Honda and Its Differentiation Strategy - Case Study Example

Honda and its differentiation strategy Executive Summary Honda is very well placed in the international market. They have been able to manage the cultural dimensions of globalization in a very efficient manner, and are better placed than the Big Three of the auto industry. Toyota is their closest rival but Honda has adopted the strategy of differentiation. They are able to manage dichotomies efficiently and effectively. They adopt the process of local adaptation and they do not believe in trade-offs. They value human dignity and encourage creativity and innovation. They are concerned about all their stakeholders including the suppliers, customers and their employees. They adhere to the norms of the country as far as corporate governance is concerned. While they have not followed the rule of the book and have demonstrated a different way to manage things and situations, they have shown the Japanese attitude towards reducing the rewards to the shareholders when profits decrease. This brings about loss of confidence among the investors. Nevertheless, currently Honda is among the market leaders in the auto industry. Table of Contents 1. Cultural dimensions of Globalisation 1 1.1 Pressures for global integration of activities 2 1.2 Pressures for local responsiveness 3 1.3 Cultural dimensions of management at Honda 4 2. Managerial Dichotomies 6 2.1 Planning versus Learning 7 2.2 Market Positioning versus Developing Internal Resources 8 2.3 Product versus Process-related core capabilities 9 3. Honda’s strategic challenges – CSR and Corporate Governance 10 4. Analysis of CSR at Honda 13 References 15 1. Cultural dimensions of Globalisation Globalization is the concept of moving towards single-world society. However debates continue whether globalization increases or decreases cultural diversity or homogenization. The major drivers of globalization according to Singer (2004) include social-demographic (regional, cultural), technological, which includes telecommunications, internet and transportation, economic factors like foreign direct investment, profit motives and market share. Global communications play an important role in the cultural dimensions of globalization (World Health Organization, 2009). Fuller-Love (2008) contends that globalization of business across national and cultural boundaries have resulted in an increase in culture clashes. However, at Honda the philosophy is different. The global auto industry has been facing such challenges of dealing with different societies that have set patterns or work and behaviour. While global culture may not be possible, Honda has been able to overcome these challenges through its own unique strategy. When Honda started manufacturing in America, they pursued a different strategy than that of Honda Japan. It was a unique set of policies and procedures since America is an individualistic society where each worker focuses on his or her dedicated task. Its philosophy is to adapt to the needs of the workers of the region. Their corporate culture in America “fosters flexibility and innovation” (Shih, 2001). This was a very wise move by Honda management as the national culture programs the mind and sets one group of people apart from others (Hope & Mühlemann, 2001). Honda has done away with executive lunch rooms and private offices. Moreover, all the employees including the President wear white coveralls with their names stitched in red letters above the right pocket (Shih, 2001). They involve all the employees in the decision making and all of these strategies are geared towards effective communication. Their core strategy is to adapt to local situations and their managerial strategy was unique to America’s auto plants in general. They established an egalitarian corporate culture which allowed the Honda associated to contribute their input directly to the management. 1.1 Pressures for global integration of activities Cultures are pervasive and influence the attitudes and behaviour of a person. Issues of ‘cultural fit’ cannot be overlooked as it can lead to conflicts and may hinder agreement over management issues (Olie, 1994). The cultural differences can even influence the dress codes which creates a barrier in the minds of the people. Because of global operations firms have come under pressure to understand, respect, share and implement a unifying philosophy, as has been followed by Honda (Furlan, n.d.). This philosophy has to be deep-rooted as the corporate culture because Honda believes that this will lead to success. Cultures are deep-seated, pervasive and complex (Schein, 1992). As a response to globalization, Daimler-Chrysler was expected to achieve synergies but the merger failed due to lack of proper vision, improper management and strategy, culture differences and delay in communication (Nguyen & Kleiner, 2003). There were no synergies from the beginning because the executive of Daimler-Benz being Germans wanted to impose their methodical approach which was resisted by the Chrysler employees who were used to having their own way (Taylor, 1999). This was due to the differences in Power Distance – one of the four dimensions of culture as specified by Hofstede. U.S. auto unions are built on an ‘us-versus-them’ mentality whereas German unions are viewed more as partners and they play a lead role in setting a firm's strategic direction (Laabs, 1998). The Germans have not yet embraced the concept of customer service to the extent the US has. The same problem occurred in the case of BMW-Rover merger as the German management culture is precise and regulated whereas the British management culture is less formal (Fuller-Love, 2008). Honda has gone even further as they recognize and respect individual differences (Furlan, n.d.). Hence they treat everyone equally and they create equal opportunities. They ensures that race, sex, age, religion, national origin, educational background, social or economic status do not affect individual’s opportunities. 