STRATEGY Process, Content, Context AN INTERNATIONAL PERSPECTIVE Fourth Edition CONTENTS PAGE Introduction 4 Preface 13 CASE TITLE Case 1 London Heathrow 14 Case 2 Honda Motors 20 Case 3 Apple 27 Case 4 Gucci 36 Case 5 UPS 43 Case 6 DSM 54 Case 7 Ferrari 58 Case 8 COSCO 66 Case 9 Starbucks 73 Case 10 Pep Stores 80 Case 11 Nestlé 88 Case 12 Aditya Birla Group 95 Case 13 Air France – KLM 101 Case 14 BT – Group 108 Case 15 NCR/Wi-Fi 114 Case 16 VION 129 Case 17 HP 137 Case 18 BP 145 Case 19 Wal-Mart 152 Case 20 Kentucky Fried Chicken 158 Case 21 PHARMAC 169 Case 22 Nike 177 STRATEGY BOB DE WIT AND RON MEYER, 2010 TEACHING NOTE 1: LONDON HEATHROW: THE AIRPORTS EXPANSION DILEMMA Case by Prabhu Sethuraman, and Abdul Samad Syed (ICFAI Business School) Teaching Note by Marcel van Gils and Geert Jan Knegt Case Synopsis London Heathrow is the world’s third busiest international hub airport. It operates as a hub between Europe and Latin America and forms a gateway to Europe. BAA is Heathrow’s hub operator. Besides Heathrow, BAA also operates other airports like London Gatwick, London Stansted, Glasgow, Edinburgh, Aberdeen and Southampton in the UK. London Heathrow carries around 68 million passengers per annum and is an important economic asset for the British and global economy. Right now, London Heathrow is operating at 99% of its permitted runway capacity. This lack of spare capacity threatens UK’s competitiveness as a global hub. An obvious solution to this problem is expansion by adding an extra runway and terminal. This case is about the dilemma concerning this expansion. In this dilemma, there are two parties with each their own interests. On one hand, there are the environmentalists that worry about the additional pollution and question Britain’s role in climate change. On the other hand, there are the BAA and the broader business lobbies who think that expansion will increase the airport’s competitiveness and importance as an economic asset. Because passenger-traffic forecasts suggest that short after the opening of the third runway, the airport will burst at its seams again, four other alternatives for the lack of spare capacity are described in this case too. These alternatives are the mixed mode operation of existing runways (1), move Heathrow away from the heavily populated neighborhoods (2), the development of an intermodal strategy that focuses on the limitation of air-passengers by encouraging the travelers to use other forms of transportation (3), and expand and use London-Gatwick for both short and long-haul services (4). It is up to Gordon Brown (Britain’s Prime Minister) what Heathrow’s future will be. Teaching Objectives If used in conjunction with Chapter 1, this case can be employed to meet the following teaching objectives: ƒ Introduction of organizational purpose and several major strategic issues . The London Heathrow case has a broad scope, touching on a variety of the major strategy topics in the book. This allows for a broad discussion on the major themes of strategic management (link to Introduction). ƒ Understanding the concepts of strategy . The case questions are aimed at testing the students’ ability to distinct, define and work with complex strategy issues, paradoxes, conflicting demands, as well as strategy perspectives (link to Introduction). ƒ Understanding of organized complexity and wicked problems . London Heathrow’s owner (BAA which is part of Grupo Ferrovial) is faced with a complex set of stakeholders with divergent perspectives on the role and future of Heathrow. Secondly the information on future developments is highly uncertain. The issue is not tame and cannot be dealt with by employing simple problem solving tools. Issues are interrelated: dealing with one means dealing with related issues too (link to Introduction and Reading 1.2 Mason and Mitroff). ƒ Ability to recognize strategy issues . As in real life strategy matters, some issues could be more present than others. Despite the wickedness of these issues, students are asked to distill and categorize the most important issues from the case. CASE 1: LONDON HEATHROW ƒ Understanding the nature of strategy paradoxes . This case can be used to illustrate that there are no straightforward ‘right’ solutions to strategy issues, but that strategists must deal with tensions between opposite demands. The tension between economic and ecological perspectives is very prominent in the London Heathrow case. As such this case can be used to illustrate the approach taken in the rest of the book (link to Introduction). Teaching Guideline As the chapter coverage table indicates, the Heathrow case touches on a variety of strategy issues. If the teacher wishes to focus on one issue, it might prove difficult to avoid class discussion going off on a variety of tangents. However, if an integral coverage of all aspects of the case is intended, then the complexity of drawing together a variety of elements within a short period of time might prove quite daunting. Whatever the objective, usage of this case requires strong directing by the