Honda Corporate Strategy
Introduction
Honda Motors, initially a maker of motorbikes, succeeded in becoming an automobile producer after all others, in the mid-1960s, by implementing a strategy of innovation and flexibility and by constructing an industrial model enabling it to avoid or limit the risks peculiar to that strategy. The firm’s success owed much to the mechanical and commercial imagination of Soichiro Honda himself. Based on the long-standing philosophy of, “building products in the markets where they are sold,” Honda now has more than 100 manufacturing facilities in 33 countries.
The successful Honda model as a whole could continue to function dynamically without strong high-technology challenges that engineers could meet in the form of automobiles that succeeded in the market. But still, there is a need for a continued search for ‘holy grail’ technologies that would be needed to make the Honda model work through the fast changing times.
Notwithstanding Honda’s leading technological position in the world automobile industry, it remained to be seen whether the Honda research and development engineers could at last create a ‘breakthrough product’ which would translate this leadership into significant competitive advantage; there were now strong echoes of the late 1960s, which produced the CVCC engine. If there was to be no such breakthrough, a key element of the industrial model that had guided Honda’s trajectory for fifty years would remain unproven.
The aim of this paper is to carry out a critical analysis and evaluation of the strategies adopted by Honda Motors to date, with the information provided and other materials researched.
Context
Honda was unusual in having already created an industrial model by the time it entered the automobile industry. Twelve years after it was founded in 1948, Honda had become the world’s largest motorcycle manufacturer, on the basis of a strategy which focused on product innovation and production flexibility and on the mass production of products which had in effect opened new market segments.
The issues that Honda handled so successfully are the central questions of strategy. Honda had to consider what markets to enter, how to position their products within these markets, how to build relationships with dealers and component manufacturers. The subject of strategy analyses the firm’s relationships with its environment, and a business strategy is a scheme for handling these relationships. Such a scheme may be articulated, or implicit, pre-programmed, or emergent. A strategy–like that of Honda –is a sequence of united events which amounts to a coherent pattern of business behavior (1995).
The firm’s success owed much to the mechanical and commercial imagination of Soichiro Honda himself. His associate, Takeo Fujisawa, who was in charge of the organization and its finances, had been concerned from the start to find the resources needed to overcome the difficulties inherent in this profit strategy. Besides loss of capacity to innovate over the long term, the risks of the strategy included of course the inevitable failures, the over- or under-estimation of demand and the refusal of investors in banks to finance projects. Industrial models which are to be consistent with part of a strategy of ‘flexibility and innovation’ must therefore give the firm the resources to counter these risks or reduce their impact (1998).
As a means to encourage creativity and get flexibility accepted, Honda and Fujisawa developed a company compromise which was not dependent upon group spirit and loyalty as at Toyota but rather on the recognition and gratification of individual talents as well as good work and employment conditions. Inventiveness and expertise were first valued by a promotion path and wage scale, named the expert system, which ran in parallel to the traditional lines and scales. This seemed a good idea since Reliance on promotion has affirmative incentive properties because workers can anticipate that differential talent and degrees of cooperativeness will be rewarded (2000)
Although first conceived in the 1950s, this system could not be established until 1967, due to union opposition. In order to retain its independence, Honda did not attempt to join a keiretsu with linked banks and industrial firms, nor to maintain close ties with the political world as Nissan had done. Neither did it form an ‘association’ of suppliers, to which it would have obligations. The company used Toyota’s and Nissan’s suppliers, and was able to profit from their experience and prices. Above all, Honda was careful to be self-financing and not become financially dependent upon the banks (1998).
By 1967 Honda had become a proper car manufacturer. It opted for an innovative automobile niche and exportation in order to create a place for itself among Japanese producers. Given that Honda cars were seen as practical and fuel efficient, the company was ideally positioned to exploit global (and, above all, US American) markets during the 1970s oil price crises (, 2003)
Honda also had a strategy consistent with the Japanese mode of growth, although for other reasons. Honda had chosen to respond to new types of demand and to export its products as the means to stake its place as an automobile manufacturer. Its export success was due in part, of course, to competitive prices and to the quality of its cars, but more so to its innovative car model, the Civic, of which 3 million units had been produced by 1982. Honda was able to expand its range to six models without commonizing their platforms, to give each its own clear personality. By 1985 it exported or produced abroad 63.4 per cent of its worldwide production. Before being obliged to invest in the USA to increase its sales, Honda had already decided to do so. The company made its first cars in the USA in 1982 (1998).
