Sample Management Paper
Critically assess an organization within a pertinent industry1 of your choice in a country of your choice via a written assessment.
This paper is a critical assessment of the car industry in Japan. An industry is simply a set of firms that provide a similar product, which is targeted at a similar market, using the same technology. It may also be defined as a technically productive or manufacturing enterprise in a particularly economy, field, country, or region, either viewed collectively or one of these aspects individually. It is common for a single industry to be named after the product it releases to a specific market, for example, the car industry.
In a critical assessment of an industry, there are different factors that are put into consideration, and the main ones include the external environment, competition, and aspects such as globalization and sustainable development. In the external environment, PESTEL (Political, Economic, Social, and Technological) analysis is sometimes used in the analysis of the industry’s position relative to global trends and standards (Milliman, 1991). Other indicators in this analysis include GDP (Gross Domestic Product) and Purchasing Power Parity (PPP).
In competition, analytical tools such as the Porter’s Five Forces model may be used in determining the competitiveness of the industry in the country of choice. With regard to globalization, focus is on how it impacts on the internal environment of the organization in the country of choice. In the present study, the factors assessed include external environment, competition, and globalization. Focus is on the car industry and the country chosen is Japan.
Japan is the leading country in the world in car production. The country produces almost 50% more cars compared to either of the two closest competitors, Germany and the USA. Moreover, automobile companies that are based in Japan are among the most technologically advanced and highly valued across the world. Six of the top 20 biggest vehicle manufacturing companies are from Japan. Additionally, the auto industry in Japan registered a massive 10.5% growth in 2009 despite operating in an environment of global financial crisis (Helper, 2011).
Throughout 2010, car sales in Japan continued increasing. However, in 2011, the car sales decreased temporarily following the Great East Japan Earthquake that causes shortages of supplies. Since early 2012, though, the sales have started holding strong. One of the reasons for this growing trend in sales is the desires by consumers satisfy their pent-up demand for Japanese cars. In the near future, this trend is likely to continue and sales levels may increase even more. The trend will also be given a major boost by the resumption by the government to pay subsidies for purchases of eco-cars. In general, the strong conditions in the car market are likely to contribute greatly to an increase in consumer spending as far as car purchases are concerned.
The car industry is a major contributor to the country’s industrial prosperity, which, in its entirety, is responsible for 24% of the country’s GDP. Given the fact that Japan’s auto industry holds a leading position in the world, there is no doubt that it contributes greatly to the significant contribution of industry segment to the country’s GDP.
In Japan, the automobile industry is sometimes referred to as the “ten percent industry” (Calabrese, 2010). The meaning of this is that the industry’s total sales and employee numbers account to over 10% of the total sales and employment figures of all the country’s manufacturing industries. This is a key indicator of the great economic importance of this industry. Additionally, in terms of market structure, the industry appears to exist in the form of a typical oligopoly (Hill, 2009). In this regard, market concentration is one of the most commonly used indices used in measuring market competition (Dyer, 1993). In Japan, the two dominant car makers are Toyota and Nissan (Dyer, 1996). As early as the 1970s, the market shares of these two car makers exceeded 60% (Heide, 1990).
From a theoretical perspective, particularly with regard to the industrial organization theory, it is normally the case that whenever few firms are in existence in the market, collusion among these firms becomes a matter of utmost importance (Uzzi, 1997). This is what happened to Toyota and Nissan in Japan during the post-World War II, when the two companies were in their infancy stages. These two companies’ strategies predicted that the level of profitability in the industry would be correlated with the concentration level.
The top five car manufacturers in the country include Toyota Motor, Nissan Motor, Honda Motor, Mazda, and Fuji Heavy Industries, in that order (Lincoln, 2010). For these car manufacturers, the formation of conglomerations, sometimes referred to as keiretsu structuring, has been critical to their success. These conglomerations are normally linked together through cross-shareholdings, forming robust corporate structures.
Similarly, supplier-assembler relations are historically structured on the basis of the keiretsu philosophy (Levinson, 1996). This philosophy enables the Japanese car manufacturers to maintain lean and flexible manufacturing while at the same time exerting leverage on supply that is very similar to the one achieved through vertical integration (Kotha, 1995). However, in recent times, a new trend has been emerging, characterized by a drift away from the tendency to supply car parts through conglomerates. The governance modes of these conglomerates have been shifting form ‘network’ or ‘hybrid’ strategies to top-down administration and arms-length contracting (Szukmski, 2010).
To best understand these changes, it is imperative to analyze them through transaction-cost economics (Ahmadjian, 2001). In this regard, the changing nature of supply-purchase relationships is traceable to the dynamics of the way parts transactions are carried out in the Japanese car industry. These changes have a lot to do with the governance choices made and the extent to which they lead to minimized costs. A case in point is the way Toyota has effectively embarked on the internalization of transactions with Daihatsu by pushing for a controlling interest. Given the nature of such relationships, it is evident that the Japanese car industry is moving towards a general trend characterized by standardization of parts. This standardization is accompanied by improvements in quality, reliability, as well as speed in supply management.
