Business Level Strategies Versus Corporate Level Strategies Business Essay

INTRODUCTION

Automobile industry is named ‘the industry of industries’ by Peter Drucker. Since its humble beginning the automobile industry has involved very much with the times. The industry which is dominated by Europe, US and Japan is currently going through extraordinary changes.

After a period of steady growth the industry started to decline in 2008, and declined further in 2009. Currently Toyota holds the majority market share of 10.9 per cent; Volkswagen holds 9.2 per cent share while Ford holds 7.2 per cent of the market share. (Datamonitor, 2009)

This report explores the business level and corporate level strategies of Honda Motors and also critically evaluated its process of reconciling dichotomies with reference to product related and process related core competencies.

The report examines the Mergers and Acquisitions (M&A) in the industry, and the impact of debts, potential synergy and new technology has on M&A are investigated with current examples.

How automobile players have been dealing with the corporate social responsibilities and its impact on the firms are also discussed. The leadership models by the Japanese management model and Western management model are compared and contrasted.

APPLICATION OF STRATEGIES

Business Level Strategies Versus Corporate Level Strategies

Pizam defined business level strategy as the approach taken by an organization to compete in its chosen markets (2005, pp. 54) Micheal Porter (1980) classified strategies into three generic types; cost leadership, differentiation and focus strategy (cited in Pizam, 2005, pp. 54) Each strategy assists the firm in gaining a certain competitive advantage in a particular competitive scope.

However Micheal Porter identified unique features for business level strategies for international businesses (Appendix 1); factors of production, demand conditions, related and supporting industries and firm strategy, structure and rivalry (Hitt, Ireland & Hoskisson, 2007, pp. 218)

A business level strategy of is its research and development. Hondas product development process is respected within the automobile industry for its sheer speed. Reducing lead time, combining productive efficiency with human dignity, mass production reducing the cost and achieving the expense of product variety are some examples of Hondas R&D accomplishments.

Honda has a wide international production network; with 89 production facilities (Wit & Meyer, 2004, pp. 665) Business level strategies determine the number of plants or production facilities and the locations.

Corporate level strategies is to identifies which businesses and industries a company should compete in, which value creation activities it should perform in those businesses and how it should enter of leave those businesses or industries to maximize its long-run profitability (Hill & Jones, 2009, pp. 285)

Corporate strategy in global context focuses on the scope of diversification, both product and geographical. (Hitt, Ireland & Hoskisson, 2009, pp. 220) Hitt, Ireland & Hoskisson also states that corporate strategy dictates business level strategies in order to standardize the firms products and sharing of resources across countries (2009, pp. 220)

While western management assumes that there is bound to be trade-offs between product quality, cost and delivery; high quality meant high cost etc. However the Japanese developed a ‘right-first-time’ approach which Honda adopts, which is a corporate strategy dictated to enhance the quality, reduces cost and differentiate the products hence a business level strategy.

Honda is the first Japanese firm to manufacture automobiles in the North America when it opened its assembly plant in Ohio is also a business level strategy dictated by corporate level strategy.

Other corporate strategies include venturing into the vehicle production from producing auxiliary engines for bicycles and venturing into foreign markets too. While they are product-related diversification here is an example of geographical diversification. Shareholding with European company British Leyland (now known as Rover Group) which was one of the least capable automobile manufacturers is a corporate strategy. Honda has production facilities at 33 countries, (Wit & Meyer, 2004, pp. 665) it is also a corporate level strategy of geographical diversification (Peng, 2006, pp. 390)

The Managing of Dichotomies by Honda Motor

Core competencies refer to firms’ internal attributes that provide a basis for competitive advantage (Peng, 2006, pp. 77) Core competencies provide access to a wide variety of markets, contributes significantly to end products benefit and are not are not easily imitated. (www.quickmba.com)

Prahalad and Hamel define a competence as “collective learning in an organization especially how to coordinate diverse production skills and integrate multiple streams of technology” (1990, pp. 82)

