Figure 2.1: Brief PLEST analysis of automotive industry
2.2 SWOT Analysis (Specific to Japanese Manufacturers)
Japanese automobile manufacturers have achieved a high market share of the world’s automotive industry, and this is predominantly down to the fact that Japanese car production techniques are as good as any in the world. The Japanese producers have struggled however, to really become dominant in Europe, and have even had their designs branded as “uninteresting”. The relaxation of legislation and trade barriers has and indeed will allow Japanese firms to enter more markets more easily than was previously possible. Of course the firms must beware of competitors attempting to imitate their vehicles, after all this is how the Japanese entered the market initially. They must also take care not to ignore the growing environmental awareness of consumers and keep up with fashion.
Figure 2.2: Brief SWOT analysis of Japanese Manufacturers
How Trade and Investment Theories Explain the Growth and
Development of the Industry
Honda started out manufacturing small motorcycles and has now expanded into a global company selling automobiles, motorcycles and power products. It sells 11 million products every year, yet is still a small company in many respects. As this market expands, Honda concentrates more on a close relationship with its customers rather than viewing size as key to survival.
3.1 Product Life Cycle Theory
Originally put forward by Raymond Vernon, the product life-cycle theory searched for an explanation why many new products were developed and sold first in the U.S during the 20th century. However, as demand increased for the products, competitors entered the market and the original firm was forced to try and cut costs. Together with demand for the product increasing abroad, this often meant the firm would set up production abroad, taking advantages of factors such as lower labour costs. In years to follow, the U.S would end up importing the very product it invented.
Figure 3.1: Vernon’s Product Life Cycle
We can utilise this theory in terms of the automobile industry. The US were firm leaders of the market until the Japanese adapted ideas from the British and American car producers in the 1960’s, and then offered a superior yet cheaper product. This is why Japan used to import so many automobiles yet now has more of an advantage on exportation. The graph below shows a rough portrayal for a developed country, such as Japan, on how, regarding a new product, consumption and production rates develop.
Advanced Countries Product Life Cycle
Figure 3.2: An illustration of a countries advanced Product Life Cycle
3.2 Absolute Advantage (Adam Smith 1776)
This theory investigates how and why countries vary in their ability to produce goods efficiently. It has been argued by various economists that American culture is individualistic and therefore its culture produces many innovators, whereas Japanese culture is more collective so that they excel in manufacturing (see appendix C). This is apparent in many Japanese firms, where emphasis is placed on a team effort to achieve their goals, for example it is common for workers to socialise together outside of work. In the USA, people are more concerned for themselves, often at the expense of others and sometimes even the company for whom they work. This shows the absolute advantage of Japan is the labour productivity borne from their community spirit. Furthermore, culture has influenced how the Japanese workforce has developed in such a way that a large number of engineers and specialised designers make for brilliantly efficient production of automobiles, office machinery, communications and sound equipment.
Within the automobile industry, absolute advantage was evident through the US being the innovators of the product lines, yet Japan, with collectivism and an engineering focussed workforce, managed to improve on American methods. This is why Japan has such a considerable share of the market.
3.3 New Trade Theory
The new trade theory emerged from a number of economists during the 1970s. It argues that specialisation in the production and export of certain goods is not due to underlying differences in factor endowment but because the world market only has the capacity to support a limited number of firms in some industries. As Japan moved into the automobile market internationally, quick adaptations of strategy meant that they were successful as early entrants. Economies of scale and learning economies are the first-mover advantages that discourage new entrants into the market, after Japan’s impressive entrance.
3.4 Porter’s Diamond (M. Porter, 1990)
Regarding competitive advantage, this theory looks at the four characteristics in figure 4.2. Porter states that these characteristics of a nation mould the environment in which local firms compete. They may either promote or impede the notion of competitive advantage.
Looking at each characteristic individually, factor endowments are a nation’s strengths in certain elements of production, e.g. having a skilled labour force or a plentiful supply of natural gas. Porter suggests a country will be more competitive in industries where it has factor endowment advantages. Demand conditions are also key: if domestic demand is high for a certain product, firms who produce this product are likely to have a competitive advantage. Firm strategy, structure and rivalry are also important traits, as these aid in the actual operation of a company. Finally, relating and supporting industries can help or hinder a country’s competitive advantage due to knock on effects.