In determining the competitiveness of the Japanese car industry, this paper uses the Porter’s Five Forces model. Porter (1991) identified five key factors that together act to exert force in determining the nature of competition that operates within an industry. The five forces include threats of new entrants into the market, the bargaining power of buyers (customers), the bargaining power of suppliers, threats of introduction of substitutes, and the intensity of competitive rivalry within the industry.
Threat of new entrants
Entry of new companies in the Japanese market poses a threat to the existing companies since this means that the market share of the existing companies would be reduced. This leads to the intensification of rivalry. The strongest barriers to entry emerge when the existing firms hold very strong positions in the market. Low barriers to entry bring about a high possibility of new entrants entering into the market and vice versa. For this reason, barriers to entry are critical in determining the threat posed by new entrants. In most cases the most common barriers to entry include investment cost, economies of scale accessible to the existing firms, legal and regulatory restrictions, access to suppliers and channels of distribution, product differentiation, and retaliation by established brands.
In the case of the Japanese car industry, the investment cost is high, and this acts as deterrence to entry. Entry into the auto industry requires a high initial capital outlay, meaning that entry by new competitors is difficult. However, there are limited legal and regulatory restrictions. It is easy for new companies to be cleared by authorities to start operations in Japan. This poses a major threat, particularly considering that in this age of globalization, it becomes easy for overseas companies to enter into the country car industry.
In terms of differentiation, the car industry in Japan, particularly on the supply side, is modeled as an oligopoly with branding as the main aspect of differentiation. The strong brand increases customer loyalty. This, together with existence of the oligopoly market structure, makes it very difficult for new entrants to venture into the industry.
In Japan, the Keiretsu approach to supply management makes it easy for car companies to access suppliers as well as channels of distribution. When new car companies enter into the industry, they may elect to join the keiretsu network and gain access to suppliers as well as distribution channels. This may have the effect of encouraging new car companies to enter into the market. However, one of the greatest setbacks for such companies is the stiff competition posed by established brands such as Toyota, Nissan, and Mazda.
The bargaining power of buyers (customers)
The bargaining power of buyers tends to be high in the car industry, not just in Japan but around the world. For this reason, Japanese car makers prefer to have as wide customer scope as possible not just in the country but also across the world in order to increase the leverage of their brands. In many cases, this scope is most profitable when exclusive ties are formed through liaisons with various suppliers.
To counteract the negative effect of the high level of customers’ bargaining power, Japanese car companies ought to work towards increasing their bargaining power, particularly in the international markets. In this case, the best approach would be to look for suppliers with the broadest customer scope. In this way, the companies’ relative bargaining power is dramatically increased because there is no reliance on a few customers for their profitability. It is difficult for new companies to survive in such a market. The challenge of teaming up with the largest suppliers may be too big a challenge, yet this is the best way of counteracting the high bargaining power of car customers.
Moreover, a supplier with access to many customers may not readily give in to the demands of customers, particularly in terms of a decrease in prices. This is because the loss of one customer has a negligible impact on the total sales and profitability. Instead, the suppliers would find it easier to more to another niche which, though less profitable, brings about numerous opportunities from other customers.
The bargaining power of suppliers
The bargaining power of suppliers in the car industry tends to be dramatically increased when the customer scope is wide and there are strong cooperative relationships among firms. Suppliers with multiple customers end up benefiting from a higher relative bargaining power. In the case of Japanese auto assemblers, a two-vendor policy is in place. This has created a situation where companies in this industry are in a dominant position as far as the relative bargaining position is concerned. However, according to Martin (1995), automotive suppliers in Japan are unlikely to have the long-term capability of using relative bargaining power in a beneficial manner. If this turns out to be the case, new entrants may find it easy to get into the market and try to take advantage of this valuable relative bargaining power to their advantage.
Threats of substitutes
In the automobile industry, there are very few substitutes for automobiles. The main substitutes include riding a bike, walking, and taking a train. The consumer’s geographic location is a major determinant for substitute products. In major cities in today’s globalized world, for example, Chicago, and New York, a car may not be as necessary. In such cities, the most effective mode of transportation is the subway. However, for the majority of areas in today’s world, access to a car is a must if a person is to get around comfortably, either as an individual or as a family unit. In general, therefore, the threat of substitutes is not a major barrier to entry for new Japanese companies seeking to break into the global market.
