Social:
- Market (Demographic & Psychographic)
- Ageing demographic in many countries world-wide suggests lower sales volumes of automobiles.
- People wanting to save money; as petrol prices are constantly rising this means they will and ‘have’ chosen to use public trans more often.
Technological:
- The gradual depletion of oil fields around the world is affecting the auto industry like no other force before. This has resulted in major technological changes, such as:
- Change of engine types & fuel efficiency. Eg: Initially 4 cylinder engines became extremely popular due to their fuel efficiency; in 1997 car companies were developing half electric half petrol cars. In 1997 it was a race to produce the first of its kind.
- Hydrogen technologies along with other possibilities such as nuclear are also being developed and will change the entire structure and manufacturing operations of car companies around the world (Llanos. M., 2004)
- Use of new materials in production, for example lightweight body types and particularly nanotechnology for a multitude of applications.
- Location of manufacturing entities in a rapidly globalising economy brings with it some technological issues to consider, for example certain countries may not be able to provide the resources needed for certain high end technologies.
Legal:
- Quality standards in production differ considerably between nations therefore Honda’s products have to be based on the highest standard of quality internationally at any one time or it would have to implement different quality control methods for each country.
- Left-hand vs. Right-hand drive vehicles, indicators etc, all must follow destination market laws.
- Laws can change and do frequently, for example; in Sydney P Plate drivers are no longer aloud to drive turbo charges cars (power restrictions on young drivers often limit markets for car manufacturers).
- Labour laws can have positive or negative affects on Honda, i.e.: health and safety issues, work breaks, etc within the manufacturing nation would slow production.
- Patent and copyright protection. Every company faces these legal issues; Honda must ensure their products and marketing is always 100% ‘legally original’.
Ecological:
- Greenhouse gas pollution caused by petrol powered automobiles is affecting the auto industry. This has resulted in major technological changes that are also linked with the depletion of oil fields world wide (as discussed in the technological section).
- Scrap concerns – a major one is what to do with used tires, fouled oil, plastics etc.
Porters Five Forces (Industry Analysis)
Bargaining Power of Suppliers:
The nature of JIT (just in time) manufacturing, affords external suppliers considerable influence, whilst on the other hand significant gearing towards one auto manufacturer. There is some interdependency resulting in mutual power-sharing for the short-term. The long-term favours the auto manufacturer such as Honda, who can switch suppliers, acquire existing ones or set up its own. JIT Manufacturing can be related to page 667 of the case study ‘right first time’. It can also be linked with and reconciles the dichotomy that fast delivery means lower quality; because (in USA) if Honda sells the products that it actually produces in the USA it will deliver at a faster rate, cut costs & maintain its dependable quality.
Bargaining Power of Buyers:
The automotive industry is highly competitive, therefore buyers tend to have some degree of control as there are many substitutes to choose from. However as companies create strategic alliances there is more and more power gain available for the car manufacturers. Individual buyers have a slight degree of control, this type of customer makes up the majority of the market, whilst large buyers such as multinational organisations fleet departments will likely have much greater influence in the procurement of vehicles and are likely to strategically align themselves with one buyer, therefore making negotiation of prices easier for them.
Threat of new entrants:
Within the automotive industry barriers to entry are habitually high due to the vast capital outlay required in automated manufacturing, design, location, cost of materials, copyright, marketing expenses and the list goes on.
New technologies in engine design, for example alternative uses of different types of energy will ultimately enter the market as our worldwide fuel sources deplete, such as hydrogen technology, these new fuel sources will allow new entrants in the near future and Honda must take an early grasp on the situation and use their already solid position in the auto industry to get a head start in this area.
Threat of Substitutes:
This threat is definitely growing. There is a noticeable concern brewing over greenhouse gas emissions. Automotive companies that are able to significantly impact these emissions in a positive way may act as substitutes for Honda’s products. Honda has taken into account this threat and has taken appropriate measures to ensure it’s continual success, with; Honda was well ahead of the game on emissions development and fuel cell technology by 1999 (Honda Motor Co. Ltd., 1999).