Figure 3.2: Porter’s Diamond Theory
Figure 3.3 outlines the main points that relate Porter’s theory to the Japanese automobile industry.
Figure 3.3 Porter’s theory in relation to the Japanese automobile industry.
4.0 Potential Strategies for Servicing Foreign Markets
Japanese car production has declined in its home country over the past ten years; this is due to the deliberate decision by Japanese manufacturers to invest in facilities closer to their main markets. Japanese car producers have become prominent in many countries’ automobile industries over the past 20 years. In this section the potential methods of market entry will be discussed and there appropriateness examined, in relation to the automobile industry.
4.1 Foreign Direct Investment
The most common form of market entry for Japanese car producers is Foreign Direct Investment (FDI), where a company invests directly in facilities within a foreign country to produce or market a product. In the automobile industry this is considered the most appropriate method of entering a foreign market.
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Wholly Owned Subsidiary: This is where a firm owns 100% of the operations within the country it is servicing. This could be a Greenfield Investment; where a firm is established from its foundation to full working capacity, by the investor. The second way is acquisition where a firm buys an existing firm within the host country. In terms of Japanese car producers both advantages and disadvantages.
Figure 4.2: Advantages and disadvantages of Greenfield Investments and Acquisitions
- Alternatively a firm may enter into a joint venture. Again, there are two types that this can take, contractual and equity.
2.1 Contractual ventures as the name implies are based on contracts, however, these may be unwise in developing economies since such countries seldom have the legal foundations to deal with such issues, and therefore are less than reliable.
2.2 Equity joint ventures are carried out with the investing company purchasing shares in foreign companies.
- Horizontal: Here, the car producer would invest in a firm within the same industry as domestic production, but in a different country. For instance Toyota may invest in Citroen.
- Vertical: In this case a company will buy into a firm in a different industry, in another country. This allows the investing company to broaden its product range and diversify. It can also help spread risk. This can be further broken down to:
4.1 Backward: Here, a company from Japan would invest in a firm, in a host country, which would be suitable as a supplier for the components used in car production.
4.2 Forward. This is the reverse of backward investment, where the car producer may invest in a dealership, thus providing an outlet for the company’s cars in a foreign country.
There are three broad reasons a firm may engage in FDI - these are centred on cost saving strategies.
- Expansion may allow the company in question to lower costs in two ways. For example if Honda wanted to export directly into a foreign market, they would face additional costs in trade restrictions such as the tariffs America imposed on imported Japanese cars. This would raise the price of the vehicle and demand would consequently fall for this product. The other way of reducing expansion costs is by lowering the transportation costs. Cars are large items therefore expensive to transport, hence having local production plants in countries where trade is completed means costs are kept down.
- FDI can also allow firms to lower its costs by exploiting resources in the host country. This could be raw materials or cheaper labour. For example, many developing countries are attractive due to the availability of cheaper labour.
- Finally by investing in foreign markets companies can help to lower risk. It allows the firm to be less reliant on specific markets - giving it more stability, and enabling it to grow in a controlled way. Recent years have seen the Japanese market weaken so investing in a foreign market allows the car producers to spread risk
The costs and benefits to FDI must be considered in terms of those applicable to the Host and the Home country. These are displayed in figure 4.3.
Figure 4.3: Costs and Benefits of FDI in terms of Host and Home countries.
4.2 Exporting
A strategy of exporting vehicles to other countries is another means of entering new markets. Many Japanese car producers attempted to do in order to enter the American car industry for example, however this method was somewhat unsuccessful, due to the restrictions imposed. The advantages and disadvantages are listed below:
Figure 4.4: The advantages and disadvantages of exporting.
4.3 Licensing
Licensing tends to be more appropriate for intangibles, a licensor grants the licensee the permission to use the intangible for example the brand name for a set length of time in exchange for royalty payments. It may be appropriate if a firm wishes to license its technology involved in car production for example. This entry form has benefits and costs as well.