Intensity of rivalry within the car industry
There is strong rivalry among competitors in the car industry. Moreover, there is a close balance among major competitors, and this increases the intensity of the rivalry. For a company to increase its market share, it must creep into the major competitors’ market share. Such high rivalry is also contributed to by the fact that there are very few opportunities for differentiation. Among the makers of cars, for instance, customers are constantly making comparisons regarding price, durability, quality, and many other factors. Most manufacturers put into consideration these factors because they are critical in customers’ decisions on which type of car to buy. This translates into the lack of differentiation and the consequent rivalry as different makers try to build the themes of their adverts based on the deficiencies of cars made by rival companies.
This rivalry is as rife in Japan as it is in the US car market, despite the high concentration ratios that are characteristic of the latter market. In fact, during the 1980s, Toyota and Honda, both of them Japanese automobile companies, entered the US market to break the traditional dominance of the market by Ford, General Motors, and Daimler Chrysler. Similarly, these dominant US companies have embarked on an ambitious strategy of globalizing themselves.
The entry of Honda and Toyota into the US car market increased existing rivalry between these two companies. In essence, both were keen to take advantage of market growth in the US and they were keen to ensure that they did not lose their existing market share in Japan during this overseas venture. This rivalry has been heightened even further by the high fixed costs that are associated with the manufacture of cars as well as the low switching costs incurred by consumers whenever they intend to switch from one make or model to the other.
According to Richardson (1993), globalization is the opening up of domestic and nationalistic perspectives, characterized by a transition towards a broader interconnectedness and interdependence across the world, leading to the integration of trade, economic, financial, and communications systems. In such a world, there is free transfer of technology, capital, as well as goods and services across all national frontiers. Globalization brings about numerous benefits for today’s companies as well as citizens. However, when applied indiscriminately, globalization has the potential to hurt smaller economies as well as companies. Even large, long-established companies in the car industry, such as the Toyota Motor Corporation, have not been spared from the influence of globalization.
As Buckley (2004) points out, globalization brings about conflict between economic management principles and market dynamics. Buckley (2004) points out that this conflict arises largely because of differences in the pace of globalization in different countries and regions. These differences present numerous challenges to policymakers at regional, national, and even local governments. The challenges are also experienced in international institutions. Using the congruence theory, Buckley (2004) argues that multinational enterprises continue to change their ownership and location strategies in response to the dynamics of globalization. Additionally, globalization makes their decision-making process much more sophisticated. Managers have to ensure that the decisions they make are right in terms of impact on international division of labor, and identification of optimum locations.
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In this part, focus is on the ways in which the internal environment of Toyota Motor Corporation has been impacted upon by globalization. Toyota, having been in existence for 75 years, has had its internal environment influenced significantly by globalization. In fact, Toyota is one of the companies that have experienced the recent wave of globalization in one the most significant ways.
First, as Sanchez (2005) points out, it is because of globalization that Toyota has been able to expand its operations to more than 170 countries, including North America, South America, Europe, Asia, and Africa. The company has had to change is strategy of maintaining competitiveness because of the stiff competition that exists in the international market. Many car companies have found numerous opportunities in different overseas markets. Market expansion programs into such markets have made it easy for different countries to break into the respective countries. These programs are characterized by free trade agreements and policies among countries. In this era of globalization, domestic markets are being transformed rapidly into global markets. In this environment of heightened competition among the existing domestic companies and new multinational corporations, rivalry has been increasing.
Figure 1: Toyota’s production: Comparison between Japan and overseas production (Source: http://www.iveybusinessjournal.com/topics/global-business/continuity-and-change-in-japan%E2%80%99s-automotive-industry#.UKOyWOSdfoM)
Technological advancements contribute a great deal to globalization. These advancements have dramatically changed the structure of business and trade operations. Operational processes and management tasks are being transformed to reflect these technological advancements. This explains why many companies are in the process of integrating elements of e-commerce and e-business in their domestic and international operations.
Globalization presents both threats and opportunities for many companies depending on the extent to which they are able to adapt to it. For Toyota, the ability to adapt has been phenomenal, and this is evident given the fact that the company is the number one automobile company in the world. The company’s internal environment has had to change to reflect the realities of the globalized world in which it has been endeavoring to manufacture and sell cars.
In this quest, Toyota Motor Corporation’s top executives have had to put into consideration differences in standards of living as well as national economies of various regions around the world where its products are targeted. One of the responses to these changes is the decision to ‘offshore’ or ‘outsource’ its operations to other countries. This strategy entails exporting the expertise and philosophy that makes Toyota a distinguished brand. The aim is to ensure that the cars that are manufactured in overseas bases are of the same quality to those that are manufactured in the parent manufacturing plants in Japan.
This decision by Toyota’s top executives reinforces Buckley’s (2004) argument regarding the complexity of ownership strategies for large companies in the context of globalization. Buckley (2004) argues that as ownership strategies continue to become equally complex, top managers of companies such as Toyota have to think about a control matrix of market relationships such as outsourcing, subcontracting, and joint ventures. Subsequent decisions also have to be made in a dynamic pattern. In this regard, it is evident that globalization forces top managers of multinational companies to rethink the relevance of understanding the international economic geography.
