The past two years have been a turbulent time for the global automobile industry. Worldwide sales have plummeted, resulting in massive layoffs and cost cutting measures. Even established players were not spared as all scrambled to minimize losses. This report examines the problems faced by the automobile industry since the crisis and discusses the strategies used by successful car makers like Honda.
2.0 LIMITATIONS OF THE REPORT
Secondary data had to be relied upon owing to the small scale and time factor of this research. Had the scope been wider and more time provided, primary data could have been obtained for the research.
SCOPE OF THE REPORT
This report encompasses a few major areas which are as follows:
A critical evaluation of the auto industry in the last three years (2007 -2010)
A comparative analysis of the strategies employed by key players
A critical review of leadership style practised by the key players
To what extent the auto industry applies the concept of CSR and its impact on the industry.
BRIEF OVERVIEW OF THE GLOBAL AUTO INDUSTRY
As mentioned earlier, the global automobile industry suffered a major crisis from 2008 to 2010. This was due to a combination of factors such as the spillover effect of the global recession, spiking fuel prices and changing consumer tastes. Since then, the industry has done some soul searching and is in the midst of reinventing itself.
In terms of total vehicles produced in 2010, China is the leader followed by Japan and the United States. However, in terms of manufacturers, the top three players are Toyota, General Motors and Volkswagon.
5.0 APPLICATION OF THE STRATEGIES
5.1 Business Level Strategy versus Corporate Level Strategy
Sometimes, the terms business strategy and corporate strategy are used interchangeably as if they mean the same thing. However, the terms ‘business level strategy’ and ‘level strategy’ do not mean the same thing, although they may have similar characteristics. Business level strategy refers to the various strategies employed by a business to achieve organizational goals. The business can be small, medium or large. The object of a business level strategy is to enable the business to overcome the five competitive forces and achieve competitive advantage.
This is done in either one of two ways. The first is differentiation which means positioning the product as being distinct compared with what competitors offer (Dess et al, 2008). Differentiation enables the business to sell its products at a premium price because the product or service is unique. Luxury car makers like Mercedes Benz and BMW adopt this approach.
The second approach is through low cost, or cost leadership (David, 2009). Here, the business pursues a ruthless cost cutting approach so that it is able to price its products lower than competitors. This approach is adopted by many car makers as they seek to penetrate the low end market. Here it should be noted that the exact approach taken by the business depends on many factors such as the business environment and the industry’s life cycle stage.
The assessment of business strategy involves a SWOT analysis to ascertain if the firm is using its resources effectively. This will help it identify the capabilities that must be cultivated to further enhance profitability.
In contrast, corporate level strategies refers to the strategies employed by large corporations in managing their businesses. These needs are different from smaller businesses because large corporations typically manage a portfolio of businesses. Hence, there are a few overriding concerns for a corporation. One is achieving synergy and the other is managing risk (Dess et al, 2008). Synergy is much sought after to make the corporation stronger and to achieve competitive advantage. Since corporations sometimes acquire other firms, it is imperative that the acquisitions serve a useful purpose and complements the corporation as a whole. All too often, mergers and acquisitions fail and synergy is not achieved.
The second major concern of a corporation is to minimize corporate risk. This is accomplished through diversification, either in related or unrelated industries. Companies diversify through mergers, acquisitions, joint ventures, strategic alliances and internal developments (Anslinger and Copeland 1996). Hence, corporate level strategy serves to identify which approach is most suitable for the corporation in achieving its many goals.
Analysis of corporate level strategy is performed to identify whether the company is competing in the right business given the opportunities and threats that are present in the environment. If the company is not suited, then it should realign its diversification strategy to achieve competitive advantage. Another issue is whether the corporation is managing its portfolio in a way that creates synergy among its businesses. Finally, corporate level strategies should not be an ego booster for top executives but instead be appropriate for the corporation and all its stakeholders.
The Managing Dichotomies by Honda Motors
Conventional Western literature on strategic management asserts that there is a process called ‘reconciling dichotomies’ which is imbued in all aspects of strategic management. Supposedly, this is evident in the buyer supplier relationship, business strategy, the organization of work and even product development. Accordingly, this results in a tradeoff between two competing forces, and that management has to choose one of two mutually exclusive options. In other words, management cannot have its cake and eat it. Concessions have to be made or reconciled. Yet, Honda seems to flout this conventional belief as can be seen in one aspect of its dichotomies, that is the ‘product related core competencies versus process related core capabilities’.