teacher and disciplined discussion by the students. The case breadth can be exploited in three ways: ƒ Introductory case . The case can be used at the beginning of a course (as we suggest using it directly in conjunction with Chapter 1), to give students an overview of issues to come. The central issue of several chapters is dealt with in the case, which makes it possible for the teacher to illustrate the topics that will be dealt with throughout the course. ƒ Wrap-up case . The Heathrow case can be used as a final wrap up case for the course, because it challenges the student to integrate the issues discussed during the course. ƒ Exam or assignment case . Again because almost all issues are touched on in this case, an assignment or exam based upon this case will ensure that the most important elements of the course can be covered. ƒ Case on nature of strategy issues (wicked problems) . The wickedness of the issues in the case perfectly allows a course on wicked problems and the strategic management thereof. Analyzing stakeholders, perspectives and relations proves essential for understanding wicked problems. Generating options to tame the wicked problem helps students to think about managing these. A vital part of Chapter 1 is the distinction in strategy between organizational purpose, process, content and context. The organizational purpose is central in this case and will serve as the first question. The last two questions will provide the students with the opportunity to dive more into the content of the book, introducing strategy issues, underlying tensions and strategy perspectives. In Case 2 on Honda the students will focus further on the nature of paradoxes and the paradoxes related to strategy process, content and context. The last two questions also provide the teacher with the handholds to add a bit of polarization to encourage debate, especially by asking the students about their own strategy perspective. Sometimes we even ask the students to physically split between the two perspectives that are handled: have each group sitting on one side of the classroom. This will add even more polarization, debate and a lot of fun for the students, too. While the following cases in this teaching guide generally focus on one particular issue, this case will serve to test students on their skills to recognize the important strategic issues themselves. Be aware of the fact that the exhibits in this case can be linked directly to the case questions, adding great depth to the case analysis. Furthermore, even though the focus of the case is on transportation, we advise you to expand the focus towards showing that the entire strategy context has been (and still is) very important for London Heathrow from the start. The first question therefore provides an ideal way to start the case discussion. Case Questions 1. Describe the context of London Heathrow’s strategy. What were the circumstances that BAA encountered? 2. What is the main paradox encountered in this case? 3. What are the main stakeholders with regard to Heathrow’s expansion plan and what is their perspective? 4. What are the other main strategy issues for BAA? Why? 5. How could Gordon Brown resolve the paradox? Is there a win-win alternative for BAA and its opponents? Case Analysis 1. Describe the context of London Heathrow’s strategy. What were the circumstances that BAA encountered? ƒ Growth in air transportation and lack of capacity. Global air transportation has been rising rapidly till the end of 2007. Heathrow has become overused, also because it is cheaper for airlines. The rapid growth in transit and transfer passengers has made that the airport served around 68 million passengers per annum in 2007, operating at 99% of permitted runway capacity. Passenger traffic forecasts showed at that time that the growth will continue. UK transport secretary Ruth Kelly, said: “If nothing changes, Heathrow’s status as a world-class airport will be gradually eroded – jobs will be lost and the economy will suffer”. ƒ Deregulation. Heathrow capitalized on various national and international deregulation measures. Government airline industry deregulation permitted the development as international hub for the North Atlantic Gateway and Latin America. ƒ Globalization of businesses. While individual people and organizations expanded their global scope, the movement of people across national boundaries created new demands for the transportation. Clients asked for a global hub and spoke system, of which Heathrow has become the major European hub and third largest hub in the world. In 2007, Heathrow served 180 destinations (in 1990 it served 227 destinations). ƒ Increasing competition. While Heathrow was one of the first large international airports serving all continents (mainly due to early deregulation in the UK), throughout the next decades a growing number of others discovered the possibilities of being an international hub in the Hub and spoke network of the larger airlines. Airports such as Paris Charles de Gaulle, Amsterdam Airport Schiphol, Frankfurt, Madrid and Dubai do have a truly global network of destinations that reaches beyond Heathrow’s network in terms of destinations. These airports do have more runways and capacity available for further growth. 