Degree of Rivalry
IMF report 2000 highlights that there has been a great deal of activity in the global automotive industry concerning strategic alliances, mergers & acquisitions between the 1991 and 2000 (IMF Auto Report 2000). Page 2, figure 1.1 of the IMF report shows that Honda has chosen to remain independent of strategic groupings this places the strategically aligned companies in a much better financial position and gives them greater bargaining power with suppliers. Page 4 figure 1.2 of the IMF Report also highlights the groupings in a pie graph, as demonstrated below.
Figure 1.2: 1997 World Light Vehicles
Production: 50.1 million units
(IMF Auto Report 2000)
Competitors
Honda competitors are primarily in the Auto Manufacturing industry. Honda also competes in the Motorcycle & Other Small Engine Vehicle Manufacturing, and Lending sectors.
Honda’s competitive landscape includes:
- Toyota
- Nissan
- Ford/Mazda
- General Motors
- Aprilia
- Ducati
- Kawasaki
- Yamaha
- Etc.
Honda is apart of the ‘Big Three’ car manufacturers in Japan. The main competitors in 1997 for Honda are Toyota and Nissan being the other two companies who make up the ‘Big Three’ (IMF Auto Report 2000)
Critical Success Factors
- Early globalisation of its operations and sales.
- The art of reconciling dichotomies between trade offs in most decisions.
- An effective production strategy (explained further in SWOT), this includes aspects such as build in quality ‘with’ just in time manufacturing and rigid geographical manufacturing guidelines.
- Valuable supplier relationships.
- Patent protection, including protection of innovative ideas such as VTEC and even their own new engine designs such as Hybrid engines (half electric half petrol powered).
- Expansion of distribution channels via R&D into what these new channels require. E.g. European market for Honda.
- Strategic Alliances with major European players, in order to augment growth in Europe.
- But the heart of its CSF’s lies in the innovative process inherited by Honda in its engine designs, innovation and R&D.
Company Analysis
Honda is Japan's #3 automaker (after Toyota and Nissan) and the world's largest motorcycle producer. The company's car models include the Accord, CR-V, Civic, Element, and Ridgeline as well as gasoline-electric hybrid versions of the Civic and Accord. Honda's line of motorcycles includes everything from scooters to super bikes. The company also makes a line of ATVs and personal watercraft. Honda's power products division makes commercial and residential-use machinery (lawn mowers, snow blowers), portable generators, and outboard motors.
By the early 1970s Honda has been recognized as a leading motor industry company in the world and one of the global Japanese ‘Big three’ automobile manufacturers besides Nissan and Toyota. By the mid 1990s Honda has 77% of its sale and 46% of the manufacturing outside Japan. Honda’s achievements on the technology front are well recognized, ranging from its cutting-edge low pollution and low fuel consumption engine technologies to its achievement in powering world champion formula 1 racing cars for six year in a row during 1980s.
Honda’s corporate strategy policy speaks for its goals and the eagerness to fulfil them. It states, ‘ By following a corporate policy that stresses originality, innovation, and efficiency in every facet of its operations- from product development and manufacturing to marketing- Honda has striven to attain its goal of satisfying it’s customers’ (Honda Motor Co. Ltd., 1997).
Product analysis
By using the ‘just in time’ and the ‘right first time’ approach in production, the company actually reduced cost (less waste and downtime) and reduced delivery time without compromising quality. One of the biggest competitive advantages for Honda has been its ‘core competence’ in the advanced internal combustion engines. Honda has a proven record in technological superiority from its CVCC (compound vortex controlled combustion) engine designed during 1969-71 to reduce pollution to VTEC (variable valve timing and lift electronic control) engines introduced in 1989 to solve the trade off between fuel economy and engine power.
By the year 1997 Honda produces over 40000 engines per day which is just over 10 million per year.
