Case Study of Honda: Corporate Strategy Analysis

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Introduction

Honda Motor Company Limited is a multinational conglomerate Japanese company. This report will mainly emphasize on Honda’s strategies in the global automotive industry.

The purpose of this report is to have an in-depth strategic analysis of the company. Frameworks including Porter’s Five Forces and VRIN framework will be carried out throughout the report to analyse Honda’s business environment, and business and corporate-level strategies, followed by identifying the strategic challenges that Honda currently facing. Finally, the report will be concluded with recommendations that manage the challenges.

Business environment

Overview of the automotive industry

Illustrating from Figure 1, the value of global automotive industry would continue to grow with a positive figure of 3.6% from 2017 to 2022. However, it shows that the growth will slow down starting from 2019. Several trends and factors will be examined below.

Figure 1: Global automotive manufacturing industry value forecast: $ billion, 2017-22. Source: Marketline, 2017a

Characteristics of the industry

1) Raising awareness to environmental issues

Increasing public awareness towards environmental issues and more emissions standards from different countries, are in turn stimulating strong expectations for the automotive industry to handle this highly prioritised problem.

2) Growth in emerging markets

The focus of the automotive industry shifts from mature markets including North America and Europe to emerging markets such as China and India (McKinsey, 2018). Because of the rise of middle class and stronger economy in these emerging markets.

Figure 2: The Changing Automotive World

3) Changing in consumer behaviour

The increasing trend of share mobility, such as ridehailing and carsharing services, it lowers consumers’ preferences on car ownership. From figure 2, it shows that almost 60% of customers believe that agree that car owners would not want to own a car in 2025.

Figure 3: Consumer opinion on car ownership in 2025. Source: KPMG, 2017

The attractiveness of the industry: Porter’s Five Forces

The automotive industry is a low-profit industry. Due to various factors, the return on capital for automotive manufacturers is low, which was only slightly above the estimated cost of capital of 10% and enjoyed a small positive return (PWC, 2017). Below is Porter’s Five Forces that further analyses the attractiveness of the industry.

The automotive industry’s Five Forces

Buyers’ Power
Threat of Substitutes
Competitive Rivalry
Suppliers’ Power
Threat of Entry

Bargaining power of suppliers (Rating: 6/10)

The bargaining power of suppliers is moderate. Through globalization, it increases the number of suppliers in the automotive market for automakers to choose from, showing that suppliers might in the weaker power. However, more auto manufacturers develop long-term partnerships with suppliers. Because their competitive positions rely heavily on the suppliers’ performance in terms of quality and costs (Brandes, et al., 2013) and it can help developing mutual benefits of higher efficiency information exchange (Kotabe, et al., 2003). Therefore, it can strengthen suppliers’ power.

Competitive Rivalry (Rating: 8/10)

The competition in the automotive industry is strong with the evidence shown in Figure 4, which indicates a tight market share among the existing brands. Companies have diverse product portfolios, with different vehicles models offers to customers. Exit barriers are high as they have invested heavily into the business, these keep companies in the industry even they may have low profitability. Besides, the diversities of product portfolios are moderately low, most auto companies still focus on the automobile industry especially the trend of electric and self-driving vehicles development.

Figure 4: Global automotive market share in 2017, by brand

[image: https://lh3.googleusercontent.com/zRFIIdaTDBun33-MCp5BaPqN-CfjXfYgHP56WQ-Kda7pwwsi1hnIfextmv_vsoqRPi2M0KeTuRspY4YCGN9yRh9whhZG2hjPf_zJZPY95__36bFm9YnAA1KiWuo0gvbR0yyoz8jU9jmibKAnXg]. Source: Statista, 2018

The threat of Entry (Rating: 3/10)

It is difficult to enter the automobile industry. One reason is the high entry barrier, it requires high capital requirement and investment. Apart from those, strong distribution network and high skilled labour are also fundamental factors to operate business in the automotive industry. Existing brands already benefit from economies of scales, it increases the difficulty for new entrants to obtain a competitive strategy. Besides, brand image is another important element for car manufacturers. It takes a long time for new entrants to build up its reputation and develop relationship with its customers. As a result, these factors hinder new entrants getting into the industry.