Another reason for the success of Honda was the consistency between their production organization, their employment relations, and their profit strategy. For Honda and other successful automakers, the new phase was an opportunity to reinforce these linkages.
During the 1970s and 1980s, Japanese carmakers, with Honda playing a lead role, were responsible for a significant shift toward the “world car” that their Western counterparts had been unable, or had not sought, to achieve. The superiority, in terms of high quality and low cost, of vehicles produced by the Japanese allowed them to override a number of previous differences between world regions; hence, smaller cars were introduced in North America, and there was partial globalization of front-wheel drive technologies (1997).
For its part, Honda continued to seek ways to maintain and indeed increase its capacity to innovate and to make its production apparatus more flexible. In particular, Honda decided always to seek two solutions to the same problem, so as not to become prisoner to a premature decision. Conversion of its production lines to other models was made easier, and the principle of producing homogeneous lots of thirty to sixty vehicles was retained (1998).
Honda was now developing its own production system, learning from the much admired Toyota Production System but also including quite different principles. While a Honda Production System (HPS) was not made explicit, its principles became increasingly clear. The HPS is a push system with production planning based on market forecasts and product variety kept low (since Honda products were already ‘different’ in terms of technology and design). Hence production could be simplified and economies of scale generated. Products are designed to fit existing equipment with only jigs altered. Common ‘design philosophies’ are adopted (architecture of components invariant across models to facilitate assembly tasks and tool sharing) (1998).
Honda Engineering was formally established in 1970 to provide innovative manufacturing solutions. Factories are planned for structural flexibility, with long-term use of the same people, sites, and production equipment even as models and product types change. The HPS is not intended to possess ‘short-run’ flexibility to produce to ‘customer order’, but can be ‘rejigged’ and restarted quickly; this is Honda’s flexible mass production system (1998). It is not by magic whereby Honda is able to deliver high-quality cars, it is through good engineering.
Honda claims to have a ‘human-centered’ approach to work, less rigid in defining standard operations than Toyota. Employees rotate tasks; indeed they must be flexible, changing posts, models, departments, and product types. But the HPS does not rely on unplanned long shifts to make up lost production. When needed, Saturdays are used. Working hours are the lowest in the Japanese automobile industry (1998). Focusing on employees is a good strategy. Employees after all are the backbone of a company, and without them it is impossible for any company to succeed (1987). Employees at Honda Motors were therefore viewed as a ‘fixed’ asset, consistent with the ‘flexi factory’ operations strategy.
Honda also continued to promote individualism, youth, and a certain equality while Japanese culture emphasized the opposites – groupism, respect for age, status. The constant theme at Honda remained how to overcome the organizational rigidities that Japanese culture was believed to foster – ‘big business disease’ (1998). Honda the business leader appears to have a contemporary and dynamic appeal. Striking remains the extent to which his and his company’s approach to business and management – and indeed to life generally – so contradict many of the stereotypical images of Japanese management styles (2003). Yet conditions of employment at Honda remained typical of other large companies in Japan (with the notable exception of fixed working hours in the factories), and were still viewed as consistent with Fujisawaism.
The period from 1982 to 1991 started with the opening of the North American automobile plant and the intensification of relations with Honda’s European partner following a serious return to compete in the Japanese market. For a decade sales grew in all three regions, yet expansion of manufacturing in North America dominated, posing questions about the transferability of Honda’s model and about the multinational form that would replace the 1970s ‘export’ model. Growth during the 1980s was financed by profits from North American production (as growth during the 1970s had been financed by profits from North American sales). Growth in Japan culminated in the ‘bubble economy, of the late 1980s (1998).
There are two views on Honda’s achievement in the U.S. market. In one, Honda‘s strategy was an archetype of Japanese penetration of Western markets. The aggressive pursuit of domestic volume established a low-cost base for expansion overseas. This was the conclusion of a Boston Consulting Group study for the British government. A rather different account was given by Richard Pascale, who went to Tokyo to interview the elderly Japanese who had brought the first Honda machines to the United States. As they recalled it, Honda had aimed to secure a modest share of the established US motor-cycle market (1995).
In Europe, by contrast, Honda’s strategy required few resources. There were persistent problems in Europe. Honda found it difficult to understand the subtle differences among European markets. Further, unlike their American counterparts, European competitors already offered high-quality, small, and low-cost products (though not always in the same vehicle). These factors, combined with lower levels of Honda sales in Europe (11% of global turnover in the early 1990s) than in Japan (33%) or North America (43%), meant that fewer resources were devoted to product development for Europe.