Figure 4.5: Advantages and disadvantages of Licensing
5.0 Producers Strategies and Structures
Today car manufacturers have become more like car assemblers. They give production of the component parts of the cars to other firms, who assemble these parts. This enables a car manufacturer to customize the car for each market, with cost of customisation supported by the suppliers, which is a common development of the multinational strategy within this type of industry.
Most Japanese car manufacturers were in a difficult situation in 1997-1998, with high debts, over-capacity facilities, and deficits. They have developed two main strategies; Toyota and Honda decided to grow internally. Others decided (or have been obliged) to ally with other car manufacturers.
5.1 Toyota & Honda
Their strategy is based on internal growth to reach critical mass. Toyota has been very aggressive: re-entering Formula One with a wholly-built car (building worldwide brand awareness), investing heavily in Europe (where Toyota was not a leader), and consolidation of leadership in other areas. The organisation has developed own-facilities (as in France) or alliances to share the cost of production. This enables better understanding of local markets, which in turn makes it possible for Toyota to serve each market’s specific tastes and preferences. Consequently, Toyota is now one of the most globalized car manufacturers in the world.
Honda, which shares the same strategy, is not so aggressive. Their complicated structure limits their ability to invest in Europe and build the same awareness as Toyota. The structure is multinational, between different products, and geographical structure between areas. They are currently trying to change this structure, but are experiencing difficulties.
5.2 Nissan
Nissan was close to bankruptcy in 1997. Their main problem was huge debt and over-capacity. They needed money to reduce their debt, and rationalize their production facilities.
In 1999, Renault and Nissan formed an alliance. Renault initially acquired a 36.8 percent stake in Nissan (€4.6 billion) and in 2003 increased that share to 44.4 percent. As the Nissan Revival Plan has worked, the “Alliance” is now trying to integrate management and succeed in being a globalized firm following a transnational strategy.
Figure 5.1 shows the structure that will be built to run the alliance between Nissan and Renault
Figure 5.1: The new structure at Renault/Nissan BV
We can, however, see that Renault is controlling the Alliance as they control management of all the structures (supported by a financial control).
But is this structure adequate? Indeed, Renault’s strategy has always been based on innovative cars (consequently they must meet high demand if a model is successful or withdraw the model if it fails), whereas Nissan’s strategy is based on volume and diversity. The strategy therefore must be coherent throughout the merged organisation and undoubtedly changes in structure.
6.0 Key Success Factors - Honda
Honda prides itself on being an innovative company offering high quality cars at a reasonable price. They have a presence in many countries across the world gained predominantly through foreign direct investment. The reasons for their success are as follows.
Strategic decision-making at Honda had previously been concerned with ‘groupism’ and horizontal communication but in the early 1970s a new CEO changed this to individualism and a more vertical structure. This change of direction was really a change of emphasis, which at Honda occurred from time to time when deemed necessary by management, i.e. when the external environment prompted a different approach. Honda’s ability to innovate and surprise has enabled its rapid growth globally due to its rapid internalisation firstly of sales then production.
The concept of the ‘dualist puzzle’ underlies Honda’s strategic management, which attempts to solve the dichotomous issues that characterise business. For example the dichotomy between the work organisation (efficiency but at the same time people- orientated) and that of business strategy (low cost but also differentiation) complicate business. However Honda’s management recognised the significance of this concept so their strategic approach to business has focussed on the dualist puzzle and partly explains their resulting growth and success. Intrinsic to their strategy was the ‘right first time’ Japanese principle, as well as seeking quality in the products rather than testing it after manufacture. (This was known as ‘building in quality’ as opposed to ‘testing quality’). The result of this was lower costs due to less downtime and waste, and reduction of delivery lead times.