Honda has a worldwide production network, with 89 production facilities in 33 countries. In addition to its technological innovative products, Honda’s product development process is respected within the automobile industry for its sheer speed. Automobiles are being manufactured only two years after the launch of their development process because of its organizational approach to SED teams who work together on a project from start to the end, unlike any western firm and secondly because of the Honda’s product replacement system which is known as the ‘rolling’ or ‘iterative’ model change program.
Honda also used the ‘small batch’ production planning strategy which is based on simple logistics and quality control, less likelihood of errors, easier to programme production schedule. This gave the company the ability to offer a wider range of products to customers and greater worker involvement and satisfaction.
Supply chain management
As far as the network strategy is concerned Honda’s approach to relationships with its components suppliers transcends the dichotomy of ‘make or buy’, associated with supply chain management. Honda has very few component makers in Japan that are considered to belong to its supplier ‘family’, and is the only firm in the Japanese automobile industry not to organize its own supplier association as a forum for suppliers to meet and solve common problems.
In North America a network of 80 Japanese component makers have developed to supply Honda with components, Honda invested its own capital in a number of the early arrivals and has no other formal linkages in the country. Honda could have the advantage of both single sourcing (stable relationship with one supplier) and dual sourcing (an element of competition), if they develop better relationships with these suppliers.
Organizational structure and human resource management
Looking at the organizational structure and the human resource management, Honda has taken a shockwave every time the CEO has been changed. Every president has its own organizational structure based on the solid base of reconciling the dichotomies of individualism versus collectivism. The founder of the company Soichiro Honda has used the individualist structure with a collective decision-making process which was utilized by its top executives and very few of them seemed to have clear individual responsibility. Later in 1973 Kiyoshi Kawashima shifted Honda further towards a collective decision-making mode with the wide-ranging committee structure. Kawamoto who took office in 1991 established a clear hierarchy at executive level, with clear and direct lines of responsibility to the top management group. He was injecting a strong sense of individual responsibility in the existing framework to enhance quick communication and decision making and also encouraging the horizontal communication within the group. There is an obvious constant change of leadership and therefore company management strategies.
Financial Analysis
The success of the strategies employed by Honda is depicted in the positive financials of the company overtime. The sales revenue rose from ¥4301.5 billion in 1991 to ¥5293.3 billion in 1997. There was a 24.5% increase over the last year which had sales revenue of ¥4252.2 billion. The net income before tax rose from ¥1320.2 billion in 1991 to ¥3907.2 billion in 1997. The interest coverage ratio rose from 3.04:1 in 1993 to 15.2:1 in 1997 which is due to the increase sales revenue and decrease in interest expense in the year 1997. This acts as a positive sign to stakeholders as the firm’s capacity to pay its liabilities has increased.
The other ratio to show the company’s capital structure is the gearing ratio. It helps the interested stakeholders to know the composition of capital through the ratio which is creditors over shareholders. Honda shows a decline from 0.6:1 in 1991 to 0.5:1, which shows the debt to equity has decreased. In addition to the increase in unit sales, the value of yen during 1996 and 1997 has changed significantly thus positively affecting the revenue. (Honda Motor Co. Ltd., 2001) (For all financial tables and ratios please see appendix)
S.W.O.T Analysis
The SWOT analysis for Honda Motor Co. is done and the findings are listed below:
Strengths:
- The unique and innovative technology engines such as CVCC & VTEC.
- Small batch processing.
- Rolling model change.
- Just in time production approach.
- Taking advantage of both single and dual sourcing.
- R&D- alternate energies.
Weaknesses:
- Has not created strong supplier relationships and has not organized a supplier association to solve common problems. They are the only Japanese auto-mobile manufacturer to have not done so yet.
- Relatively small scale production.
- Not involved with alliances.
Opportunities:
- Form partnerships.
- Look at some of the new global markets.
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Design more personalized products.
Threats:
- Global automobile manufacturing alliances.
- Upcoming technologies in other companies.
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Global economic downturn- Asian crisis.
