and acquisitions especially those world class auto manufactures. According to the recent 11th Annual Global Automotive Survey participated by 200 senior executives from various automobile manufacturers and suppliers, besides that 40 percent participants predict a stable profit and 33 percent predict a decline profit, about 75 percent of them anticipate a raise of the number of mergers and acquisitions (M&A) in the next five years term due to the shrink of market. And in term of the reasons for the increase of M&A activities 89 percent of them attribute the reasons to the “too much debt and risk and bankruptcy”, and 84 percent attribute to the new technology, 83 percent agree with the reason of potential for product synergy and 82 percent consider the new market share as one of the driving forces (KPMG 2010). Below focus will be given to the three major factors that allegedly will lead to M&A and how they will influence the M&A process.

 

2.1    Too much debt and risk of bankruptcy

 

Within the most recent merger involving world class auto manufacturer Ford and a relatively small Chinese counterpart Geely, Geely brought the eminent Swedish origin brand Volvo from Ford USD 1.8 billion which has lost USD 2.6 billion during the past two years (Welch 2010). A force bankruptcy of General Motor had sent a warning message to Ford who even though refused to accept bailout had been put under dubious voices about its profitability and sustainability. Driven by Volvo’s large debt, Ford was said to be more eager to see this merger happen than Geely did. To Ford, this merger will inject enough of cash to concentrate on its domestic business and avoid the destiny of being bailed out. This is also a strategic move to focus on the core business in term of recession.

 

2.2    Access to new technologies and emerging markets

 

In the merger between Volvo and its Chinese counterpart, Geely, Volvo’s technology advantage seems to be the most attractive for Geely to take over the large debts. Geely has Volvo as the windows to extend its business into Europe, but it judged from the declaration from Geely’s CEO, Li Shufu, that most important goal will be to build up a Volvo manufacturing center in China, and the two brand will be operating separately (Yao 2010), and so most important target in this merger seems to be the transfer to technology which is desired very much by the Chinese auto manufacture. Irrespective about the ownership issue, Volvo as a brand also earn the chance to be a local auto manufacturer in the world’s fastest growing and emerging auto market.

 

2.3    Potential for product synergies

 

As just mentioned, Geely has treat the merger as a way to obtain advanced technology and run the two brand as two separate business divisions, then the building of network level strategy and product synergies will be critical to the success of the merger. Such importance has been proved by a lot of merger failures such as the merger between Daimler and Chrysler, and regarding the reason of the failure of Daimler and Chrysler merger, despite the most talked about underestimated culture difference, the product synergy is one of the major issues as the two brand images under different corporate structure, corporate value. So to Geely, if it decide not to integrate the core business of these brands, the logically product synergy will not be obvious and thus could become a major driving force that lead to the possible failure of the merger. In my personal perspective inspired by the theory of embedded organization which upholds the importance of network level strategy, if the cultural integration may more hard to achieve, then product synergies should be the way lead to a breakthrough in Geely and Volvo’s merger. Firstly, trust between the employees of the two divisions should be built; secondly, core products of Volvo should be maintain and further developed which the close to core process could be transferred to Geely manufacturing centers to build up product synergies. By building up network level strategy between Geely and Volvo, like the strategic alliance relations between Honda’s its major suppliers, would be a way lead to the success of the merger.

 

 

 

3.        Question three: corporate social responsibility & competitiveness

 

According to the Takanobu Ito, corporate social responsibility is described as evaluating all the activities from the stakeholders’ perspective to contribute to a sustainable society (Honda official website 2009) which is deeply embedded in the Honda’s philosophy. And the original corporate belief like Honda has does bring competitiveness to the company in lot of fields which will be analyzed below.

 

3.1    Impact of Corporate Social Responsibility (CSR)

 

3.1.1            Organizational performance in financial area

 

In a consumer attitude survey in the automobile industry participated by 1058 consumers, low emission and energy consumption car models such as hybrids are receiving more concern and a preference to those with a good reputation as being socially responsible (Synovate Motoresearch 2009). This has demonstrated the close relation between the sale and corporate social responsibility (CSR) practices. CSR functions through the influence to the decision making process, and in this point Toyota has recently about USD 2 billion to make a example in the recent recall event regarding the safety scandal. In the past ten years, with the fast expansion of Toyota especially in the north America market, Toyota’s decision to focus too much on the growth in the cost of quality control one hand push it into the world’s no.1 auto manufacturer but also pave the way to the difficulties that it faces today. While the defects that will lead to the stick of the gas pedal and uncontrolled acceleration were found in several of its car models, Toyota had been forced to recall the problematic vehicles in a global scale which will cause Toyota approximately USD 2 billion (Popper & Hirsch 2010) and face an expected decline in its financial performance due to the fall in the sales.

 

3.1.2            Organizational performance in non-financial area

 

Firstly, a company’s corporate and social responsibility practices could influences over its reputation. This argument has been proved by Capriotti and Moreno (2007) ’s study implying that in the perspective of the major citizens, companies’ reputations are influenced by the companies’ social and environmental responsibilities. And provided that reputation takes long term to build up but falls easily, a bad CSR practice could be fatal to the company’s reputation.

 

Secondly, good CSR practices could be used to attract quality talents. According to the signaling theory (Albinger & Freeman 2000) which suggests that because most of the job seekers do not possess the necessary comprehensive information about the employers, they tend to interpret the employers through “signals” they have to imagine the internal environment and working conditions they will received in the companies. And the companies’ polices involving the stakeholders will create signals to the potential job applicants.