1.2 Pressures for local responsiveness Companies face challenges in issues such as differences in languages, cultures, laws, economies, and business customs (Bellin & Pham, 2007). Under pressure for local responsiveness, different companies have been responding in different ways. Honda believes that its companies may adopt local statements of purpose and philosophy which are consistent with Honda’s global philosophy (Furlan, n.d.). They also create occasions when their global teams can meet and exchange views and opinions. This would help them to understand and support each other in a patient and constructive manner. Toyota too has a global presence but they could not impose Japanese culture as they found it to be a deterrent in the auto industry. Instead they focused on having a global perspective which gave them a competitive edge. They follow the “Thainization’ approach in Thailand under which the Japanese company is managed by a Thai workforce and not by Japanese expatriates. This is their way of exploiting the local advantages for global competitiveness. They use this localization principle in all their ventures in international markets which has helped to enhance sales in the regions. They prepare their expatriate managers in the local culture and language; they focus on community education programs in the different regions (Petison & Johri, 2006). To bridge the cultural, knowledge and skills gap between local and expatriate employees, they bring the local employees to Japan for training in the Toyota culture and philosophy. This strategy helps them to create strong affiliation with the host countries. 1.3 Cultural dimensions of management at Honda Motor Co. Ltd. It is generally argued that Japanese management systems could not function effectively in the West because they are culture-bound (Mair, 1998). Japanese firms adapt their management systems in to their new environments in a process of ‘hybridization’. This is interpreted as Theory X management whereas Honda falls under the Theory Y management under which they offer the Western production workers new opportunities for teamwork, self-expression and workplace democracy. Based on Porter’s five forces, Honda is very strongly placed in the international market taking into account the cultural dimensions. Threat of new entry – consolidation is taking place in the industry but Honda is not threatened as they have a local perspective. Power of suppliers - Honda does not enter into long-term agreements with unions and suppliers while their rivals in the US were constrained by the social embeddedness (Wollin & Perry, 2004). Thus the power lies in the hands of Honda and not with their suppliers. Power of buyers – Honda’s global ambitions affected their home market. Overall, their marketing, sales and manufacturing were more integrated with engineering through the TQM process of communication. Availability of substitutes – Their responsiveness to local communities such as environmental education to children to fight global warming (Corporate, October 23, 2008) has helped them to ensure that substitutes such as Toyota do not over take them. Competitive rivalry – While there are several auto makers, due consolidation many are in the process of restructuring their organization. Honda is not one those and has been consistently progressing and meeting the challenges posed by the market. Honda does not have a formal structure but they do organize frequent project teams. They have innovative teams and they also have a ‘tight’ organizational culture (Mair, 1998). Honda employees are called ‘associates’ to instill a sense of belonging and to abolish the class system. They did not believe in allotting different canteens for different ‘castes’ which were based on education and clothing. They even assign production work to university graduates to knock off their status or ego. Honda does not encourage politics within the organization. New employees are informed at the outset that divisions and barriers would not be tolerated. Honda usually has bureaucratic control at all its subsidiaries but at its UK subsidiary where most recent recruits were local workers whose production knowledge was not yet firmly grounded, the company adopted tight control and did not allow the workers any initiatives (Petison & Johri, 2008). However, at HATC (Thailand) they have been responsive to the local needs as they gave the employees a sense of responsibility in manufacturing products which helped to improve the efficiency of local production. These suggest that to compete in the global auto industry firms have to be adaptive to the local market conditions and the business environment. Maintaining variety within the firm, at the expense of short-term efficiency, is the main way a firm can adapt to a changing environment (Wollin & Perry, 2004). GM and Ford in the US could not recognize the changing systems. 2. Managerial Dichotomies Managers and organizations face situations when they have to resolve and reconcile dichotomies. Numerous dichotomous categories pervade management thinking and permeate all aspects and functions. Dichotomies emerge in buyer-seller relationship – whether to have vertical or horizontal integration, dichotomies can emerge in business strategies – to adopt the cost leadership or to have a differentiation strategy. Usually it requires the management to understand the trade-off between two alternatives. An organization has to take a definite step towards one or the other and cannot try to make the best of the both. This would result in being no where. Honda Motors does not engage in static trade-offs but follows the Japanese style of management and based on the JIT production system they have been able to resolve dichotomies successfully (Mair, 1997). 