The threat of substitutes (Rating: 7/10)

The threat of substitutes is moderate. Due to the development of technology, the alternatives are no longer just the means of public transport including buses, trains, taxis and bicycles. The growth rate of the automotive industry forecasts to be drop from 6.2% in 2017 to around 2% by 2022 (Marketline, 2018b), this is partly driven by the rise of shared mobility services. In 2017, it is estimated that 338 million worldwide users are using these services and it is expected to continue to grow in popularity (PWC, 2018). Thus, sharing mobility services might result in a decline in vehicle sales.

Bargaining power of buyers (Rating: 5/10)

Buyers have more power because they have a wide range of brands and models to choose from, automobile companies need to invest in product differentiation with various features in order to attract and retain customers. Besides, due to the development of the internet, company transparency is higher, customers can quickly access more information and compare with other companies before making a purchasing decision.

Business-level Analysis

A firm’s profitability is dependent on the fit between its competitive strategy and resources and capabilities (Cool & Schendel, 1988). A resource appraisal framework is used to identify the relevant resources and capabilities to Honda (Appendix A). Below will examine some key resources and capabilities from the framework that enable Honda to provide competitive advantages.

1. Brand image

Honda has a strong reputation of high quality and reliability which provides them a competitive advantage over their competitors. They ranked 20th in the Best Global Brands list, with a growing brand value of close to $24m (Interbrand, 2018). A strong brand name can enhance customers’ confidence in their purchasing decision (Aaker, 1993), resulting in enhancing customers’ willingness to buy Honda’s products. Thus, the growing brand value acts as a driver to increase profitability. Source: Interbrand, 2018

2. Design and Engineering

Honda has strong focus on design and engineering and is granted as one of the preeminent engine makers in the world. Two engines from Honda were chosen to be the 10 best engines for 2018 (Murphy, 2017), and they were the first automaker that met the 1970 U.S. Clean Air Act emissions standards (Honda, 2018a). These achievements enable Honda to possess the first-mover advantage and gain a reputation of quality and performance.

3. Global subsidiaries

Honda sets up subsidiary operations across the globe, including North America, Europe and China. Each subsidiary is independent with low control from headquarters and operates based on the local market (Rothfeder, 2015). Thus, this approach enables them to respond quickly to market changes and gain deeper understanding of its local market. Consequently, Honda can introduce products that address local’s needs to generate competitive advantage.

4. Research and Development (R&D)

Honda invests heavily on R&D to develop advanced technology as to achieve competitive advantage. They plan to spend JPY750 billion in 2018 with a 9.4% increase from 2017 (Honda, 2017). They also develop partnerships and collaborations with various companies to exchange information and share ideas (Honda, 2019). As a result, through developing more innovative products, it can maintain Honda’s competitiveness and increase its profit growth.

In order to provide sustainable competitive advantages, the above distinctive resources and capabilities need to fulfill VRIN framework. (Details can be found in Appendix B)

Resource/ capability

Valuable

Rare

Inimitable

Non-substitute

Competitive implications

(competitive advantage)

Brand image

Yes

Sustainable

Design and Engineer

Yes

Yes/No

Yes

Temporary

Global subsidiaries

Yes

Sustainable

R&D

Yes

Temporary

Business-level Strategy

Customer perception of the best value is to balance between cost and quality (Taylor & Brunt, 2001). In order to satisfy customers, Honda adopts hybrid strategy, the combination of differentiation and low costs, to achieve competitive advantage.

Hinda achieves low costs through manufacturing and developing long-term partnerships. They operate with lean production system and develop an Assembly Revolution Cell line which increases efficiency and reduces costs (Narsalay, 2017). They also develop close relationships with suppliers and distribution channels to assist in controlling costs. Regarding to differentiation, Honda is one of the first few automakers that emphasises on eco-friendly and fuel-efficient vehicles. The move gives them first mover advantages and unique selling point. They even awarded several milestones and recognition due to its promotion of being environmentally friendly, such as introducing the world’s first electric moto for hybrid vehicles that use no heavy rare-earth metals (Forbes, 2016). These can enhance its brand image and remain competitive in the market.

However, it is difficult to maintain hybrid strategy due to the unattractiveness of the industry. Because of the frequently change in external factors and it also requires combination of many distinctive resources and capabilities to keep Honda’s market position. Therefore, Honda would also expand its business into other markets.

