Msc Business Administration 2008/9

1. HONDA CASE ASSIGNMENT-SESSION 9
1. What is the distinct resources and capabilities base of Honda?
Honda operates in the fast-moving, technology based auto industry which requires
specific resources and capabilities to stay competitive. Some of Honda’s most important
resources include:
• Knowledgeable and passionate employee base – Both in Japan and in the US,
Honda made sure to surround itself with the best people for the required job. This
was consistent with their strategy which was one of the only ways they believed
they could maintain the quality and cost of their automobiles/motorcycles.
• Lean supplier network- In the US and Japan, Honda knew it was vital to their
success to develop a lean supplier network. Honda became actively involved in
the operations of its US suppliers which helped it ensure the required performance
level was being met so quality and cost requirements could be achieved. Also,
Honda could benefit from efficiencies of purchasing locally and not exporting
which helped them keep costs down and supported their strategy.
• Location- Not only would Honda be manufacturing in its US market which put it
closer to its local market, but it built its plant in Ohio, which was relatively close
to Detroit, Michigan where the automotive industry cluster is located. The plant
gave Honda easy access to a pool of highly skilled labor and railroad transport
which was essential in the auto industry.
Some of Honda’s most important capabilities are:
• Manufacturing- Using its resources from both Japan and the US, Honda was
known for being a leader in manufacturing technologies. Honda used a volume
production method which thrived on efficiencies, low cost and skilled labor, and a
strong supplier network which Honda possessed. Honda’s methods gave them an
advantage because it resulted in less presswork, more integrated welding
processes and better real-cost performance in comparison than its US competitors.
• Product development- Honda was skilled at new product development and when
it saw an opportunity in the market it exploited it. With its new CVCC engine
Honda that met fuel efficiency and CO2 emmison requirements was
overwhelmingly popular and it even won many awards. This capability also led to
possible sales to some of the largest US auto manufacturers.
2. Is Honda’s competitive advantage based on firms-specific or country-specific
resources and capabilities?

2. Honda enjoys mostly country-specific resources and capabilities. Country specific does
not necessarily mean that the resources are natural, but rather they are advantages as a
result of the location. For example, Ohio is well known for its availability of skilled
production workers which is why Ohio was Honda’s first choice to locate its plant. There
is also a large availability of suppliers in this area, not to mention the US as a whole.
Operating in this vicinity gives Honda access to resources, knowledge and technology
that support the auto industry. Also, by operating in the US Honda could penetrate one of
the largest auto markets in the world.
One could also argue that Honda’s competitive advantage is based on firm specific
advantages such as their manufacturing capabilities (quality and cost) and their ability to
detect gaps in the market and exploit them (new product development). Clearly, both
country specific and firm specific advantages are important to Honda.
3.Are Honda cars tradable to the US or are there barriers to trade?
Honda decided to develop its international capabilities in US market clearly because US
was a substantial market and Honda couldn’t effectively export there.
There are several main reasons for that:
- because of the oil crisis, that made transportation and manufacturing costs
extremely high;
- because due to the rising yen and the presence of 3 big local competitors,
American potential customer might easily opt for American cars rather than
Honda’s ones.
- One other reason is indeed the presence of the 3 giant companies GM,Ford and
Chrysler.
- Since the Clean Air Act US congress imposed strict requirements on tailpipe
emissions, it would become impossible for the Japanese company to export its old
models so they had necessary to innovate their manufacturing process.
(In the same time anyway it represents an opportunity to line up as its biggest
competitors if they would decide to establish a new subsidy in US).
- Last one, the important restriction imposed by the US government on the imports
that block the sale of the Honda’s new Civic model although it was obtaining a
discrete success in US.
4. What are the expected costs and difficulties Honda will face when transferring
their distinct resource and capabilities base to the US?
Honda’s management expects difficulties with achieving comparable quality standards
and cost level when transferring its capabilities to the US.
In its domestic market Honda experienced economies of scale as the cost of production
declined with the increased level of output. In terms of low unit costs and high output the
company is worried if this technique can be efficiently replicated in the US.
Human resources are one of Honda’s distinct resources. In this respect the company will
face difficulties and costs in selecting and training capable employees who are going to

