HONDA – THE INNOVATION STEPS

Page 1

EXECUTIVE SUMMARY

Honda Motor, the Japanese manufacturer of cars, motorcycles and power products is one

of the great success stories of the post-war Japanese economy. Established in 1948, since

the 1970s Honda has been widely recognized as a pioneers Japanese Car Manufacturer.

For the scope of this paper, we only investigate on the company’s Car division.

For many decades, the companies keep consistent with its core competency, which is

high quality and low cost based; and its direction, which is continuous improvement. In

other words, it is able to state that the company’s Strategic Planning Perspective has

brought about today Honda, one of the most valuable brand name in the world.

Can a market positioning and resource based view of strategy be reconciled in innovative

way in the company? By investigating on Five Forces and PEST model, we did point out

that the company has appeared to face challenges at a numbers of points in its history,

particularly in reconciling the company’s core competencies in its engineer ‘s pursuit of

technological mastery to the evolution of market demand. This is evident that the

notwithstanding image as a designer of sporty and technically innovative cars comprises

from two simple models i.e. Civic and Accord, has been kept for decades.

A classic dichotomy in organizational structures is between vertical and horizontal

structures. However, Honda management team think that organization like a sailing ship

on a narrow tack against the wind, progressing in a zig-zag fashion, first toward

individualism and vertical structure then back towards collectivism and horizontal

structure. Last but not least, the report supposes that the company’s car division could

strengthen its current position by integrating with other car manufacturer to enrich

customer’s choice, moving backward to control material’s quality and moving upward to

expand its dealer network.

Page 2

I/ INTRODUCTION

By advance of technology, many motor companies had become the leader in

producing cars such as Honda, Toyota, BMW and Ford. Honda was established by

Soichiro Honda in 1948. Honda has striven to attain its goals and satisfying its customer

from product development and manufacturing to marketing. In the report, we argue that

the process of strategic reasoning of Honda could be divided into four general categories

of activities including identifying, diagnosis, conceiving, and realizing.

Page 3

II/ IDENTIFYING

- Inside-Out Core Competency

Honda use inside-out methods when they create new technology, strategies and

research the market by themselves.

The technology and design are competitive advantage. For example: Honda’s

technology is the CVCC (compound Vortex Controlled Combustion) in 1969-1971 and

this engine was accepted in the world’s automobile industry because this engine could

reduce emissions effectively.

Honda was the first automobile company introducing the VTEC (Variable Valve

Time and Lift Electronic Control) technology in 1989 which was controlled the fuel

injection system and control the fuel ratio to air.

Page 4

Honda of America manufacturing was the first automaker in us using light weight

underbody coaching, sound deadener and application system. In addition, Honda also

improved time for design the new models. For instance, from started design to finish a

new model and takes Honda 4 years, while the western automobile took 10 years.

III/ DIAGNOGSIS

1/ SWOT MATRIX

Page 5

With the strength of brand name and the advances of technology, Honda can take

over the opportunities. For instance, to enter a new market, especially emerged market,

Honda will has great advance by using their good reputation. Moreover, Honda is famous

with fuel and cost efficiency products, so they can attract more customers. Honda can

reduce the cost of their products. Honda technology can make them become a leader in

hybrid cars.

However, Honda also has some weakness. Most income of Honda has come from

international market. They should focus more on Japan market or enter new markets that

have low risk of being affected by recession. Because of economic recession and

increasing in oil price, Honda should focus on the price and fuel efficiency of their

products to attract more customers.

Page 6

2/ PORTER’S FIVE FORCES

We use Five Force model to derive five forces that determine the competitive

intensity and therefore attractiveness of the Car market. However, there are still some

extra important factors which are also worth considering such as management culture.

Honda is stressing decentralized management structures, praise achievement of individual

and awards responsibility to young employers whereas the Japanese society founded on

centralization, collective decision making and responsibility and respect for the elders.

Page 7

A/ Supplier powers

Honda uses several opposed polar strategies to ensure their minimal dependency,

maximal flexibility and efficiency with their suppliers. Since Honda’s market share is

low in Japan the need for suppliers is also very low. Therefore, the supplier’s power is

significantly lower in this region. The overall suppliers’ power for North America is

stronger since there are about 80 components makers. Honda is depended on them.

a) Single and dual strategy

Single sourcing and multiple sourcing strategies are both used. For simple

components Honda contracts only one single contractor. For more complex units to

produce company contracts various contractors. Honda can advantage from multiple

sourcing strategies so the dependency decrease for more complicated products. The

advantages for single strategy is stable relationship ensuring consistency in quality and

possibility for long term contracts

b) Long term contracts

Switching cost is potentially high. Honda made various investments to its suppliers.

