International Business Strategy - Assignment Example

Order 140782 Topic: International Business Strategy Introduction The paper seeks to analyse and discuss an article ‘All Strategy is Local’ by Bruce Greenwald and Judd Kahn and, more generally, the concept of competitive advantage through the investigation of Honda Motors of Japan. This paper answers three questions in relation to competitive advantage concepts, theories and applications. Questions and Answers a) With reference to the theory discussed in class and presented in the article, outline the concept of competitive advantage and explain why, according to the article, a firm’s main competitive advantage stems mainly from ‘local’ strategies [maximum 600 words] [30 marks] A firm’s main competitive advantages mainly stem from ‘local’ strategies because the smaller the area where market is targeted, the easier it is to limit or subscribe some of the controllable parameters by creating barriers to entry for competitors. This is confirmed by Greenwald and Kahn (2005) when they said that “Barriers to entry are easier to maintain in sharply circumscribed markets. Only within such confines can one or several firms hope to dominate their rivals and earn superior returns on their invested capital. When competition is global in scope, the need to circumscribe the competitive arena is even greater.” This simply means that adopting ‘local’ strategies will allow the company to conquer first the local market by building good market share that will afford to have economies of scale, which in a sense will sustain its long term profitability and which will discourage new competitors in entering the same kind on industry. It is easier to control parameters locally because the firm is in a position to know the market or type of customers who may need their products or service on the basis of culture. Just like in some competitive sports, the company who has known his market will simply have the home court advantage. Building market share to be leader with in the industry or a certain strategic group (Porter, 1980) of competitors within the industry is a requirement. This is the reason Greenwald and Kahn (2005) said argued, “ That is why Jack Welch, instead of just setting revenue and growth targets, insisted the only markets in which GE would do business were ones where it could be first or second.” Competitive advantage is taken to mean barriers to entry. The author of ‘local’ strategies presupposes ease of circumscribing or limiting in one’s local territories than abroad. Having a competitive advantage allow the company to gain better profitability better than competitors, hence a company could set a premium price higher than competitors that could still help the company in further improving economies of scale, which means lower cost and better long-term profitability. Having premium price could eventually lead to market leadership. In explaining the need to have market leadership, Greenwald and Kahn’s (2005) said, “Sustainable dominance is more likely in markets of restricted size. It is paradoxical but true that economies of scale are subject to scale limitations themselves. First of all, economies of scale require levels of production above a certain size. Such scale is easier to attain in large markets.” The authors meant that economies of scale have a corresponding size of production depending on the amount of cost associated with production. The meaning of certain size of production appears to connote measurability and it could not just be simply attained by going global with out conquering local market because cost could increase in going global without attaining the objective of lower cost advantage. Greenwald and Kahn’s (2005) must be right in arguing that past a certain point, however, economies of scale cease being commensurate with continued increases in quantity. After the desired level of production which is more controllable locally, the same authors said the firms become subject to diminishing returns, disadvantaging a larger competitor. Hence, Greenwald and Kahn’s (2005) further argued, “ In a restricted market, by contrast, economies of scale are much more difficult for a new entrant to achieve because it may have to capture 20 per cent to 25 per cent of the market, a difficult threshold to reach when each incremental gain comes out of the incumbents existing share. But unless the new entrant reaches those levels, its economies will not come close to paralleling the incumbents.” The principle of more control in restricted size stands to reason since as one expands the market variables of the ‘equation’ expands too which may be more difficult to address. Going global for example may force company to know the other countries culture and other macroeconomic variables like their interest rate, currency exchange rates, inflation