3. be one of the two key elements of achieving HAM’s top priority – manufacture of high –
quality products.
The other key element is a lean supplier network. Few of the company’s Japanese
suppliers will follow it to invest in the US. Therefore Honda will have to develop a
supplier network which is going to be a difficult and costly venture. The development of
a lean supplier network will be costly as Honda will become actively involved in
suppliers’ operation in order to make sure that they accomplish the required performance
level.
5. What specific resource reconfiguration (associated with each alternative foreign
entry and operating mode) will be required so as to make the proposed international
value – added activities successful?
Honda’s competitive advantage is firm - specific. It’s in the company’s manufacturing
capability – expertise in the development and manufacture of engines. Therefore it’s a
rationale for Honda to exploit the US market by direct investment in US production
facilities.
The introduction of the CVCC engine proved that the company had an in – house
capability allowing Honda to battle the big three giants in the US market. This innovation
won the company a reputation as a high quality carmaker.
When it comes to marketing, supplier network and distribution, however, Honda has to
make some resource reconfiguration. The company needs to start its auto marketing
strategies from scratch in an unfamiliar market. In this respect Honda can establish a
relationship with firms in the US market thus accessing their knowledge of the market
and distribution facilities.
6. Does Honda have the required resource reconfiguration capability in – house?
Honda needed to develop a lean supplier network in the US. In order to do that the
company had to work closely with its suppliers. Honda had the required resource
configuration capability in – house. It sent out teams of specialists to its suppliers to help
them increase performance. Honda specialists were fully involved in implementing those
changes as they were crucial for the company to be able to compete globally.
7. If Honda does not have the necessary in – house reconfiguration capability, what
are the costs and benefits of using complementary resources of external parties to
fill the resources and capabilities’ gaps?
Honda can pursue a strategic alliance with a local company in order to fill the gaps in its
marketing and distribution capabilities in the new market. It’s a cost effective means to
access another company’s capabilities. Establishing such a partnership will allow Honda
to concentrate on developing its core strengths which will provide the company the
ability to respond more quickly to change and opportunity. Another benefit of using

4. strategic alliance is the increased leverage of the company. By using external parties’
distribution network Honda has the opportunity to expand its business in the US market
faster and more cheaply than by other means.
Establishing a strategic alliance can cost Honda the sharing of too much information with
the external party and the risk the partner company to become a competitor. It also
includes the potential risk of reducing future opportunities for Honda. The strategic
alliance with a partner in the automotive industry can make it impossible for the company
to enter into agreements with its partner’s competitors.
8.What are the main bounded rationality and bounded reliability problems we will
face when extending the geographic scope of Honda’s activities, given the changed
boundaries of the firm,the changed linkages with outside stakeholders and the
changes in internal functioning?
Extending the geographic scope of Honda’s activities involved important decision in
several fields; it needed 4 years to Honda’s managing director in charge of overseas
manufacturing to evaluate if manufacturing cars in US would be a good decision or not;
rationality and reliability problems that Honda faced in this situation were:
- The opportunity cost to produce in the US. This is given by: economic, social and
political conditions (exchange rate, growth demand rate, potential market share,
cost of adapting products) and cost and availability of inputs they needed .For
example, producing in the US they don’t have to include the transportation cost
from Japan. They referred this evaluation to the feasibility studies they requested
in 1974 and 1976.
- The risk to “export” the distinct resources and capabilities of Honda in the United
States: because of different regulation, it might happen that local firms could have
easily access to their competitive advantages or that Honda lost one of them.
Indeed, its main trouble was if they would be able to maintain the high quality of
their products using their management system abroad .
- Given the changed boundaries of the firm, they have to face the difficulty to
maintain internal coordination and cohesion between the US subsidiary and the
Japanese one; Suzuki was able to overcome the initial scepticism of the American
colleagues about the feasibility of a manufacturing plant, but they have to
coordinate it with the other value-chain activities located outside US to optimize
their FDI.
- The new environment where they started to manufacture presents new pratical
challenges such us: creating an effective network of intermediaries and suppliers
that fit Honda’s organization structure and that are willing to learn from it,
training workers that meet Honda’s philosophy,
- Regarding the changed linkage with the external context, clearly they have to gain
the consensus and reliance of American stakeholders, being careful to respect the
regulations about tail pipe emissions, labour’s rights, technologies and
environmental damages; building relationship with local associations and banks,
involving them in the first steps of the decision process.