2. What is the main paradox encountered in this case? Why? The main paradox in this case is ‘profitability versus responsibility’ . The London Heathrow clearly illustrates a classic debate between economic and ecological purposes. On the one hand all kinds of stakeholders are representing the economic case. They argue that the UK’s entire economic direction would come into question. Investments could prevent Heathrow from gradually eroding as a world- class airport, where jobs will be lost. On the other hand environmentalists do not think primarily from profitability for the economy, they stress the societal impact of a huge airport. The environmentalists argue that expansion of the airport runs contrary to the growing evidence on the impact of aviation on climate change. The greenhouse-gas emissions will increase. 3. What are the main stakeholders with regard to Heathrow’s expansion plan and what is their perspective? ƒ Economic perspectives: 1. BA British Airways, Willy Walsh indicates: “If fears about climate change are allowed to frustrate the overwhelming case for extra runway capacity at the national hub, the country’s entire economic direction would come into question”. STRATEGY BOB DE WIT AND RON MEYER, 2010 2. BAA Limited; BAA does not stand for anything, it is widely and erroneously referred to as British Airport Authority. 3. Department of Transport, UK Transport Secretary Ruth Kelly. 4. “Future Heathrow”, lobbying for expansion, Lord Soley claims that “Heathrow is critically important to the economic prosperity of west London and the Thames Valley”. ƒ Environmental perspectives: 1. London Mayors, Ken Livingstone and Boris Johnson: “I am firmly opposed to this expansion as it runs contrary to all the growing evidence we now have on the impact of aviation on climate change”. 2. Environmental Agency; the EA is disputing the idea that extra flights are bearable since aircrafts are getting quieter and cleaner. 3. Greenpeace, executive director John Sauven: “If everybody took trains to Manchester, Paris, Scotland and Brussels rather than flying, a third runway would not need to be built”. 4. Residents in the community of Sipson. They are saving their village and believe that current noise and air pollution already amount to an environmental disaster that will increase. They also fear accident rates to go up. 4. What are the other main strategy issues for BAA? Why? ƒ The issue of industry development. How should Heathrow relate to its environment? In 2007, BAA has to deal with various situational changes, such as fierce competition and economic decline. Somehow, Heathrow should comply with the demands these changes pertain. However, its competitors will probably adapt to the new industry rules, too. Instead, maybe Heathrow could also try to set the ‘rules of the game’ themselves, for example by no longer focusing on volumes but on added value. In other words, Heathrow has to deal with the paradox of compliance and choice. ƒ The issue of international configuration . How should Heathrow organize that international activities are locally embedded? In 2007, Heathrow served 180 destinations around the world. On one hand, Heathrow can try to increase capacity to attract as much cross-border passengers and leverage on the expenses for consumer goods at the airport f.e. On the other hand, Heathrow should stay attuned to the specific demands of each their local environment, answering to the demand for local responsiveness (in terms of decreasing pollution and noise). Thus, Heathrow is confronted with the paradox of globalization and localization. ƒ The issue of competitive advantage . How can Heathrow organize its business system to create superior value for its buyers? Its buyers ask for more and more services, Heathrow has to move, as their bargaining power increases. This exemplifies the demand for market adaptation. Also, Heathrow has strong limitations in terms of resources. Its two runways and limited infrastructural capacity pose limits to the volumes that can be dealt with. This illustrates the company could also adhere to the resource-base as starting point for its strategy. Hence, Heathrow faces the paradox of markets and resources. ƒ The issue of strategic renewal. How should Heathrow design its change path when dealing with these strategy issues? In 2007, Heathrow is standing at the brink of a major decision. Heathrow could for example decide not to choose for extending the runway capacity, but focusing on added value within the current set of runways. Some structures, processes and cultures could be rooted so deeply that the company needs to break from the past in a ‘big bang’, illustrating the demand for revolutionary change processes. Alternatively, the organizational system could hold certain characteristics that need to be saved in order to build new unique assets, so the Heathrow needs to