rates and others. Doing business locally may not burden at all the companies and a more restricted market allows a focus on its strategies. The ease of circumscribing local market has also something to do with the size of the market. A new entrant will find it difficult to come in within the industry where there are already competitive advantages of the incumbents because one needs to have wider or bigger market share. To do that and to dislodge the incumbents will really be difficult for the new entrants. Hence it is but logical that going global is allowing the competitor to attain competitive advantage. For new entrant also to build economies of scale would be very difficult because to capture 20 per cent to 25 per cent of the market, is a big and hard threshold to reach. For the new entrant to do that a major issue as to the name of incumbents must really be put in issue to customers. New entrant must beat the net margin of the incumbent and if the new entrant has not even developed its own local market in its home country, it would be placed in devastating defeat. To parallel the economies of scale of the incumbent by the new entrant would be very difficult especially if the market is nearing maturity or perfect competitions markets. This would happen because of the barrier. It is also easier to control a smaller area rather than going globalization because of the closer applicability of decentralization as it is easier to implement in local operation. Greenwald and Kahn (2005) confirm this when they said: “Coping with either regional differences or an unwieldy range of offerings puts heavy demands on any companys management. The more local a companys strategies are, the better the execution tends to be. Localism facilities decentralization - and since the days of Alfred Sloan, decentralized management has consistently served as a superior structure for concentrating management attention.” b.) Choose one of the three case studies discussed in class (Costa Coffee, Samsung, Ikea) or any company that you might be interested in (you are not allowed to chose any of the companies mentioned in the article!) and, with reference to competitive advantage theory, discuss the strategies that the company has implemented in order to gain a competitive advantage in the industry. [maximum 900 words] [40 marks] I am choosing Honda Motors of Japan as a subject of analysis in reference to competitive advantage theory. Honda Motors is hereby being analyzed in comparison with its competitors, UK firms in the motorcycle industry, to appreciate the differences in strategy. In a empirical analysis of the competitiveness of two motorcycle industries between the British and the Japanese, which were compared and contrasted both in terms of product development and production systems at their respective home bases and in terms of their sales and distribution systems in the United States, Mair (1999) citing Boston Consulting Group (1975) said: “ Theoretically, the report analyzed the preconditions for the realization, in the Japanese case, and non-realization, in the British case, of economies of scale in product development , production and sales distribution. Importantly, both empirical and theoretical analyses focused on the period during the late 1960s and early 1970s when the Japanese motorcycle producers effectively displaced the British companies in the North American Market for the medium and large-size motorcycles; the British motorcycles market fell from 11 percent to 1 percent even as the market size (in units sold) more than doubled between 1968 and 1974, leaving the Japanese with 87%, and Honda alone 43%, by the latter year.” The report focused in the realization and non realization of economies of scale as competitive advantage between two countries and the effect are remarkable on its effect on the market share which definitely worked well for Honda of Japan. Mair (1999) continued explaining: “BCG’s explanation of the relative success of the two industries pinpointed a nexus of inter-related economic factors. For the Japanese industry Honda furnishes the majority of examples. On the side of production, scale, cost and technology were said to be interlinked. Large volumes permitted lower cost, both through the use of specialized production technology, and through the imputed operation of the ‘experience curve’, an analytical toll favored by BCG at the time (see Stalk and Hout, 1990), which proposed that costs declined with ‘experience’ (i.e. as accumulated volumes increase) . Evidences of Honda’s large volumes and specialized production technology was presented, although, lacking any evidence on Honda’s cost structure. BCG as only able to show that product prices decline over time , which was said to be ‘useful guide to movements in underlying costs’(1975: 39). Causally, then higher volumes led