Even by the mid-1990s, Honda’s European distribution network, unlike North America, did not receive any Honda cars fully designed for Europe. Instead, basic Japanese products, of similar general size—though slotting uncomfortably in-between the actual size classes used by European producers—were tinkered with, the first being a partially successful 1992 Accord for Europe, the second being a more successful 1995 Civic for Europe – although this tinkering produced improvements over the Ballade and Concerto models that Honda had asked Rover Group to manufacture for it during the 1980s (1997).
Rover entered into collaboration with Honda in order to secure new model designs and engineering capabilities without which it could no longer survive. Honda’s main interest in the collaboration was more offensive, seeing Rover as providing a bridge into the European market. Moreover an alliance which starts off with primarily defensive intentions can become offensive in nature if it is successful in the market ( 1998).
The latter is an alliance in which each partner possesses expertise, information, or skill which is of value to the other, an example being General Motors’ cooperation with Toyota on lean production manufacturing in the USA which benefited the latter’s access to the American market. Applying the logic of game theory, Kay concludes that, in a common objective alliance, cooperation is a dominant strategy for both partners–it pays both partners to put the maximum effort into attaining the common objective. In the case of a mutually beneficial-exchange alliance, however, the dominant strategy for both partners is to hold back–in other words, to get as much as possible while giving as little as possible ( 1998).
Neither did the automobiles Honda had designed for North America fare much better In Europe. The 1989 Accord was not very successful in Europe as a near-luxury car because its midsized 2.01 engine proved underpowered in Germany. Thus while Japan was an important enough market to warrant its own products, and so was North America, Europe was not, and was accordingly fed an ill-fitting range of products designed and produced in Japan for Japanese and American markets or designed and produced in the United States for North American markets (1997).
Honda overcame these problems through their brilliant strategies. From the late 1980s, the central theme of Honda’s global car design process became the “total car concept.” The 1993 Accord model exemplifies the outcome. In North America, the Accord had now evolved into a large car with a clearly American-oriented design. A smaller automobile was developed for Japan (Accord Inspire/Ascot). This product became the basis for the “spin off” Accord for Europe (seats, suspensions, and some other features altered for European tastes). The same automobile, with a more radical body redesign, became the Rover 600, produced and marketed by Rover Group. At the same time, four-door, coupe, and estate/station wagon variants of the American Accord were exported to Europe for sale alongside the smaller (family resemblance, but still different) Europeanized Accords, and to Japan as a new and different model. Moreover, Honda’s first minivan recreational vehicle was designed as a direct spin-off from the American Accord, sharing 50% of its components (1997).
The key to the Honda new system was ‘single status’ employment, in which all employees shared the same uniforms, parking lots, restaurants, and private health-care. All offices were open-plan and many had windows so that they could be viewed from production areas. All production workers were placed in one category (with separate categories only for maintenance workers and team leaders) and received the same wage with no allowance for seniority, job done, or individual merit.
This un-Japanese system was consistent with Western principles of equality. Consistent with Fujisawaism, it reduced obstacles to managerial authority, individual initiative, transparency of merit, and open communications. Also consistent with Western ideologies, there was a measure of democracy. Workers voted on the organization of the working day (breaks, leaving hours), holidays, and when to make up for any lost output. A panel of production associates reviewed management dismissals of workers and had the power to reinstate; one in five were reinstated. More challenging than getting American workers to accept this system was to ensure that American managers could work in it (1998).
The resulting ‘global local corporation’ was built on the foundations of the HPS and Fujisawaism, with their simplicity of model range, flexi factories, use of best technologies, and organizational flexibility. In 1987 Honda declared its aim to build a ‘self-reliant’ company in North America. ‘Self-reliance’ did not imply operational separation from Japan but a product development capability within a new division of labor between Japan – design and production of niche models, design of mass models; and North America – design and production of niche variants (1998).
Honda’s practice is explored along numerous dimensions of corporate globalization—localization strategies: products, research and development (R&D), production, parts sourcing, production methods, employees, and so on. There is some localization of R&D, as in product design appropriate to particular local road conditions, but basic research and product technology have been retained in Japan. There is some localization of production with respect to particular markets, but some production is also for markets elsewhere, depending in part on the global output of particular models. Disaggregation of the different dimensions themselves also helps in understanding parts sourcing strategies: in the United States and in general, the more sophisticated parts, like the electronic, are brought in from Japan. And while hard technology and organization have been globalized, local incentive structures are molded significantly by on-site managerial staffs with the local cultural environment in mind (1997).