Company has invested its own capital to ensure proper development of some of its

suppliers. That makes switching cost very high. Therefore Honda has long term contracts

and long term relationships with its suppliers.

c) Control over the suppliers

Honda has a right to intervent into operations of its suppliers. For some components

makers, company directs purchasing of raw materials. Moreover Honda makes regular

check up on its suppliers.

B/ Buyer powers

Page 8

Buyers have medium buying power since the importance on individual costumer is

low. Moreover cars in general are high switching cost items for customers. On the

contrary buyers have variety of options of substitutes as well as competing car brands

The company is producing highly fuel efficient cars since company have realized

increased demand for fuel efficiency. Honda has managed to ensure high performance of

its products at the same time. Prices are low compare to the high quality of the

automobiles. Using high tech technology to develop high performance engines made

brand famous.

C/ Threat of Substitutes

The other means of transport are motorcycles (two wheelers or three-wheelers),

various public transportation (busses, trolleybuses, MTV, underground) and means of

transport for long distance travel (airplanes, trains, coaches) Each country has different

preferences in common means of transport. The government in some countries is also

putting regulations for cars purchase or increasing taxes for cars in order to limit number

of cars in the country.

D/ New entrants

The barriers to entry are extremely high. The brand new player would have it very

hard to enter the automobile market. The reasons for it are long proprietary learning

curve, difficult access to inputs, strict government policies, high capital requirements

needed and also because there are already several well build brands with strong

customer’s loyalty.

E/ Industry Competitors

There are several major rivals for Honda. Since Toyota, Suzuki and Mitsubishi

focus on similar market and have similar performance, quality and price characteristic,

they are Honda’s major competitors. Those brands are only the major competitors but

Page 9

nearly every car brand has one or more car models competing for the same target market

as Honda. The car industry creates enormous value for its buyers however the profits

retained in the industry are relatively low.

3/ PEST ANALYSIS

We use PEST model as a scan of the macro environment in which Honda operates

can be expressed in term of the following factors: Political factors which Honda might

concern about Environmental issue; Economic Factors which have positive sign from

Global Economic Recovery; Social cultural which encourage hybrid concepts; and

Technological Factors which relates to CVCC and VTEC system.

PEST MODEL

Page 10

A/ Political factors

Political factors are Government regulations and legal system, which the firm must

abide by, for instance, environmental issue, especially in environmental problem.

Although Honda Company is a reputation automobile company in the world, they still

face with these barriers when they approach difficult markets such as European and

North America. Moreover, they have to meet technical standards of technology in

environment-friendly in these markets.

B/ Economic factors

The world economy is recovering quickly after the financial crisis at the end

2008, so people have a higher standard of living and many developing countries have

gained a high growth rate in GDP such as China, India and Brazil. For example, China's

economy grew by 8.7 percent in 2009 and population is more than 1.3 billion, this is a

great market for Honda to enter. Therefore, Honda needs to introduce new models with

high quality and attractive design to adapt with all the market.

C/ Social cultural factors

Social cultural factors the demographic aspect. The demographic aspect is related

to the people and age, gender, and geographical distribution. People currently tend to use

automobiles which meet the standards in fuel-efficiency and environment-friendly. For

example, hybrid car, this is an automobile which powered by both an internal combustion

engine and an electric motor. The car functions can reduce the amount of gasoline using

and restrict the pollution issues.

D/ Technological factors

Honda always innovate their product technology throughout the year For instance,

compound vortex controlled combustion (CVCC) and variable valve timing and lift

electronic control (VTEC) which are two kind of Honda’s technology and the firm has

Page 11

succeeded many year with VTEC engine. Honda could reengineer the technology to

satisfy the consumers’ demanding, so the firm maybe easily expands in Europe and

America.

4/ AN UNWEIGHTS COMPETITIVE STRENGH ASSESSMENT

Page 12

In order to deeply understand about Honda’s competiors, we have developed an

assessment table in consideration of product quality, reputation, manufacturing

capability, technological skill, distribution network, new peoduct innovation, finance

resources, cost and customer service of Honda and its four key competitors which are

Toyota, General Motor, Nissan and Ford. Generally Honda finished as a third player in

car market. The company has almost the same product quality performance while the

company’s reputation and manufacturing capability has a lower score than Toyota and

General Motor.