to lower costs which were passed on in lower prices, which in turn increased market share and therefore profitability.” Honda is obvious to have capitalized with the economies of scale for producing larger volumes which then permitted lower cost and which were passed on to lower prices, there driving away competitors as market share expanded and the profitability improved. Honda was maintaining strategies based on cost and revenues. In terms of sales distribution, the Japanese maintained unit spending on the market as the US sales mounted. In addition, Honda, in the United Kingdom, had been willing to sustain financial losses for the period to encourage market share to grow and therefore create the higher volumes at a lower cost that would allow the company to sell at low prices, hence profitable. In the United States, however, Honda and other Japanese Companies had been permitted to advance from the smaller motorcycle segments to medium and now large sized segments in part because the British retreated from a segment as soon as it became unprofitable. The effect of all these combined strategies of Honda led to its present market leadership, see Appendices A and B (Mair,1999) (Paraphrasing made). It is clear that Honda’s strategy of conquering the US Market is more easy than that in the UK market for its major competitors then were British companies, Hence, Honda was willing suffer losses to encourage market share. This also indicated that the British firms may not have fully established its competitive advantage back in UK as indicated by their withdrawal from the US market. Proceeding to find out how had Honda, the market leader among the Japanese companies, managed to enter the US market with its smaller motorcycles in the first place, during the early 1960, Mair (1999) quoted BCG’ report saying: The success of the Japanese manufacturers originated with the growth of their domestic market during the 1950’s . As recently as 1960, only 4 percent of the Japanese motorcycle production was exported. By this time, however, the Japanese had developed huge production volumes in small motorcycles in their domestic market, and the volume related cost reductions had followed. This resulted in highly competitive cost position which the Japanese had developed huge production volumes in small motorcycles in their domestic market, and the volume-related cost reduction had followed. This resulted in a highly competitive cost which the Japanese used as springboard for the penetration for the world market with small motorcycles in the early 1960’s (Boston Consulting Group,1975: xiv). The ‘cost superiority’ of the Japanese relative to British was very much obvious that a number of management concepts at work in Japan which only received only later much more sustained focus in the West and the importance of which was not widely recognized until after the publication of Womack, Jones and Roos (1990). Also worth noting was Honda’s launching in 1979 of a complex collaboration in the European automobile sector with the British car maker British Leyland that would endure at least two decade (Mair, 1994; 1998b, 1999) (Paraphrasing made). c) With respect to your chosen business, explain whether the company’s competitive advantage actually derives from the pursuit of a ‘local’ strategy as argued by Greenwald and Kahn’s article. [maximum 500 words] [30 marks] Was Honda’s competitive advantage actually derived from the pursuit of ‘local’ strategy? Our answer to this question is of course in the affirmative. The readiness for Honda to leave its shore and going global started with conquering first the Japanese market. Boston Consulting Group’s report explained that the success of the Japanese manufacturers originated with the growth of their domestic market during the 1950’s. It must be noted that the period under study is the application of its competitive advantage in the 1960s and a1970s in the US and in UK but effect is still continuing for Honda , which has become a market leader. BCG said, “As recently as 1960, only 4 percent of the Japanese motorcycle production was exported. By this time, however, the Japanese had developed huge production volumes in small motorcycles in their domestic market, and the volume related cost reductions had followed.” Note that it was the developed huge production volume in small motorcycles in their domestic market that gave Honda the needed confidence to enter into globalization as strategy. With increase market share in the US, it was even able to enter the UK market where its US competitors came and that is was willing to sustain early losses. But with the economies of scale Honda was not afraid of bringing the battle right in the territory of its strongest competitors and which eventually result to complex collaboration. BCG confirmed this empirical fact when it said that