 

Thirdly, good CSR practices could help build up good community relations. Business as big as automobile production or supply could involve a large number of employees the majority of which need to be obtained from the local talents which makes relations between the company and the local communities of great importance. If the auto manufactures do not put enough of contribution into the local society and environment protections but instead keep polluting and extracting human and nature resources from the local communities without trying to adopt cleaner manufacturing processes, a tension local community relationship could happen which could lead to disastrous result such as a strike.

 

 

 

3.2    Japanese and Western strategic leadership models

 

If there should be a pragmatic evaluation over the a leadership mode, then it should be a leadership models that is analyzed based on particular company under situational corporate culture, structure and other necessary factor and also need to take into the particular social and culture factors that surround the company. So theoretically there is no one best leadership model that could be specially indentified. But base on my personal experience as a Chinese and my vision about the future leadership features, I would choose the Japanese model rather than the classical western style leadership model which are both shown in the Table 5 in the Honda case study. In my opinion, the Japan’s leadership model is more effective than the western model in the Asian business environment for the following reasons:

 

3.2.1            Cultural background

 

Figure 3.0 Asian countries’ Geert Hofstede Cultural Dimensions

(Source: geert-hofstede.com)

Figure 4.0 Japan’s Geert Hofstede Cultural Dimensions (Source: geert-hofstede.com)

 

According to the figures shown above, as analyzed under the Hofstede five cultural dimensions, Japan has moderate degree individualism (IDV) while the Asian’s average is even less than Japan’s IDV level. This IDV cultural dimension scores suggest that Asian countries are generally more group oriented rather than individual oriented which is considered to be more popular in the western culture. Under this situation, the more relationship oriented and group as responsible organizational structure of Japanese leadership model will be more suitable than the western management model. Moreover, in other four culture dimensions, Japan also share similar trends with the Asian average level which will enhance the viability of the Japanese model in the Asian business environments.

 

3.2.2            Employee commitment

 

Under the typical Japanese leadership model, the group decision making process that encourage employees to play their role in the decision making, such employees involvement will increase job satisfaction in the work place and satisfy the higher need of employees such as aesthetic needs and the need to know, such satisfaction also sources from the leaders’ personal relationship and care with the employees.

Figure 5.0 Maslow’s hierarchy of needs

 

This rational also explain the fact why there will be a unique life-time employment in Japan that seems to be inefficient in the classical western motivations theories. While the monetary incentives become less effective with the development of the economy worldwide, the Japanese leadership model that focus on the relationships could be an effective way to increase the employee commitment with a lower cost.

 

 

 

 

3.3

Reference list:

 

Albinger, S. & Freeman, S.J. 2000, Corporate social performance and attractiveness as an employer to different job seeking populations, Journal of business ethics, Vol. 28 no 3, pp. 243-253

 

Andrews, K. R. 1997, Resources, firms, and strategies: a reader in the resource-based perspective, Oxford University Press, New York, p52

 

Beard, W. B. 1981, Corporate-Level Strategy, Business-Level Strategy, and Firm Performance, Academy of Management Journal, 1981 Vol. 24, No. 4, 633-688

 

Capriotti, P. & Moreno, A. 2007, Communicating corporate responsibility through corporate web sites in Spain, Corporate communications: an international journal, Vol.12 no 3, pp. 221-237

 

Fuller, C. B. & Pitt, M. 1996, Strategic innovation: An international casebook, Routledge, London, pp.435-61

 

Freyssenet, M., Mair, A., Shimizu, K. & Volpato, G. 1998, One best way?: Trajectories and industrial models of the world’s automobile producers, Oxford University Press, New York, p110

 

Annual report 2010, Honda Annual Report 2010,  accessed on 15th Sep 2010 [online] available: http://world.honda.com/investors/annualreport/2010/

 

Honda official website 2009, Message from the president and CEO,  accessed on 15th Sep 2010, [online] available: http://world.honda.com/CSR/philosophy/top-message/index.html

 

Honda official website 2010, Developing an Engine with a Prechamber, accessed on 15th Sep 2010, [online] available: http://world.honda.com/history/challenge/1972introducingthecvcc/photo04/index.html

 

Hartley, J. R., 1992, Concurrent Engineering: Shortening Lead Times, Raising Quality, and Lowering Costs, Productivity Press, Portland, Oregon

 

KPMG 2010, Mergers & Acquisitions, accessed on 13th Sep 2010, [online] available: http://mergers-and-acquisitions.verticalnews.com/articles/3050605.html

 

Popper, N & Hirsch, J. 2010, Toyota says recalls will cost the company about $2 billion, accessed on 13th Sep 2010, [online] available: http://articles.latimes.com/2010/feb/04/business/la-fi-toyota-profit5-2010feb05

 

Synovate Motoresearch 2009, New research shows social responsibility key to attracting and retaining car buyers in a troubled economy, accessed on 13th Sep 2010, [online] available: http://www.synovate.com/news/article/2009/04/new-research-shows-social-responsibility-key-to-attracting-and-retaining-car-buyers-in-a-troubled-economy.html

 

Unknown 2009, Business-Level Strategy, accessed on 13th Sep 2010, [online] available: http://www.wiziq.com/tutorial/379-Business-Level-Strategy

 

Yao, Y. 2010, 李书福:吉利、沃尔沃”兄弟”要保持各自品牌优势 (Li Shufu: Geely and Volvo need to keep its own brand advantage), accessed on 13th Sep 2010, [online] available: http://auto.ce.cn/xwzx/201008/08/t20100808_20454847.shtml

 

Welch, D. 2010, Geely buys Volvo. Believe it or not, it could work, accessed on 13th Sep 2010, [online] available:http://www.businessweek.com/autos/autobeat/archives/2010/03/geely_buys_volvo_believe_it_or_not_it_could_work.html

 

 

Appendix 1 Honda’s net sales by business in 2010

(Source: Annual Report 2010)