In 2007, Toyota Motor Corporation overtook General Motor Corporation in terms of sales for the first time in history. This was an indication that the company’s response to globalization was the right one. At a time when other major American automobile companies such as GM and Chrysler were struggling to survive the global recession in mid 2009, Toyota recorded profits amounting to $16.7 billion (Rurnelt, 2011). Moreover, Toyota’s sales grew by 6% during that year (Rurnelt, 2011). However, towards the end of 2009 and the start of 2010, the company had to recall some 8 million vehicles because of the problem of unintended acceleration. This failure of Toyota Production Systems and the ‘just-in-time’ production philosophy injured the company’s brand significantly.
Figure 2: A comparison of annual production volumes of passenger cars by Toyota, Ford and GM between 2000 and 2009. (Source: http://www.iveybusinessjournal.com/topics/global-business/continuity-and-change-in-japan%E2%80%99s-automotive-industry#.UKOyWOSdfoM)
One may argue that globalization impacted significantly on the susceptibility of Toyota production systems to failure. Most of the cars that were recalled were manufactured in the company’s bases in the US. Exporting Toyota’s production philosophy has been an uphill task. With the failure of the cars’ acceleration systems, it was evident that the Toyota philosophy as far as manufacturing processes are concerned had not been successfully transferred from Japan to the US environment. The core argument in this case is that if Toyota had not ventured into the global market, it would have faced few risks of injury to brand reputation.
The most dramatic changes in the company’s internal environment were seen during the 1990s, when the company embarked on growth and expansion activities in different parts of the world. With this expansion, the company started being increasingly protective and defensive of information. Moreover, with this expansion, there was severe straining of resources across the company’s organizational structures, leading to slowed response time.
In the massive recall of 2009, the problem of slow response time appeared to have been one of the most enduring impacts of globalization on the company’s internal environment. Unlike in the recall of 1989 where the company’s employees were in some instances even going to customers’ homes to collect the defective Lexus cars, the 2009 recall cast the company in bad light because its top executives were not even anywhere within the public sight. During the 1989s, when the just-in-time philosophy was at its best employees were at their most efficient mode of operation, and there was minimal waste of resources. During that time, assembly line workers were fully empowered and they could pull a cord at any time whenever they noticed a problem and the manufacturing line would be stopped.
During the 2009 recall, Toyota Motor Corporation did not swing into action until it the issue was raised by the US transportation secretary. This incident presents an excellent example of the changes in organizational structure and internal environment that can occur because of the effects of globalization. Such changes may lead to disastrous failures such as 2009 recall. In ability to deal with such serious problems in a constructive and effective way may lead to paralysis of productivity. In the case of Toyota, although the problems threatened the reputation of the company, it presented numerous opportunities for organizational learning and improvement.
Currently, Toyota faces the challenge of doing away with the rigid organizational structure that poses a major threat in the company’s operations globally. Most information flows in a one-way fashion, whereby all decisions originate from Japan. For instance, no top executive in the company’s US headquarters is authorized to issue recalls. It would be a great idea if the company turns its failures in manufacturing processes in international bases into opportunities for decentralization of its internal environment. As Robinson (2001) points out, companies that want to excel in the globalized world have no choice but to decentralize their production and decision-making processes.
In conclusion, this paper has critically assessed three core aspects of the car industry in Japan, namely external environment, competition, and globalization. With regard to the external environment shows that the car industry in Japan is in a position of great advantage by virtue of being the leader in the world as far as car production is concerned. Japan produces almost 50% more cars in comparison to either of its two closest competitors.
Regarding competition, Porter’s Five Forces model is used in the assessment. The five forces analyzed include new entrants into the market, the bargaining power of buyers (customers), the bargaining power of suppliers, threats of introduction of substitutes, and the intensity of competitive rivalry within the industry. In the Japanese car industry, the investment cost is high, and this acts as deterrence to entry. Entry into the car industry requires a high initial capital outlay, meaning that entry by new competitors is difficult.
The bargaining power of buyers tends to be high in the car industry, not just in Japan but around the world. For this reason, Japanese car makers prefer to have as wide customer scope as possible not just in the country but also across the world in order to increase the leverage of their brands. The increase in the bargaining power of suppliers, on the other hand, depends on whether a company has increased its customer scope as well as on whether strong cooperative relationships among firms have been established. In the case of Japanese auto assemblers, a two-vendor policy is in place.
Lastly, globalization has influenced the operations of Toyota Motor Corporation. The company has had to make adjustments to its highly centralized organizational structure in the face of manufacturing failures, such as the one that resulted in the massive recall of millions of cars in the US market in the late 2009 and early 2010.
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