moderate change gradually. This demonstrates the demand for evolutionary change processes. Accordingly, Heathrow also has to handle the paradox of revolution and evolution. CASE 1: LONDON HEATHROW 5. How could Gordon Brown resolve the paradox? Is there a win-win alternative for BAA and its opponents? For the dominant strategy issue the two perspectives were outlined. This question gives an opportunity for class discussion: what do your students think? Do they really take a stand, or are they ready to congregate two seemingly conflicting viewpoints? When asking this question for exam purposes, they should give a solid foundation why they employ a particular perspective or synthesis of two perspectives. This would be a great way to test their grasp of the material. The question asks for creativity to overcome a dilemma between two seemingly contra dictionary viewpoints. Are they able to get from a dilemma to a trade-off or even a win-win situation (see also p. 16 Chapter 1)? The case outlines four alternatives for Heathrow’s expansion, besides the construction of the new 2,200 meters long runway, plus an additional passenger terminal with direct access to rail services. The four alternatives are; ƒ Mixed mode operating of existing runways ƒ Move Heathrow away to less densely populated areas ƒ Intermodal strategy; more passengers in train ƒ Expand Gatwick. In the end Gordon Brown has chosen for expanding Heathrow with a new runway (see below ‘What Happened After the Case’). He has chosen for the economic stake, but within strict environmental boundaries. Brown has clearly chosen for representing the economic-environmental discussion as a dilemma, in which a choice is made between the two poles. He has also done some kind op trade-off, where he has done concessions to the environmentalist by imposing strict rules for the expansion. The tension seems not to be conceptualized as a paradox, where multiple innovative reconciliations could have been made. An example of getting the best of both worlds would have been looking at Heathrow from a perspective of added value. Airports can generate higher added value with fewer passengers. This gives the economic actors a fair deal because they can generate more money with fewer passengers. For environmentalists this means fewer passengers, fewer flights, which means noise, air pollution and the risk for accidents become lower. Some major (air)ports have now adopted this approach (f.e. port of Rotterdam around new port expansion) and this has completely changed the debate between the economic actors and the environmentalist actors and citizens living close to the expansion areas. What Happened After the Case? In 2008 Heathrow, the third biggest airport in the world and BAA’s largest, registered traffic of 67 million passengers. The opening of T5 in March 2008 was the first step in the transformation of the airport. The investment program planned until 2013 will involve the construction of a new terminal (Heathrow East), to replace T1 and T2, and the refurbishment of Terminals 3 and 4. When all these projects have been completed, 70% of passengers will be using new terminals and the remaining 30% will have been refurbished. In January 2009, the British government approved the construction of a third runway, representing a crucial step in the development of Heathrow airport. BAA is committed to ensuring compliance with strict environmental limits before increasing the number of flights at the airport. STRATEGY BOB DE WIT AND RON MEYER, 2010 Heathrow • Operations. Passenger satisfaction levels have risen from 3.64 to 4.06 (5=excellent; 1=poor), and represents the airport with the greatest increase this year (+4%). In 2008 the security queues were less than 10 minutes for 95% of the time. • Terminal 5. The opening of this new terminal is just the first step in the transformation of the airport. T5 has been selected as the best terminal in Europe in terms of customer satisfaction (Airline Council International’s Airport Service Quality). • Approval of the 3rd Runway (*). Permission to construct a third runway and sixth terminal was officially granted by the UK government on 15 January 2009. The project will take several years in both planning and construction phases to complete. It represents a crucial step forward in the strategy for investment and growth developed by Ferro vial’s Airports division. Beginning April 1 2008, BAA has won the right to raise passenger charges at London’s Heathrow and Gatwick airport to help pay the cost of needed infrastructure improvements. The extra fees could come as a blow to airlines and passengers already suffering the effects of record fuel oil and rising ticket prices. But for Ferrovial, whose 2007 net income fell by 48.5% to €733.7 million ($1.1 billion), the additional revenue could not come at a better time. The Spanish company is trying to refinance at least $8.2 billion in debt related to its 2006 acquisition of BAA. The company was recently forced to sell off its duty-free shops, and speculation continues that it may be forced to