There is, in brief, a pattern of what is called as “strategic localization,” rather than the melting away of national boundaries foreseen by the more vigorous of advocates of a new globalized economic geography. National-specific practice remains significant. Some aspects of production have been globalized and others are less so (1997).
The globalization model is represented by the “world product” (for instance, “world car”) concept, in which the same product is produced for sale in all (or at least many) world markets. The alternative localization model involves production of distinct products for each market, which was the traditional pattern in the automobile industry (1997).
In this process of creating a global local car, similarity of design lines and sharing of components is taken as far as possible. The various aspects of car design are logically separated into (schematically) (1) the power train technology (engine and transmission), (2) the engine compartment (which gives the dimensions of the front of the vehicle), (3) the basic design shape (aesthetics), (4) detailed aspects of seats, suspensions (handling characteristics), and (5) other expensive components like instrument panels and exterior lights. The engineering and managerial puzzle, and hence the key issue in the strategic localization of product design, is to put all the pieces together for each local market in a way that both meets requirements in that market—fitting the demands of localization—and also permits economies of scale and acceptance of the product in other Honda regions—fitting the demands of globalization. Thus an American model, for instance, may share power train technology and expensive components with a Japanese model but differ in all other respects. Or a European model may share everything but handling characteristic components and minor style cues with a Japanese model (1997).
Until the late 1980s, Honda adopted a strategy of conquering the “most difficult” markets first with its automobiles, in the expectation that the others would follow “naturally” (2003). The company’s view was that the United States was the most difficult market in the world until the mid-1980s, and that Japan took its place in the late 1980s.
Within Europe, Germany was seen as the most difficult market. However, this strategy, a derivative of the product life-cycle approach and a close relative of the globalization model, began to cause Honda problems. The company’s internationalization had started with automobiles designed initially for Japan which found favor in North America (the Civic in 1972, then the Accord in 1976). During the 1980s, these cars were redesigned in steps with a clear focus on American market tastes, but as the Accord model became increasingly “Americanized” (much larger, and with gentle design lines), it began to fail in the Japanese market, where it was perceived as uninspiring in the late 1980s bubble economy atmosphere of euphoric consumption (1997).
Far from creating a post national company, strategic localization at Honda has meant the adoption of a series of new nationalities, as suggested in the citation from Honda itself. Some of these nationalities are themselves being reinvented along the way, delivering that cutting edge of sociopolitical and economic change for which multinational enterprises have long been well known.
Set against this deeper understanding, simple and reductionist ideas about post national enterprises and global corporations operating in borderless worlds do not offer very helpful interpretations of Honda’s international strategy. Moreover, other potential routes to globalization of operations, such as the “world car” and global sourcing strategies pursued by some of Honda’s Western rivals during the 1980s and 1990s, have run into serious difficulties. Honda’s new global local corporation, by contrast, helped the company to weather the storm caused by the collapse of the Japanese bubble economy in the early 1990s (1997)
Honda therefore built effective strategies in support of their competitive strategies. Honda has not only extended its distinctive capability into other markets but has added new distinctive capabilities. Honda has added reputation to its critical distinctive capability. By specializing in engine technology, it has achieved some success in innovation as well. The company has chosen a positioning somewhat up-market of its principal Japanese rivals, and supported its entry into most major geographical markets with a plant in the United States and an extensive relationship with Rover in Europe (1995).
Conclusion
Many industry observers have wondered how Honda is able to respond to the increasing competition it constantly faces from traditional rivals and new start-ups. The answer sounds relatively simple – through its strong and effective corporate strategy. It may sound simple but it definitely is not.
The Honda models underwent crisis was real, but was due largely to one vital element; and other elements in fact helped Honda overcome the crisis. Most significant is that the element in crisis was the one most associated with Mr. Honda: the self-image of a company led by product technology and sporty vehicles. Fujisawaism with its organizational creativity and flexibility, the HPS with its flexible mass manufacture of high quality cars, and the global local corporation with competitive advantage from global interaction between local production and marketing bases all triumphed.
How Honda was able to survive through all the years despite strong rivalry and competition from other Japanese and Western automakers can solely be attributed to their corporate strategy. Honda built effective strategies in support of their competitive strategies. Honda has not only extended its distinctive capability into other markets but has added new distinctive capabilities. Honda has added reputation to its critical distinctive capability. By specializing in engine technology, it has achieved some success in innovation as well. Honda the business leader therefore appears to have a contemporary and dynamic appeal
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