First, let us define what is meant by ‘core competencies’. According to Porter (1990), a core competency is a well performed internal capability that is essential to a firm’s strategy, competitiveness and profitability. At Honda, there are a number of product related core competencies. Chief amongst them is the development of the compound vortex controlled combustion (CVCC) engines (first for motorbikes then cars) which is the major engineering breakthrough that propelled the company to success. Western automakers concede that there is a tradeoff between the various pollutants from internal combustion engines. The conventional wisdom was that trying to reduce one pollutant invariably led to an increase in another. Honda had the brilliant idea of adding another process to clean up the pollutants after combustion, thus leading to superior engine performance.
The success of the engine is not just superior engineering but that it can be used to empower a wide range of products. Honda demonstrates the power of being able to marry the mental process of technology research and the philosophy behind product design. Indeed, successful reconciliation of dichotomies is evident in the design and technology found in Honda products and these contribute to instant and enduring competitive advantage for the firm.
The process related core competency that is prevalent in Honda is the sheer speed in reducing new product development time which is the object of admiration and perhaps envy among its competitors. Most Western car makers take approximately five or more years to launch a new car model and even rival Japanese firms take around three to four years. However, Honda is able to accomplish this feat in an astounding two years. This is accomplished using a two pronged approach. The first is the organizational approach to product development led by SED teams. SED teams work on proposals from start to finish. The second approach is through the firm’s specific model replacement system. This is more than mere window dressing of preexisting models as the company systematically replaces all parts of its models after four years. This results in a smoother transition from one model to another and is termed the ‘iterative’ model approach.
Behind Honda’s success at reconciling dichotomies is its philosophy which emphasizes ‘right first time’ or ‘build in quality’. Honda does not accept conventional wisdom and constantly challenges accepted norms in pushing the boundaries of the automobile industry. By getting things right the first time, the company is able to reduce wastage and obsolescence while keeping production costs lower and at the same time not compromising on quality.
6.0 THE RULES OF MERGERS AND ACQUISITIONS
6.1 Brief Explanation
Mergers and acquisitions of firms have existed for years but in the last two decades we have witnessed a proliferation of acquisitions which occur in waves. The first wave occurred in the 1990s while the second wave occurred from around 2001 to 2007. These waves took place during times of economic growth where companies were flushed with surplus cash and wanted to prove they knew how best to manage their working capital. However, mergers and acquisitions are not as simple as they might appear to be as buying over another company may not necessarily solve a corporation’s problems or bring it to greater heights. There are a number of major factors that will impact mergers and acquisitions in the global automotive industry, which are discussed in the following sections.
Too much debt and the risk of bankruptcy is a major factor that must be considered before a firm decides to take over another company. A corporation has two major ways to finance its acquisitions, that is through the issue of debt or equity (Begley and Boyd, 2003). While corporations typically perform detailed analyses to determine a fair price for a target firm, the latter’s shareholders may be hostile to the takeover bid. Hence, there is a bidding war between both sides to reach an agreeable target price. The danger here is that the acquirer may go overboard in wanting to acquire the target and end up paying far more than what the target is worth. A failure to achieve the desired effect from mergers and acquisitions put the corporation at risk of bankruptcy.
If the acquisition is financed through the issue of shares, a few likely scenarios can happen. Assuming that the competitive advantages through the acquisition are sustainable and difficult to copy, investors will not be willing to pay a high premium for the stock. Similarly, the time value of money must be factored into the stock price (Asaf, 2004). Acquisition costs are paid up front. Conversely, the acquirer pays for research and development, ongoing marketing and capacity expansion over time. Stock analysts want to see immediate results from the large cash outlay for an acquisition and if the acquired firm does not produce results quickly, investors often sell the stock, driving the price down (Dess et al, 2008). Therefore, the parent company may experience a decline in stock prices in the short term and its long term stock price will depend on how well the merger or acquisition works.