Core competence is often acknowledged in the form of tangible and intangible assets. Organizations should pay equivalent amount of attention to its employees ‘competencies once it starts to pursue core competences track (Bergenhenegouwen et al.,1996)

Tangible resources and capabilities are financial, physical, technological and organizational (Peng, 2006, pp. 78) For example, the ability to generate internal funds, ability to raise external capital, location of plants, offices, and equipment, access to raw materials and distribution channels, possession of patents, trademarks and copyrights, formal planning, command and control systems, integrated management information systems (Peng, 2006, pp. 78) Hence tangible resources are those which are directly involved in the manufacturing of a product.

Intangible resources and capabilities include human, innovation and reputational (Peng, 2006, pp. 78) Examples of intangible resources are knowledge, trust, managerial talents, organizational culture, a supportive atmosphere for new ideas, research and development capabilities, capacities for organizational innovation and change, perceptions of product quality, durability, and reliability among customers, reputation as a good employer and reputation as a socially responsible corporate citizen (Peng, 2006, pp. 78) These factors are mostly involved in the production process.

One of the core competencies Honda is famous for is in the advanced internal combustion engines which power the whole range of its products. The case of CVCC (compound vortox controlled combustion) engine designed so in such a way pollutants are not created. While the rest of the industry was battling with ways to clean up the emitted pollutants, Honda designed so that no pollutants were created to clean in the first place. The dichotomy was reconciled in a way there was no trade-off. Refer to Appendix 2 for the framework to integrate markets, platforms and competencies.

In the case of VTEC (variable valve timing and lift electronic control) controlled fuel injection electronically, control the ratio of fuel to air according to driving condition, hence what the process required, hence reconciling the dichotomy of fuel economy vs. engine power. Honda is known for its technologically innovative engines, refusal to accept taken-for-granted trade-offs characterizes all aspects of Honda’s strategic approach to technological change (Wit & Meyer, 2004, pp. 673)

Honda also developed an innovative strategy for the planning of production, a strategy which exhibits characteristics of both the traditional dichotomous poles; one pole is ‘large-lot mass production’ and the other pole is the ‘one piece flow’ (Wit & Meyer, 2004, pp. 675-6)

Honda’s own innovative strategy overcame this dichotomy and obtained the advantages of large-lot production which is simpler logistics and quality control, fewer chances of error, easier programming of production schedules. (Wit & Meyer, 2004, pp. 676) And also the advantages of small-lot production were obtained, those being ability to offer a wider range of products to consumers and greater worker involvement and satisfaction (Wit & Meyer, 2004, pp. 676)

MERGERS & ACQUISITIONS

Mergers are commonly characterised as the consolidation of two organizations into a single organization (Schraeder & Self, 2003) Acquisitions are the purchase of one organization from another where the buyer or the acquirer maintains control (Borys and Jemison, 1989)

“Car-making may be one of the world’s most competitive big industries, but rival producers have always been ready to cooperate on expensive new technologies and products when the cost or risk of going it alone was too high” (www.ft.com)

The search for partners is now heating as automakers pursue to build scale, lower costs, and pool efforts in zones like small cars, vehicle electrification, and new or emerging markets (www.ft.com)

Automotive mergers and acquisitions take place to increase market share, attain economies of scale and augment product ranges (www.reportsure.com)

Figure 1; driving factors of Mergers & Acquisitions for the years 2007, 2008 & 2009

Source: KPMG’s Global Auto Executive Survey, 2010, pp. 20

Too much Debt and Risk of Bankruptcy

“Companies believe that a rising rate of M&A will be driven partly by crisis factors, and partly by the long-term imperative of finding and developing new technology solutions for a changing market (the continued high stress that companies place upon new technology development” KPMG’s Global Auto Executive Survey (2010, pp. 20)

KPMG predicts that indebtedness will be the top of M & A. Also states that all cost pressures now seen as less significant (KPMG’s Global Auto Executive Survey, 2010, pp. 20)