this continued application of the strategy strengthened Honda, resulting in a highly competitive cost position because the Japanese were able to established huge production volumes in small motorcycles in their domestic market, which was followed by e volume-related cost reduction. Eventually, this highly competitive cost was used by Honda as springboard for the penetration for the world market with small motorcycles in the early 1960’s (Boston Consulting Group, 1975: xiv) (Paraphrasing made). The argument by Greenwald and Kahn (2005) competitive advantage is actually derived from the pursuit of a ‘local’ strategy has a very clear application for Honda since it could not be said that Honda’s competitive advantage of economies of scale originated from adopting its global strategy. The same theory of local strategy first seem also to explain the loss of market of Honda competitors in the motorcycle industry in 1960’s and 1970’s. The report of BCG (1975) indicated retreat from the US to UK, which means that UK firms could have realized that it will have to conquer first its domestic market before competing head on overseas. The truth the proposition that all strategy is local before global is observable also in the behavior of Honda in the US Market, where it has been to “permitted to advance from the smaller motorcycle segments to medium and now large sized segments in part because the British retreated from a segment as soon as it became unprofitable. Casually, too, segment advance led to higher volume and eventually to higher profitability.” (Mair, 1999). Conclusion: The proposition that all strategy is local finds application in theory, application and even in common sense. Greenwald and Kahn’s article proved their point in the case of Honda Motors. It banked on its economies of scales grounded in its domestic market before it went global. By conquering Japan first, it was able to sell its products al lower price, which thereby created increased market share. It could be market share first before economies of scale. The best proof Honda’s success in the 1960’s and 1970’s may be best seen in the present market position. Its market capitalization is above industry average (Appendix A) while ranking first among its competitors in terms P/E ratio and return on equity (Appendix B). Appendix A DIRECT COMPETITOR COMPARISON   HMC F GM TM Industry Market Cap: 129.77B 16.72B 20.01B 197.60B 20.01B Employ­ees: 144,785 300,000 335,000 285,977 29.61K Qtrly Rev Growth (yoy): 12.50% -8.40% 3.60% 17.30% 3.70% Revenue (ttm): 89.15B 166.13B 206.71B 190.84B 190.84B Gross Margin (ttm): 28.63% 4.43% 0.54% 19.38% 16.98% EBITDA (ttm): 10.23B 8.58B 4.09B 31.01B 10.23B Oper Margins (ttm): 7.54% -3.10% -5.74% 9.59% 2.72% Net Income (ttm): 5.28B -6.82B -9.58B 13.36B 1.10M EPS (ttm): 1.44 -3.751 -17.124 8.26 0.47 P/E (ttm): 24.71 N/A N/A 14.88 16.34 PEG (5 yr expected): N/A N/A 1.44 N/A 7.77 P/S (ttm): 1.46 0.10 0.10 1.03 0.82 F = Ford Motor Co. GM = General Motors Corporation TM = Toyota Motor Corp. Industry = Auto Manufacturers – Major Referece: Yahoo finance Appendix B HMC VS. INDUSTRY LEADERS Statistic Industry Leader HMC HMC Rank Market Capitalization TM 197.60B 129.77B 2 / 8 P/E Ratio (ttm) HMC 24.71 - 1 / 8 PEG Ratio (ttm, 5 yr expected) DCX 7.77 N/A N/A Revenue Growth (Qtrly YoY) TTM 61.10% 12.50% 3 / 8 EPS Growth (Qtrly YoY) TTM 56.50% -3.30% 3 / 8 Long-Term Growth Rate (5 yr) TTM 20.0% N/A N/A Return on Equity (ttm) HMC 15.63% - 1 / 8 Long-Term Debt/Equity (mrq) F 16.851 0.853 5 / 8 Dividend Yield (annual) CVR 3.10% 1.30% 6 / 8 Reference : http://finance.yahoo.com/q/in?s=HMC Bibliography: Boston Consulting Group (1975) Strategy Alternatives for the British Motorcycle Industry. London: HMSO Greenwald and Kahn’s (2005), All Strategy is Local, Harvard Business Review Mair (1) Learning From Japan? Interpretations of Honda Motors by Strategic Management theorists {www document} URL http://www.nissan.ox.ac.uk/nops/nops29.pdf, Accessed November 18,2006 Mair (1998b), ‘From British Leyland Motor Corporation to Rover Group; the search for viable British model’ Forthcoming, A. Mair , K, Shimizu and Volpato (Eds., One Best Way? Trajectories and industrial models of the world’s automobile producers, 1970-1995. Oxford University Press Mair, (1994a) Honda’ Global Local Corporation, Houndmills; Macmillan. Porter (1980) Competitive Strategy, The Free Press, London, UK Stalk, G. and Hout, T. (1990), Competing Against Time, New York: The Free Press. Womack, Jones and Roos (1990). The Machine that Change the World, New York; Rawson Associates Yahoo Finance (2006) DIRECT COMPETITOR COMPARISON {www document} URL http://finance.yahoo.com/lookup?s=honda&t=S&m=, Accessed November 18,2006 Yahoo Finance (2006) HMC VS. INDUSTRY LEADERS, {www document} URL http://finance.yahoo.com/q/in?s=HMC, Accessed November 18,2006 Read More