divest further assets, including possibly an entire airport, to meet repayments on more than $46 billion on net financial debt. In August 2009, BAA unveiled that is aims to spend $1.65 billion renovating Heathrow’s overcrowded Terminal 2, which will enable it to handle 30 million passengers a year. BAA said the development of T2, which will be home to Star Alliance airlines, was crucial for Heathrow to remain competitive. The airports operator also gave a much-needed tonic to the aviation industry when it reported that the falls in traffic figures seen in recent months had slowed at all of its UK airports in July. The July performance figures were announced only two weeks after BAA said losses at its three London hubs – Heathrow, Gatwick and Stansted – had hit £546m in the first six months of the year, with 7.4 percent, or 4.4 million fewer passengers, using the airports. Underlying earnings in the period were up 28 percent, helped by BAA’s unpopular decision to raise the fees it charges airlines to use its airports. Industry experts warned that BAA’s July numbers were likely to be boosted by seasonal traffic and that aviation is still struggling. In October 2009 UK airport operator BAA has reached an agreement to sell Gatwick airport in London to an entity controlled by Global Infrastructure Partnership for 1.51 billion pounds ($2.46 billion). BAA has been ordered by Britain’s Competition Commission to also dispose of London Stansted airport and either its airport in Edinburgh or Glasgow in Scotland. The company is allowed to keep London Heathrow airport. The sale will enable BAA to reduce its net debt and strengthen its financial position. The agreement with Global infrastructure Partnership completes the sale process that commenced in September 2008, before the end of the Competition Commission’s UK airports market investigation. After divesting Gatwick, BAA will own six airports in the UK (Heathrow, Stansted, Glasgow, Edinburgh, Aberdeen and Southampton) and one in Italy (Naples). Global Infrastructure Partners, based in New York, also owns a 75 percent stake in London City Airport. The sale, subject to clearance by regulators, is expected to be completed in December. References ƒ www.baa.com ƒ www.ferrovial.com ƒ Business Week, March 11, 2008, August 11, 2009 and October 23, 2009 ƒ Associated Press, October 21, 2009 ƒ The Economist, October 22, 2009. TEACHING NOTE 2: HONDA MOTORS Case by Andrew Mair Teaching Note by Ron Meyer and Claudia Cox Case Synopsis Honda is a popular company to use as a strategy case study in a pedagogic setting. The company first rose to prominence as a strategy example when Boston Consulting Group (1975) published its analysis of the declining British motorcycle industry, in which the competitive threat posed by Honda’s advance along the so-called experience curve was highlighted. A well-known essay by Richard Pascale (1984) took issue with one particular aspect of the BCG version of events. This essay is frequently invoked to argue that there may be more than ‘one best way’ to create strategy, and more specifically that learning from experience, together with luck, may be more important than analytical thinking. Another well-known case study of Honda is by James Brian Quinn (1991, 1996), in his strategy text edited with Henry Mintzberg, in which he describes Honda as an idiosyncratic entrepreneurial firm, much in line with Pascale’s portrayal. The summer 1996 issue of California Management Review published a lengthy debate on the so-called ‘Honda effect’ between the BCG camp, for which Honda remains a company best understood as an analytical planner, and the Pascale/Mintzberg camp, which stresses the incrementalist approach. Besides this strategy process debate, Honda is also at the center of discussion in strategy content issues. Hamel and Prahalad (Reading 6.2) lay claim to Honda to argue the importance of technical core competencies, while others propose instead that Honda’s success is best explained by broader core capabilities. Honda, in other words, has - unwittingly - become embroiled in some of the major controversies of the strategy field. This case attempts to explain how Honda can appear to support opposing theoretical perspectives at the same time. The case describes that while many companies, when faced with strategic and other managerial choices, select one option, or trade off one against another, Honda has acquired a strategic capability to reconcile management dichotomies - and hence achieve solutions to management challenges that are denied to other companies. Teaching Objectives If used in conjunction with Chapter 1, this case can be employed to meet the following teaching objectives: ƒ Understanding the concept of strategy tensions . This case explains how organizations are confronted by tensions between opposite demands that need to be dealt with. In the case these tensions are referred to as managerial dichotomies (link to Introduction). ƒ Understanding the concept of strategy paradoxes. In the case it becomes clear that while Honda managers accept