On the other hand, if the company finances its acquisitions through debt, then the debt needs to be serviced. Interest needs to be paid and if the merger is unprofitable and the acquirer ends up paying for sustained losses, it could erode the overall profitability of the corporation. This diverts cash flow to the loss making subsidiary and the parent company may experience problems servicing its debt. All borrowings also come with a repayment date and the parent company needs to take into consideration factors such as the redemption of debentures (if that is the source of financing) and how to provide funds for it. All these put the firm in a very precarious financial position with the risk of bankruptcy. High leveraging and an unhealthy cash position will cause a business to incur more stringent terms and higher interest rates from future lenders so this may perpetuate an already bad situation to become even worse.
The second factor is the potential for product synergies. Synergy is the outcome which is more than the sum of the two parts combined and it has been repeatedly stated that synergy brings many competitive advantages (Begley and Boyd, 2003). The four competitive advantages that can be obtained through synergy are the acquisition of new products, skills and capabilities, the extension of market share, the consolidation with an industry that has reached a higher state of maturity and to create a new industry by transforming an existing one (Greenwald and Kahn, 2005). Here, we will concentrate on product synergies.
In Malaysia, the acquisition of MV Augusta by Proton is a famous example of an attempt at acquisition to achieve product synergy. In December 2005, Proton acquired a controlling stake in the Italian motorcycle maker MV Augusta in an attempt to achieve product synergy. However, the venture was a terrible flop resulting in terrible losses for Proton. In the end, Proton was forced to sell the company for a token sum of 1 Euro in August 2007 (Proton, 2010). Similarly, Proton purchased the British car maker to establish a presence in the luxury car market but this too was a disappointment.
The third factor is access to new technologies and emerging markets. Another strategic driver for acquisitions is acquiring innovations in technology (Stieglitz, and Heine, 2007). Normally, innovation occurs in smaller companies that have fewer constraints than a larger one. Therefore, acquiring these firms would provide immediate access to these innovations. However, old and reputable companies too can have a range of innovative products and technology so these may be sought after as well (Sharma, 1999).
When a corporation acquires another firm in a different market, it immediately has access to this market. Western firms in particular are eyeing emerging markets like China, India and Brazil for they record phenomenal growth rates and have ever growing consumer markets. Often, it is difficult for a new entrant to penetrate a new market as there are significant entry barriers. These are not just legal and government barriers, but social and cultural ones as well. Therefore, acquiring firms in these emerging markets is seen as a quick and relatively easy way to establish a presence in these countries. For example, General Motors has acquired a stake in Chinese car makers to penetrate the lucrative China market and other Western countries are aggressively trying to make inroads in China and India.
7.0 THE RULES OF CSR
7.1 Brief Introduction
Corporate Social Responsibility (CSR) is defined as “the continuing commitment by business to behave ethically and contribute to economic development while improving the quality of life of the workforce and their families as well as of the local community and society at large.” CSR focuses on what is termed the triple bottom line – people, planet, profit (O’Donovan, 2002). Supporters of CSR believe that it is compatible with the traditional goals of a business and in fact can enhance a business. These supporters assert that CSR must become an integral part of the wealth creation process. Therefore, if CSR is managed properly, it should enhance business competitiveness and maximize wealth creation value to society. Also, when the economy is facing challenging times like now, there is greater not lesser need to practise CSR. The benefits of CSR will be discussed in detail in subsequent paragraphs.
One theoretical basis for CSR is the stakeholder theory. Stakeholders are ‘groups from whom the organization has voluntarily accepted benefits, and to whom the organization has therefore incurred obligations of fairness’ (Phillips, 2004). A firm’s traditional stakeholders are its shareholders, employees, creditors, customers and the government. However, the scope has been expanded in recent years to include non-governmental organizations and the community as a whole. CSR is utilized as a management tool for managing the information needs of the various powerful stakeholder groups and managers use CSR to manage or influence the most powerful stakeholders in order to gain their support which is vital for survival (Freeman et al, 2004). The key issue here is identifying the concerns of the various stakeholder groups which are often different, and how to satisfy them. Hence, the corporation is driven to act in a more ethical manner to avoid antagonizing powerful stakeholders.