Praising the success of individual employees and their personal innovations fostered competition between them – for example company-wide quality circle competitions which resulted in innovative ideas and increased motivation. However individualism and competition are not emphasised above the most important corporate culture features of loyalty to Honda and co-operation with fellow employees
6.1 Structure
Honda is structured as a ‘web-like’ organisational form, which is a very complicated structure. It involves individual processes, horizontal and vertical structures, formal and informal relationships and positions – therefore it’s difficult to recognise the actual structure of Honda.
6.2 Product strategy
Honda’s competitive advantage has been its advanced internal combustion engines which are used in all products. The aforementioned dualist puzzle solving strategy of Honda puts emphasis on the mental process of technology research, and the philosophy behind the product designs enable greater product strength.
The organisation’s production and logistics strategy, which focuses on the assembly line, is another contributor to Honda’s success. Initially, they experimented with a ‘free-flow’ assembly line, which combines productive efficiency and is not like the traditional assembly lines, which create boredom among workers. The result is a more interesting production line but no sacrifice of efficiency (i.e. solving one of the dichotomous puzzles which states that efficiency requires lack of worker stimulation thus potentially de-motivating employees). The system adopted gave workers more control and consequently increased job satisfaction, which in turn enhanced motivation, and according to motivation theory, more satisfied workers will be more productive and innovative. In the automobile industry there are two opposite methods of production, large-lot mass production and flexible lot-of-one, so organisations have traditionally chosen one or the other. Both concepts have benefits and drawbacks so Honda developed a small batch production system to combine the advantages of large lot (which are simpler logistics and quality control systems, less error, simpler production schedules) and lot-of-one (enabling wide range of products, greater worker involvement and satisfaction) production.
Conclusions
It has been shown that Japanese car manufacturers are now more akin to assemblers, with part components being produced across the world. The assembly is also global now and many firms have a mix of multinational and transnational structures.
The global market is maturing and competition is intense, so all players have to offer additional value. The Japanese manufacturers are known for quality and reliability coupled with innovation. However, they are often seen as uninteresting in design compared to European firms.
Organisations such as Honda are looking into the problems of improving quality, yet reducing costs and efficiency versus differentiation. Their answer has been to turn to an individualist culture, combined with a batch processing flow of production. This has allowed workers to build in quality and take responsibility for quality levels.
Both Honda and Toyota have chosen to grow internally to cope with increasing demand, rather than enter joint ventures or acquire other companies. The relaxation of legislation has allowed more FDI and Greenfield investment.
Japanese firms show no signs of slowing down, but can they be classed as Japanese firms? Over the next 10 years it is expected that most firms will be truly global, with only a historic tie with the original Japanese homeland.
8.0 Appendices
Appendix A
PLEST
Political-Legal
- Un-cooperative governments may protect infant/own industries
- Barriers to trade making it cheaper to buy own country’s cars (thus more expensive to buy Japanese)
- If Britain doesn’t adopt the euro, Nissan have threatened to pull out of Washington – negative connotations of Japanese manufacturers from UK customers loyal to their own workforce who have been made redundant
- Politically, Japan is a stable country, no huge swings in style of government
- Highly regulated in forms of inward FDI until 1996. (Merrill Lynch)
- Government legislation relaxed for inward and outward FDI
- There has been a toughening of environmental standards such as measures to halt global warming and anti-exhaust emissions standards manufacturers have to change designs, which is costly.
Economic
- Price of oil (which is ever-rising) may impact how likely people are to buy new cars / drive at all
- With economy heading towards recession (according to some economists) consumers have less disposable income and may thus be reluctant to buy new cars / want cheaper cars / cars with better fuel-economy
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A year ago, GDP growth in the euro area was tipped to be a respectable 2.8% in 2003 by The Economist's poll of forecasters; now it is expected to be only 1.1% - thus shrinking market, US down from 3.6% to 2.5%, Japan down from 1.2% to 0.5%
- Jobs are also disappearing in the euro area which means less disposable income to purchase new cars – however could be opportunity if Japanese are lower cost than others
- Deflation in the Japanese economy (stockmarket is currently at its lowest in 20 years) may impact ability to purchase, although being global in production may protect as not that much producing is in Japan for most automobile manufacturers (need to check stats – this is very random statement which may not be relevant but I just saw ‘Japan’s economy’ and thought I should include something of it)
- The war in Iraq, reaction to the SARS virus and economic uncertainty look like restricting trade growth to less than 3% this year.