the existence of the tensions/dichotomies, they constantly seek to find innovative ways of reconciling them. In other words, they do not see the tensions/dichotomies as false opposites (a puzzle) or as mutually exclusive demands (a dilemma). Nor do they accept that meeting one demand is always at the expense of meeting the other (a trade-off). Honda managers believe that opposites can be bridged (a paradox), but that this transcending of the tension requires creative thinking (link to Introduction). ƒ Discussion on the reconciliation of opposites. The case gives many examples of tensions/dichotomies that Honda managers have successfully bridged. Less attention is paid to the cognitive and organizational processes required to achieve successful reconciliation. This allows for a discussion on the use of dialectics and argumentation as creativity enhancing methodologies. This discussion is important as the entire set-up of the book rests on dialectical inquiry and CASE 2: HONDA MOTORS argumentation to stimulate students’ critical thinking abilities (link to Introduction and 1.2 Mason & Mitroff). ƒ Discussion on the nature of strategic thinking. The case continuously makes clear that Honda’s success rests on its ability to break through existing trade-offs and to creatively find new ways for dealing with enduring strategy tensions/dichotomies. This makes the step to the discussion in the following chapter on the nature of strategic thinking quite easy (link to Chapter 2). ƒ Discussion on cross-cultural management differences . The case also clearly brings forward the traditional differences between stereotypical Western and Japanese management. The question that can be asked is whether these historical differences still exist and whether they will continue to influence how managers from each nation will develop strategies (link to Introduction and 1.4 Hofstede). Teaching Guideline The Honda case is not a traditional strategy case study in the Harvard Business School sense. While most case studies attempt to be theory-neutral, so as to provide empirical materials upon which course participants can practice the application of the theoretical strategy perspectives and models they are learning, this case study definitely has a point of view to get across. This case illustrates how managerial dichotomies can be reconciled in a way that the ‘best of both worlds’ is achieved. Where the opening case particularly focused on the different issues of context, content and process, this second case encapsulates the pedagogical philosophy underlying the book, as in the Honda case, students are encouraged to understand the tensions posed by opposite pressures placed on organizations. And according to this students must find the most effective way of dealing with these opposites. In Chapter 1, four alternative ways of viewing dichotomies are given – as puzzles, dilemmas, trade-offs or paradoxes. The case illustrates that at Honda the dichotomies are viewed as paradoxes – two opposites seem contradictory but can be reconciled through creative thinking. And this is exactly what the book challenges readers to do in all further chapters. The case is designed to work as follows. After providing a broad background to the company, it presents its fundamental story - that of ‘Mr. Kawamoto’s Reforms’. This story nicely illustrates two issues. First, the issue of reconciling the individualism-groupism dichotomy at senior management level is examined, which gives valuable insights into managing the strategy process. More subtly, the story also illustrates how easy it can be to misinterpret this reconciliation process as an attempt at a revolutionary swing from one extreme to the other (as is visualized in Figure 1). The bulk of the case then reviews a series of easy-to-understand management dichotomies and presents Honda’s ‘solutions’. There is no attempt to explain how the solutions were arrived at. The principle behind this pedagogic structure is that of Thomas Kuhn: a young child shown a duck and a goose may not be able to explain the difference between them theoretically, but will certainly recognize the next goose encountered. The Honda goose is shown against a series of different backgrounds in the hope that its silhouette too will be recognizable in front of new, unanticipated backgrounds. While the dichotomies and constant reconciliation described in the case make the fundamental philosophy of the book clear, they do not pre-empt the debates that follow in the next chapters. This is because the focus in the Honda case is primarily on the functional level of strategy – in particular, production operations and product development - and organizational issues. Only at the end does the case raise some strategy dichotomies as discussed in the book, but whereas previously Honda’s reconciliatory management practices were fully described, for strategy they are only hinted at. A good way to start off the case discussion is to draw attention to Figure 2, which incorporates a trade- off line, upon which all types of dichotomies can be