2.1 Planning versus Learning Honda Motors does not have any apprenticeship system for training skilled workers. They do not even provide financial assistance to employees seeking external qualification. Their training focuses on particular jobs and this is described as the natural learning process (Mair, 1998). When employees try to learn through the existing system, methodology or paradigm, and when such planning is insufficient to reach a target, learning takes place. At Honda Motors breakdowns lead to breakthroughs. Quality at Honda does not mean to eliminate errors or defects (Tanner, 1991). To them quality is a discipline. Quality in most firms undergoes the process of planning, research and development, resource allocation and then they finally wait for a feedback. Honda Motors believes that if financial measures are the yardsticks for decisions, it would result in compromising long-term benefits. If enduring values, trust and empowerment are in place, learning takes place (Tanner, 1991). They do not plan; they challenge, assemble and manage a design team which is an important component of their learning system. Another innovative learning process is their Idea Contest in which they provide the employees with time and fund to build prototypes of projects that would not be funded through normal channels. Thus they plan their learning strategies but they do not provide guided learning. They bring out the best in the employees by giving them a free hand to create and innovate. 2.2 Market Positioning versus Developing Internal Resources Positioning a product implies to have certain unique differentiating characteristics of the product in the eyes of the customer (Knowledge@Emory, 2002). Honda has a very independent status and they do not follow any rules. They focus on the car and the motor cycle and they have recently entered the light SUV category (Erika, 2009). They are well positioned to take care of the future demand for fuel efficient vehicles. Honda Motors does not believe in offering a wide choice of products to its customers. Some firms such as BMW had expanded product variety. BMW had initially succeeded in attaining differentiation by adding to its product line the growing needs of its target audience. They too later had to change their policy to move away from the pack and focused on design philosophy, brand equity and driving quality (Danzig, 2004). Honda Motors addresses the dichotomy of market positioning versus developing internal resources by focusing on the strengths of the product. Their strategy is to emphasize high technology built into its products and hence they could include features such as advanced engines, anti-lock brakes, electric windows and sun roof as standard and not as optional extras (Mair, 1997). They continue innovative research in fuel cell technology, hybrids, CVT transmissions (Erika, 2009). Their current product line reflects the company’s creative abilities and the desire to appeal to a youthful audience (SD, 2004). Their products emit world’s lowest emissions and are fuel-efficient. For the US market they have launched a leisure and recreation vehicle which features flip down and removable seats and side cargo doors. Their internal strength lies in their superior designs which enable them to build products better than their competitors. They build complex designs at low cost thereby better positioning their products (Erika, 2009). 2.3 Product-related core competencies versus Process-related core capabilities The technology and design features of Honda products are the embodiments of successful reconciliation of dichotomies which lead to competitive advantage. They work in a high-autonomy organization with a flat hierarchy (Mair, 1998). When the company faced the dichotomy whether to economize on fuel or lose engine power, they designed the VTEC engines which enabled them to achieve performance economy trade-off of Honda’s conventional engines, and the dichotomy reconciling leap. Its VTEC system enhances efficiency at lower speeds without sacrificing performance (SD, 2004). They demonstrate a strategic approach to technological changes. They refuse to accept taken-for-granted trade-offs. When their corporate goal was to reduce the weight of the automobiles, they sought a light weight underbody coating. In addition, they also looked for other attributes such as reduced volatile organic compound emissions. They also specified that it should be an easy-to-use product by the workers. However, Honda ensures that all of their requirements and standards are met (Mair, 1997). They do not accept trade-offs and they do not expect lesser performing products by their vendors. If Honda restructures its plants and process they ensure that the product features are enhanced too. 3. Honda’s strategic challenges – CSR and Corporate Governance With a view to enable all of its stakeholders to place greater trust in the company Honda Motors is working towards enhancing its corporate governance. They are continuously working towards updating and strengthening their corporate governance. To ensure an objective control, they appoint outside directors and outside corporate auditors and the term of each director does not extend beyond a year (Corporate Governance). All of the business units of Honda, reflects its fundamental corporate philosophy. They have separate head quarters for each region, business and function and a general manager or an operating officer is responsible for each unit or region. With such a flat structure they are able to function effectively and efficiently and they can address the needs of the customers and societies in an efficient manner. Their