- Automotive industry already globalised in terms of markets
- Nature of exporting cars necessitates some form of FDI
- Changes in global economies make FDI more attractive
- High cost of capital and resources and instability of Yen
- The car market formed by Japan, the United States and Europe has matured and competition has become increasingly intense
Socio-cultural
- Concerns about the environment may be a threat as people may be more aware about fuel-efficiency and more environmentally friendly cars (lower emissions)
- Split on Iraq may harm US-Europe trade (thus implications for Japanese industries located there – possibly)
- A new World Bank publication, the Little Green Data Book 2003 highlights countries emitting the most CO2 which has the US as number one, so if this is well publicised there may be new legislation to control emissions more, impacting manufacturing processes and the products they produce
- Oil’s hour of reckoning may be approaching in connection with ethics due to emerging alleged bribery
- Cultural problems associated with Japanese working practices
- Cultural differences in management styles
- Japanese team working
Technological
- Better public transport systems may be a threat to private transport as a whole
- Automotive industry is technology driven
- Need to safeguard some technologies and intellectual property
- The increase in the toughening of environmental standards have forced Honda to increase expenditure on R & D and environmental capacity, this has therefore affected their bottom line.
- Dedicated automotive networks such as ANX in the USA and JNX in Japan have recently been developed as open platforms for B2B transactions in order to increase efficiency. This could promote further globalisation of the auto industry as a result of strengthening relationships.
Appendix B
SWOT Analysis
Strengths
- Bad reputation post-War has been completely reversed
- Reputation for quality and reliability
- Innovative with new models taking considerably less time to develop and introduce into the market than European and US counterparts
- Positive image for workforce too – consumers are aware that employees are treated well and integral part of organisation
- Japanese manufacturing techniques are second to none
Weaknesses
- The tendency, in the past, of Japanese automotive manufacturers to see Europe as a single regional market with similar tastes rather than a diverse series of markets
- Car designs have branded by Europeans as uninteresting
- Honda has experienced recent decline in sales in Europe Hon
- Honda lost Y 5.55 billion in the period 1998 – 2001 in Europe.
- Have had little foresight with regards to the diesel market and have catching up to do in this area
- Weak distribution networks as a result of relying too heavily on imports from Japan over local production
- The negative view by executives of Europe as a secondary market in terms of prestige and importance in comparison to North America.
Opportunities
- If demand for air travel and foreign holidays continues to decline, there may be increased demand for cars (new) as people decide to partake in their own driving holidays and buy a new car to do so (quite far off but possible!!)
- Opening up of markets could create new opportunities
- Richer countries with disposable income e.g. India’s middle classes may be new market to focus on
- China’s opening up economy may have opportunities if people are becoming more able to purchase cars and infrastructure (including roads necessary for cars) is being improved
- Europe targeted as a key area for growth and change
- Opportunity to develop the diesel market
Threats
- Charges for using roads, e.g. M6 Motorway, may put people off using cars and thus buying new ones or making sure theirs is fuel-efficient
- US and European rivals copying business model and engaging in more aggressive marketing campaigns to win customers
- Rising oil prices due to War in Iraq may put people off buying cars – perceived as too expensive
Appendix C Culture and Hofstede’s Dimensions
According to Hofstede (1984) Culture is “the collective programming of the mind, which distinguishes the members of one category of people from another”. As we can see from Figure 8.1 there are several determinants to what culture is and how norms and value systems are developed. Hofstede, through his research into culture, developed his 5 indices to define culture. The key points are outlined below:
Figure 8.1: The Determinants of Culture; Source, Hill (2003)
Power Distance Index (PDI) focuses on the degree of equality, or inequality, between people in the country's society. A High Power Distance ranking indicates that inequalities of power and wealth have been allowed to grow within the society. These societies are more likely to follow a caste system that does not allow significant upward mobility of its citizens. A Low Power Distance ranking indicates the society de-emphasizes the differences between citizen's power and wealth. In these societies equality and opportunity for everyone is stressed.