According to the survey (KPMG Global Executive Survey, 2010), the specific global drivers of alliances, mergers and acquisitions will be driven by crisis factors such as too much debt and risk of bankruptcy 89 per cent (Car Magazine, May, 2010)

Ford Motors partnered with Mazda since 1970’s to raise cash and to focus on its own brand/ business. (www.ft.com)

PSA Peugeot Citroen & Toyota produces small cars in Czech Republic. (www.ft.com)

As the surveys, too much debt and risk of bankruptcy’s impact on Mergers and Acquisition (M&A) is very high and it is one of the driving forces of M&A.

Volkswagen in December 2009 announced its plans to buy 19.9 per cent of Suzuki which is to take a stake of approximately 3 per cent of Volkswagen. (www.ft.com)

General Motors owned an equity stake in Suzuki from 1991 to 2008

Potential for Product Synergies

Companies in auto industry merge to gain product synergies. GM has a contract with Renault to produce vans in Luton, England since 2001 to 2013 (www.ft.com)

Daimler announced strategic partnership with Renault and Nissan April 2010; three companies are to build small car engines and vans together. BMW and PSA Peugeot Citroen produce petrol engines together. (www.ft.com)

PSA Peugeot Citroen corporates with Mitsubishi Motors on cross over vehicles, electric cars and a joint plant opened in April 2010 in Kaluga, Russia. They also announced that they would work together to develop a compact sport utility vehicle (www.ft.com)

Access to New Technologies and Emerging Markets

Nissan has OEM (original equipment manufacturer) / supply deals with Mitsubishi, Suzuki, Mazda and Chrysler’s Dodge brand (www.ft.com)

Volkswagen currently owns 49.9% of Porsches’ sports car business, and Porsche owns 51.1% of Volkswagen. Talk of full-fledged merge is taking place (www.ft.com) Porshe corporates with Volkswagen and its luxury marque Audi sports vehicles. (www.ft.com)

PSA Peugeot Citroen with Fiat produces light commercial vehicles and vans. (www.ft.com)

New products and new technologies have moved higher among their highest ranking concerns, from an already high leading position in last years’ survey (KPMG Global Auto Executive Survey, 2010)

ROLE OF CSR IN THE AUTOMOBILE INDUSTRY

“A happy convergence between what your shareholders want and what is best for millions of people” Kofi Anan (2001)

Corporate social responsibility raises “consideration of, and response to, issues beyond the narrow economic, technical, and legal requirements of the firm to accomplish social benefits along with the traditional economic gains which the firm seeks” (K. Davis, 1973 cited in Peng, 2006, pp. 484)

Carroll (1999, p. 286) suggests that social responsibility covers “the conduct of a business so that it is economically profitable, law-abiding, ethical and socially supportive.”

Global automotive makers and suppliers are also seen to be more corporate responsible now. Going green is a common term in the industry now. Each company in the industry is coming up with a better plan each day. GM has promotes a building greener car, electric car experience and also teach green campaign. (www.gm.com)

Toyota has numerous CSR activities as development of environmental vehicles, design for recycling, pedestrian safety campaign, vehicle safety, and customer first, support of art to name a few (www.toyota.com) Refer to Appendix 3 for overview of Toyotas CSR activities.

Apart from producing many models of hybrid cars, Honda has devised a Honda LCA (Life Cycle Assessment) system. Honda is determined to measure, assess and analyse the full impact of its products on the environment. Honda LCA will monitor its products entire life cycle from the development and production stages to the final disposal at the end of its life. According to Honda, this will help them identify specific issues at each level of corporate activity and set corresponding targets for action.

CSR helps to create shareholder value, increase revenue base, helps in strategic branding, operations efficiency, provides better access to capital, enhance human & intellectual capital and also lower business risks (www.csrsingapore.org) Today investors are more aware of corporate governance and social responsibility, associating a firm to these features promote the image of the company and hence better access to capital and other such advantages. Therefore, organizational performance increases.