IV/ CONCEIVING - Reconciling Dichotomies Strategy

To illustrate the Honda approach, let us look at a very significant instance of the

thought process that characterizes dichotomy reconciliation. Innitially, Western

management thinking has traditionally assumed trade-offs between product quality and

cost and delivery. In other words, this has been considered that high quality products cost

Page 13

more and took longer; low cost meant low quality two; and fast delivery cost more and

risked low quality. Honda has proven that they can do both at the same time. For

example, “Just In Time” production system has reveal that there are better way to manage

these dichotomies. Besides, it is possible to reduce the cost by focusing on how to “build

in quality” to products rather than “test in quality” afterward.

1. The strategic planning perspective

For many decades, the companies keep consistent with its core competency which

is high quality and low cost based; and its direction which is continuous improvement. In

Honda, the split between thinking and doing is more explicit than in other organization.

The manager are the officier who formulate the strategies and personal on the work floor

are the troops that must implement them. This requires formal planning to guide worker’s

actions and a tight control system to ensure compliance.

2. The strategic Outside-In vs Inside-Out perspective

Can a market positioning and resource based view of strategy be reconciled in

inovative way in the company? In fact, the company did appear to face challenges at a

numbers of points in its history, particularly in reconciling the company’s core

competencies in its engineer ‘s pursuit of technological mastery to the evolution of

market demand. The notwithstanding image as a technically innovative cars comprises

from two simple models i.e. Civic and Accord, has been kept for decades.

3. The strategic Leadership vs Organization Dynamics perspective.

In the Honda view, when a company grows bigger, it can loose the small firm’s

vitality and communication. Hence, there is the promotion of group process such as

collective decision making, team working and discipline cooperation. According to

Kawamoto, the company president from 1973-1983, organization like a sailing ship on a

Page 14

narrow tack against the wind, progressing in a zig-zag fashion, first toward individualism

and vertical structure then back towards collectivism and horizontal structure.

V/ REALIZING

Honda growth direction

Page 15

This chart describes the directions that Honda should focus in their strategy. In car

industry, securing the upstream (suppliers) or downstream (buyers) is a hard choice. By

concentrating to suppliers such as controlling spare part manufacturers, Honda can reduce

the cost in producing. On the other hands, by focusing on buyers such as improving

distribution network, Honda can increase their sale and gain more market shares. The

chart shows us Honda move to right to focus on businesses within automobile industry.

They can buy other car producing companies or release new models to gain more

customers.

VI/ Conclusion

For many decades, the companies keep consistent with its core competency, which is

high quality and low cost based; and its direction, which is continuous improvement. But,

can a market positioning and resource based view of strategy be reconciled in innovative

way in the company? In fact, while the company did appear to face challenges at a

numbers of points in its history, the notwithstanding image as a designer of sporty and

technically innovative cars comprises from two simple models i.e. Civic and Accord, has

been kept for decades with high quality and low cost based. Honda has recently invested

huge resources into developing new low-pollution sources for its vehicles i.e. electric,

solar power.

Reference

1. Andrew K.R., 1987, ‘The concept of corporate strategy’, 3rd Edition, Irwin,

Homewood, IL.

2. Bailey A., Johnson G., 1992, ‘How strategy develop in Organizations’, ‘The

challenge of Strategic Management’, Kogan Page, London

3. Bbc News 2008, Honda announces cut in production, viewed 10th April 2010,

< http://news.bbc.co.u k/2/hi/uk_news/england/wiltshire/7694844.stm >

Page 16

4. Bbc News 2007, Honda expands global production, viewed 13th April 2010,

< http://news.bbc.co.uk/2/hi/business/6904190.stm>

5. Cnn 2010, China GDP grows by 8.7 percent in 2009, viewed 12th April 2010,

<http://www.cnn.com/2010/BUSINESS/01/20/china.GDP.annual/index.html>

6. GIZMODO 2007, Honda CR-Z Hybrid Concept Car To Awesome To Be A Honda,

viewed 12th April 2010, < http://gizmodo.com/308956/honda-cr+z-hybrid-concept-

car-too-awesome-to-be-a-honda>

7. Honda Engine 2009, Mini 4-Stroke Series Engines, viewed 12th April 2010,

< http://www.honda-engines.com/mini.htm>

8. Honda Worldwide 2009, Retailer Expectations: Customer Response, viewed 12th

April 2010, <

http://world.honda.com/history/challenge/1968honda1300/text/07.html >

9. Honda Worldwide 2009, Global Operation, viewed 11th April 2010,

< http://world.honda.com/profile/globaloperations/>

10. Rumelt R.P., 1982, ‘Diversification Strategy and Profitability’, ‘Strategic

Management Journal’, Vol. 3, No. 4, pp. 359 - 369

Page 17