Individualism (IDV) focuses on the degree the society reinforces individual or collective achievement and interpersonal relationships. A High Individualism ranking indicates that individuality and individual rights are paramount within the society. Individuals in these societies may tend to form a larger number of looser relationships. A Low Individualism ranking typifies societies of a more collectivist nature with close ties between individuals. These cultures reinforce extended families and collectives where everyone takes responsibility for fellow members of their group.
Masculinity (MAS) focuses on the degree the society reinforces, or does not reinforce, the traditional masculine work role model of male achievement, control, and power. A High Masculinity ranking indicates the country experiences a high degree of gender differentiation. In these cultures, males dominate a significant portion of the society and power structure, with females being controlled by male domination. A Low Masculinity ranking indicates the country has a low level of differentiation and discrimination between genders. In these cultures, females are treated equally to males in all aspects of the society.
Uncertainty Avoidance Index (UAI) focuses on the level of tolerance for uncertainty and ambiguity within the society - i.e. unstructured situations. A High Uncertainty Avoidance ranking indicates the country has a low tolerance for uncertainty and ambiguity. This creates a rule-oriented society that institutes laws, rules, regulations, and controls in order to reduce the amount of uncertainty. A Low Uncertainty Avoidance ranking indicates the country has less concern about ambiguity and uncertainty and has more tolerance for a variety of opinions. This is reflected in a society that is less rule-oriented, more readily accepts change, and takes more and greater risks.
Long-Term Orientation (LTO) focuses on the degree the society embraces, or does not embrace, long-term devotion to traditional, forward thinking values. High Long-Term Orientation ranking indicates the country prescribes to the values of long-term commitments and respect for tradition. This is thought to support a strong work ethic where long-term rewards are expected as a result of today's hard work. However, business may take longer to develop in this society, particularly for an "outsider". A Low Long-Term Orientation ranking indicates the country does not reinforce the concept of long-term, traditional orientation. In this culture, change can occur more rapidly as long-term traditions and commitments do not become impediments to change.
Figure II shows the dimensions for Japan compared with the World and European Average, along with individual country dimensions. As we can see form the graph Japan has a high score on Masculinity and uncertainty avoidance, meaning it has a high reliance on rules and legislation. It also has a high score on Long Term Orientation, meaning it gives credence to traditional values, but may be slow to take up new working practices.
In comparison the European Average (Figure iii) shows less inclination to masculinity and rule-based structures. There are no figures for LTO for Europe as a whole but looking at the figures for U.K., Germany and The Netherlands there is a suggestion that European countries have a less traditional view. This will mean that they are more open to change and are more likely to make rapid improvements.
In the USA, as in the UK, there is a high degree of individualism and less inclination towards collectivism, a stark contrast to Japan. This could cause problems in working practices if not handled properly.
For Internationalisation to be effective it is important that the firm understands the culture in the host country. With host country employees and multi ethnic executives it is possible to prevent ethnocentric behaviour.
Culture and Competitive Advantage
The value systems and norms of a country influence the costs of doing business in that country and therefore affect competitive advantage. Attitudes towards group working and collectivism may also affect manager-workforce relationships, whilst social structures and religion can influence pay systems. Companies with high levels of co-operation tend to enjoy greater productivity and profitability, which may go some way to explaining Japanese firms’ rise in the global marketplace.
Figure 8.2: Hofstede’s Cultural Dimensions
Figure 8.3: European Average
9.0 References and Bibliography
Hill Charles WL (2000) – International Business: competing in the global marketplace
4th Edition McGraw Hill Irwin
Baden-Fuller, C., and Pitt, M., Strategic Innovation (1996) London: Routledge
Baden-Fuller, C., and Stopford, J. M., Rejuvenating the Mature Business (1994) London: Routledge
Czinkota, M. R., Ronkainen, I., A., and Moffett, M. H. International Business (1999) New York: The Dryden Press
Websites:
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