CSR impacts a firm in both financial and non-financial areas. The exact impact varies from country to country. In developed countries, the automotive industry is viewed with skepticism due to its poor environmental record and dwindling job creation potential. This might adversely affect the share price. Hence, by acting in an ethical manner and by engaging in CSR, the management of a automotive firm is actually serving the best interest of shareholders by maximizing their wealth (Deegan, 2000). Therefore, it would be wrong to accuse top management of robbing from shareholders for seemingly frivolous CSR initiatives for these actions actually boost the company’s image and brand, thus contributing to increased shareholder value. Also, there are a growing number of investors, particularly in developed countries that only invest in green companies. These investors shy away from unethical companies that cause widespread damage to the environment or do not contribute in any meaningful way to society’s well being. Therefore, by performing CSR, an automotive company also increases its attractiveness to potential shareholders.
There are also non-financial impacts of CSR on the company. It has been documented that in firms that act in an ethical manner, employees have a greater sense of pride and purpose. This positively affects staff morale which translates into better job performance (Deegan et al, 2003). On the other hand, employees working in unethical firms are sometimes frustrated and embarrassed by their organization’s conduct and this affects their performance.
In short, global automotive makers and suppliers will benefit from better financial and non-financial performance through CSR.
7.3 The Future of CSR
The number of companies jumping on the CSR bandwagon has been increasing in recent years and it is a trend that is expected to continue (Freeman et al, 2004). While CSR is not mandatory but a largely voluntary practice, corporations are beginning to view it as an excellent way of engaging with their stakeholders to create goodwill and to enhance shareholder value. Automobile manufacturers who have suffered negative publicity find their reputations improve after embarking on rigorous CSR campaigns.
8.1 Brief Description
There are many major differences between the Japanese and Western strategic models. For example, the Western strategic model emphasizes mass production and standardization. This is termed Fordist, after Henry Ford who invented mass production of automobiles. In contrast, the Japanese management model focuses on lean management that is flexible. This style is termed post Fordist.
The differences between both strategic models transcend all aspects of the business. For example, there are major differences in terms of work process. The Western model is Taylorist, whereas the Japanese model is post Taylorist. Western factory workers are called do workers who obey strict orders and are unskilled while Japanese workers are think workers and polyvalent.
The production organization and logistics also differ between the two approaches. Western factories favor large lot productions and just in case production. Products are manufactured not according to strict demand, but based on company targets and this is called the push system (David, 2009). In contrast, Japanese firms prefer small lot productions and they have perfected the concept of just in time (even though it originated in America). Japanese firms operate along the pull system.
The typical Western organization has a vertical organization structure. There is fragmentation of duties and individuals are responsible for their own actions. Japanese firms in contrast have a flatter and horizontal organization structure. Members have broad duty scopes and there is collective responsibility for actions and decisions.
Labour relations too differ between both approaches. Western firms take a more competitive approach in which employees are hired and fired according to performance and needs. There is a focus on job control and cross country unions. The Japanese firm is characterized by the job for life approach in which there are strong enterprise unions and the focus is more on employment conditions (Greenawald and Kahn, 2005).
Finally, there are differences between industry organizations. Western businesses emphasize on separated firms while Japanese firms focus on Keiretsu families. Western firms have distant inter-firm relations while Japanese firms have close inter-firm relations.
Personally, I prefer the Japanese management model. This approach is more suited for Asians, as it reflects our cultural norms and beliefs. The Western model may have its advantages and strengths, but it is not very good when placed in an Asian context. For example, we Asians prefer to ‘save face’ and favour collectivism over individualism. As far as possible, Asians try to take into consideration the feelings of others and only fire an employee as a last resort. Furthermore, the Japanese approach has other advantages such as a leaner organization structure that is more flexible and able to meet with changing demands of the external environment. It also emphasizes the importance of getting things right the first time and places a premium on quality throughout the production process. This helps eliminate wastage and reduces operating costs.
While the automobile crisis of 2008 has been traumatic, signs are showing that the worst may be over. Companies like Honda are bouncing back, mainly because they have strong fundamentals in place and the strategic vision to succeed. Indeed, all automobile makers can learn from Honda’s stellar example of reconciling dichotomies and pushing the boundaries of what can be accomplished. In fact, Honda’s success at tackling the industry crisis will make it stronger and more competitive and it is poised to become one of the main global automobile makers.