internal control system is also very strong and they conduct internal audits to keep a check over the operations. To obtain the trust of all the stakeholders they perform appropriate disclosures of company information. They comply with the corporate governance norms that have to be adhered to by the NYSE-Listed U.S. Companies. This requires that at least half of the corporate auditors must be from outside the company who has not served in an executive position in the company or at any of its subsidiaries. The company also has a risk management officer who is in charge of taking risk management initiatives and address crisis situations. They have also established a "Code of Ethics" as set forth in the rules of the U.S. Securities and Exchange Commission regulations pursuant to Section 406 of the Sarbanes-Oxley Act of 2002. In addition, they boldly and consistently oppose the anti social elements that are a threat to the social order and safety. They work towards this goal with the police and other institutions in addressing concerns. Investor sentiments have weakened recently in Japan and this has affected Honda as well, despite their attempts to keep their stakeholders happy. The weakening of the dollar against the Yen has resulted in three-year lows coupled with adverse reports from the US has led to a shard decline in the share prices. One of the main reasons cited for loss of investor confidence has been that Japanese firms are overtly conservative in rewarding the shareholders (Whipp, 2008). They have limited experience in the dividend policy and they should not cut dividends even if earnings fall. This hurt’s the company’s share price and the sentiment in the Japanese equity market. While Honda paid 11 yen per share for the quarter ended 31st December 2008 (Corporate, January 30, 2009), they paid only 8 yen per share for the quarter ended 30th June 2009 (Corporate, July 29, 2009). This justifies the claim that Japanese firms reduce the dividend which only brings about loss of investor confidence. Investors keep a close watch on the earning of the company and when they find that shareholders are not rewarded, they say that valuation of the Japanese companies has reached the competitive levels (Whipp, 2008). The auto industry is under the process of consolidation which suggests that intense competition prevails in the industry. This requires that auto makers develop some point of differentiation to compete in the global market place. While some use product or service differentiation, some try to become sustainable by being ethical in their approach. Some firms have even tried to differentiate themselves by being socially responsible in their approach. They use CSR (corporate social responsibility) as a strategy in all the organizational functions like marketing, finance, and production process. CSR is an important factor because investors take into account the social performance of a company before deciding to invest in it (Environics, 2001). Companies that ignore social responsibility place the market share at risk. Apart from considering the CSR to be their corporate strategy, firms are also bound by the rules and norms of the policy environment of the country they are located in (Fox, Ward & Howard, 2002). CSR strategies can have a positive or negative impact on businesses depending upon the strategy the firms choose. Honda strives to be a company that the society wants to exist (CSR Report, 2008). Meeting the challenge of global warming is their top priority. While they try to keep their operations simple, they do realize that operations do impact the environment. Their new plants in Saitama will have high-efficiency equipments and the most advanced manufacturing techniques and technologies that will reduce the energy consumed per vehicle (CSR Report, 2008). They are focusing on developing the next-generation diesel engine technology, a new hybrid system and the FCX Clarity fuel cell vehicle. They are continuously enhancing their line up of compact hybrid models which have other unique characteristics such as compact size, light weight and high efficiency (News Release, July 13, 2009). According to Galbreath (2006), CSR is a strategic issue, and cannot be separated from a firm’s overall strategy. This is in-built into its corporate goals and strategies as is evident from the report that for the 4th consecutive month their product Fit was the industry’s best selling car in March 2009 (News Release, May 11, 2009). Their decision to launch a hybrid version of the Fit extends its strategy of competing primarily on price (Soble, 2009). 4. Analysis of CSR at Honda Honda strategy on CSR demonstrates its concerns for the environment and for the society. They are concerned for all their stakeholders including the employees. Generally companies take care of the investors and the shareholders but Honda ensures that its employees are not left out in it CSR stand. They take care of the stakeholders by their internal control systems and audits. They reassure their commitment to the society through their focus on the environment. In addition they have been working with the police to keep check on the anti-social elements that are a threat to safety of the people. Towards their concern for the future of the society, they provide environmental education to children to fight global warming. They do not merely use CSR as their corporate strategy and nor do they view it as a separate function. However, when it comes to profitability, they forget their CSR and their action demonstrates a short-term vision. They compromised on the shareholders’ earnings and reduced the dividend payouts. Apart from this, Honda is making a conscious effort to improve the lives of the people the community they work in. 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