Corporate-Level Analysis

Honda’s main business

Automobiles
Aircrafts
Power Equipment
Robots
Motorcycles

Diversification

Honda diversifies its products portfolio to create value under Porter’s better-off test, which is the new business unit gain a competitive advantage from its link with the corporation (Porter, 1987). The businesses that Honda operates are all related through the core competences of reliable engines. Besides, Honda also maintains strategies that focus on innovation and sustainability across all business in order to create value (Honda, 2018b). Thus, Honda leverages its capabilities to exploit the synergies that exist among different business.

Motives for diversification

There are three major reasons for operating in these businesses. Firstly, Honda would like to expand in its business operations to create growth opportunities for the company (White, 2014). Besides, since its businesses are related, they can gain from maximizing the utilization of the existing resources and capabilities, which enable them to increase effectiveness and fully capture the returns on those innovations (Rong & Xiao, 2017). Lastly, Honda can enlarge its business apart from the unattractive industry such as automobile industry and generate more profit through operating in other businesses.

Synergies

As we know from above, Honda operates in similar industries to generate synergy. The resource sharing among different operations in turn facilitates the exploitation of common core competencies to create synergy (Grant, et al., 1988), for example gathering ideas and research information from different R&D centres to enhance new product development. Moreover, they can create cost synergy which enable them to improve the efficiency in production since they access broader supply chain network. However, there are also some risks and limitations to diversifying its Honda. Operating in many businesses means that it becomes more complex and difficult to manage, and lead to overwhelming positive benefits (Geringer, et al., 1989). They also cannot allocate all resources just for those more profitable businesses, otherwise, conflicts can arise easily among businesses and affect the whole performance.

Corporate Governance

Honda develops a decentralized organizational structure. They have subsidiaries based on regions, business and functions respectively, and they would delegate responsibilities to their subsidiaries and allow them to make decisions according to their own markets (Honda, 2018c). Thus, this allows Honda to facilitate quicker and more appropriate decisions at regional levels, whereas the headquarter has more time to make strategic-level decisions. As a result, it can increase the efficiency and effectiveness of Honda as a whole.

Strategic Challenges

There are two major challenges that Honda is currently facing,

1. Increasing in competition

With the rise of advanced technology, Honda faces challenges from the shift to mobility services would continue to grow steadily and impact vehicles sales till 2030 (Hausler, et al., 2017), since the public see vehicles as a service instead of a must-have possession (PWC, 2016). Besides, Allied Market research (2018) identified that the compound annual growth rate of autonomous vehicles would raise sharply almost 40% from 2019 to 2026, showing the development of autonomous vehicles would take up the market in the future. Consequently, the expansion of these two would reduce the number of vehicles owned, which lead to downfall to automakers’ profitability. Thus, it would be more difficult to Honda to remain its market position.

2. Changing regulations

More major global automotive markets increasingly place stringent regulations focusing on controlling carbon dioxide and gas emissions (Pearson, 2019). These legislations require automakers to invest heavily in R&D to develop low-emissions vehicles that meet the standards. Therefore, in order to maintain competitiveness, Honda needs to increase costs to drive innovation. However, at the same time due to the intense competition, it is difficult to pass the costs onto consumers. Hence, it might affect Honda’s profit margin.

Recommendations

To conclude, below are a few recommendations for Honda to address the strategic challenges.

Honda can either partner with new mobility companies or diversify its business to offer mobility services. Building long-term relationships with them through offering deals and discounts, allowing Honda to increase visibility to mobility users and access to customer data and analysis. Regarding to diversifying to new business, it is another source of ways to generate revenue. Honda can increase its engagement with more customers as these mobility services are just short-term rental program, hence there is possibility to turning these customers to increase preferences to choose Honda over its competitors.
To address the rise of autonomous vehicles, Honda should continue focusing on its strengths of developing more reliable and low-emission engines while joining with another automaker’ technology on self-driving. With the exchange of research results and information, they can combine their technologies to develop inventive autonomous vehicles with low-emission engines. Thus, once they introduce the vehicle into the global market, it enables them to gain first-mover advantage and set a premium price to achieve higher revenue.
Apart from Honda’s current R&D development, Honda can set up engineering programs and competitions for public to design and create new engines that can meet the local requirements. Because Honda only has limited capital and skills, it requires a long time for them to develop new products that comply with emissions regulations. Hence, organising engineering competitions and programs can generate more new ideas from the participants. They might even discover any talented participants and recruit them to work for Honda, in order to bring in new ideas to the company.

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