Recommendations
1st Recommendation
Production Vs Sales:
Probably one of the most interesting issues we picked up on within this case study was the fact that Honda produces 54.1% of it’s cars in Japan yet it only sells 23.0% in Japan. If Honda was able to produce more cars in the USA (USA currently has 53.2% of Honda sales yet only 38.9% of production) they would be able to improve their concept of ‘just in time’ manufacturing; this would save massive importation and transport costs and also reduce the time in which they receive money after actually making the products, not to mention saving on costs such as modifying the cars to suit US safety standards. Europe is the same with only 3.3% production yet 10.7% sales. Honda needs to concentrate on developing a business system that is geographically rigid; with manufacturing reduced in Japan and increased in countries that import a large amount of goods such as the USA.
CSF: Effective production strategy.
2nd Recommendation
Augment Growth In Europe:
The second recommendation we make to Honda is to augment business growth in Europe. The EU currently makes up only 3.3% of Honda’s sales. European cities such as London, Athens, Rome, Madrid etc favour a small, yet fashionable, fuel efficient car market. Creative units, within Honda, should focus on offering the same (or a new) products in different ways to these groups, either cosmetically and/or performance and fuel efficiency wise until a mean age usage is achieved. Honda has the backing and reputation to be able to create a line of smaller, fuel efficient cars and implement these around Europe. Honda already has their ‘foot in the door’, however their reputation of being an over 60’s car company in countries such as the UK must be countered by producing young fashionable ‘smarter’ cars; (in the last 4 years they have developed the Honda Jazz, which is exactly this) however when looking at the case from a 1997 perspective this is a highly profitable and marketable recommendation.
If Honda is unwilling to change their image in the EU then a second option is available in this recommendation. Honda has the option to exploit the image of being an older persons car and extensively market their product to just that. Once it grows market share, then a further differentiation strategy could be utilised to diminish negative, stereotypical images. This is less favorable however could be seen as a lower risk strategy.
CSF: Distribution Channel
3rd Recommendation
Strategic alliance:
The 3rd recommendation is in fact linked to the 2nd. If Honda is able to create a strategic alliance with a car company that produces and sells cars in the EU then they will be able to expand their existing 3.3% of sales extensively. A strategic alliance will also allow them access to technologies and processes they do not currently possess and also if chosen wisely they will gain extra cash flow form the strategically aligned company. The only disadvantage within this recommendation is that Honda’s own technologies and plans would also be exposed.
CSF: Strategic Alliances
4th Recommendation
Supplier Relationships:
Honda is the only Japanese Auto-Mobile manufacturer who has not yet organized a ‘suppliers association’ as a forum for suppliers to meet and solve common problems and develop important relationships with them. We recommend that Honda set up such a forum in order to develop healthy relationships which will allow them to negotiate better prices, develop new products with greater ease and solve problems with the suppliers technical help.
CSF: Valuable supplier relationships.
References
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Honda motor co. ltd., (1997), ‘Honda annual report 1997’ (http://world.honda.com/investors/annualreport/1997/97AR.pdf), viewed on 20/11/06.
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Honda motor co. ltd., (1999) ‘1999 Press release’, (), viewed on 21/11/06.
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Honda motor co. ltd., (2001), ‘Honda annual report 2001’ (), viewed on 19/11/06. (This Document shows financials from 1991 – 1998 and can be seen in the Appendix)
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Honda motor co. ltd., (2006), ‘Honda history: a dynamic past an exciting future’, (http://world.honda.com/history/), viewed on 17/11/06 (Facts between 1991-1997 were used from reference)
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IMF auto report (2000), Automotive department international metal workers federation, (), viewed on 21/11/06. (Facts between 1991-1997 were used from reference)
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Krueger. O. A., (2004), ‘Lessons from the Asian crisis’, IMF external relations department, (http://www.imf.org/external/np/speeches/2004/021204.htm), viewed on 19/11/06 (Facts between 1991-1997 were used from reference).
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Llanos. M., (2004), ‘Hydrogen cars ready to roll- for a price’ - MNBC, (http://www.msnbc.msn.com/id/4563676/), viewed on 20/11/06.