Financial advantages sought in the name of corporate social responsibility are creating shareholders value, increased revenue base, better access to capital and lower business risks. Non-financial benefits are enhanced goodwill of the organisation, strategic branding, and operation efficiency and enhanced human and intellectual capital.

While the players of automobile industry focus so much on CSR, the companies are being criticized too. Polonsky and Jevons (2009) states that criticisms has been raised in regarding to global automobile manufacturers who endorse “fuel-efficient” vehicles of various descriptions, while also producing fuel guzzling SUVs targeted at inner-city users.

CSR is a very serious matter. CSR is not only associated with responses to crises, but it has also led to many crises, due to negligence of responsibilities as a corporate citizen. Non-compliance can be expensive and can even push corporations into existence threatening controversy- poor labour relations or public hostility. (Keinert, 2008, pp. 103) And threatening government or civil society action can lead to a slump in sales, lost market share and even withdrawal of capital (Keinert, 2008, pp. 103)

LEADERSHIP; JAPANESE STYLE VS. WESTERN STYLE

“Japanese and American Management are 95% the same, yet differ in all important respects” Takeo Fujisawa, founder of Honda Motor Company. In the early 1960s to the 1990s, Japanese management claimed a prominent place in the consciousness and management discourse of the west.

Western management involves mass, standardized and fordist production while the Japanese prefer lean, flexible and post-fordist production. A mass production system focuses on producing a single product for a mass market, where else lean production focuses on producing a finite set of standard products designed for a segmented markets demand (Swamidass, 2000, pp. 451)

Fordism is the transformation of the economy from agricultural to industrial to mass production to mass consumption. (www.willamette.edu) Where western management model is based at this, the Japanese management mode is post- fordist, the period after that. Mass production equals to fordist standardized production and lean production creates flexible and post-fordist creations.

In the work process, western models are taylorist, do workers and unskilled workers. The Japanese work process consists of post-taylor, think workers and polyvalent. Taylorist is a means of detailing a division of labor in time-and-motion studies and a wage system based on performance (www.vanderbilt.edu) which western work process adheres to. The workers are do workers as in, they do what is asked, and thinking is not necessary nor is skilled workers. While the Japanese are post-taylorist, their workers are thinkers, they are to think and come up with ideas for the tasks they are entrusted with. Also under Japanese management style, workers are multi skilled.

Production, organization and logistics involve large-lot production, just-in-case method of inventory management and push system. The Japanese management model focuses on, small-lot production, just-in-time and pull system. Just-in-time method is a fool proof method where production, purchasing and distribution all happens just-in-time. In western management model is just-in-case method is more popular. (www.leanmanufacturingconcepts.com)

Pull models strive to persistently expand the choices offered while at the same time assisting people to find the resources that are most applicable to them unlike push models treat people as passive consumers (even when they are producers/workers) whose needs can be expected and shaped by centralized decision-makers. (www.johnhagel.com)

The organization structure is vertical with fragmented duties and individual as responsible. In the Japanese management model, the structure is horizontal, with broad duties for employees and group is responsible for success of failure.

Labour relations are job control focus, cross-company unions and hire and fire strategy. In the Japanese model labour relations are employment conditions focused, enterprise unions and job-for-life employed.

Western organizations have separated firms and there are distant inner-firm relations, where else in the Japanese management model it has Keiretsu families and there is close inter-firm relations.

There is no better or worse model among the two, as it depends on the situation. And there is no single good method, the situation and the issue in question should be closely examined before choosing the most appropriate model. Just like Honda Motors has, it does not practice one style of management model, the model chosen depends on what the best one is for the firm, given the situation.

CONCLUSION

The performance of the industry is forecast to accelerate, with an anticipated CAGR of 11.5% for the five year period 2009-2014, which is expected to drive the industry to a value of $2,526.6 billion by the end of 2014 (Datamonitor, 2010)