mapped. The top right hand corner is the neo- classical economists’ unattainable area - which suggests that innovation will have been achieved if it can indeed be reached. The next step is to ask students to create lists of dichotomies through a classroom discussion, carefully managing it to bring out relevant dichotomies and set aside ideas that don’t work. It can be very difficult for some course participants to understand this concept if they are not adept at thinking abstractly, so it is worth spending some time on this. One approach could be the following: CASE 2: HONDA MOTORS ƒ First, create a list from the Honda case (e.g. humane vs. efficient work). ƒ Second, develop a list of other dichotomies drawn from their own work experience (e.g. what appear to be contradictory pressures on their behavior, such as teamwork combined with individualized reward systems). ƒ Third, review and get course participants to explain the broad strategy dichotomies. ƒ Fourth, if a counterpoint might prove useful, Reading 5.1 by Michael Porter can be used. Cost and differentiation can be presented as polar points on Figure 2 of the Honda case study. Porter is interesting because his points are not at the extremes (firms following the cost strategy must bear differentiation in mind too). He is also interesting because he does not permit a sliding trade-off; any attempt to do so leads to ‘stuck in the middle’, the bottom left hand corner of Figure 2. For Porter, the top right hand corner is unattainable (despite his typical caveats; see Porter, 1996, for his admirable defense of this – we believe fundamentally flawed – approach). ƒ Fifth, only at this point would we attempt to get course participants to isolate the strategic dichotomies their (former) firm faces - indeed this may best be left until later in the course in the context of the in-depth chapters of the text. The Honda case should nevertheless have made this task less daunting. Of course, the Honda case can also be used in shorter courses and one-off seminars as a tool to quickly introduce the concept of ‘reconciling managerial dichotomies’ without participants having read the book. This leaves participants the freedom to focus on the dichotomies that they find most interesting and/or relevant to their practical situation. Case Questions 1. What are the major strategy tensions/dichotomies that Honda has attempted to reconcile over the past 50 years? 2. Do Honda managers view these tensions/dichotomies as puzzles, dilemmas, trade-offs or paradoxes? Explain. 3. What type of organization and mind-set do you think are needed to reconcile strategy tensions/dichotomies in the way Honda has? Case Analysis 1. What are the major strategy tensions/dichotomies that Honda has attempted to reconcile over the past 50 years? The case describes many tensions/dichotomies that Honda has attempted to reconcile, but mostly they have been framed as general management issues or dichotomies at the functional strategy level (e.g. production and product strategy). Yet, with a little discussion, many of these dichotomies can be reframed as the fundamental strategy conflicting demands discussed in this book: ƒ Deliberateness vs. emergentness . In the case this tension is identified as the dichotomy of planning vs. learning. ƒ Revolution vs. evolution . While describing Kawamoto’s reforms, it is argued that Honda did not radically switch to a new mode of doing business, nor where the changes gradual and gentle. Honda’s approach to change combined revolutionary and evolutionary characteristics. ƒ Markets vs. resources . In the case this tension is only mentioned in passing as the dichotomy of market positioning vs. developing internal resources. ƒ Responsiveness vs. synergy . At the beginning of the case the dichotomy between individualism and groupism is discussed in depth. At the corporate level this issue is translated into the tension between individual business units responding to the demands of their own businesses, while recognizing the group’s potential for achieving synergies through the leveraging of competencies/capabilities. STRATEGY BOB DE WIT AND RON MEYER, 2010 ƒ Competition vs. cooperation . In discussing the relationship with its component suppliers, this dichotomy is brought forward. ƒ Globalization vs. localization . This tension is raised in a slightly different way, as the general dichotomy of Japanese vs. Western management. Looked at differently, the question for Honda is to become a nationless company versus one with a strong Japanese identity. At this moment the professor might want to complete the full list of 10 tensions, to give students an overview of what is to come, and ask whether students think these additional tensions are also relevant for Honda. 2. Do Honda managers view these dichotomies as puzzles, dilemmas, trade-offs or paradoxes? Explain. In the case it becomes clear that while Honda managers accept the existence of the tensions/dichotomies, they constantly seek to find innovative ways of reconciling them. In other words, they do not see the tensions/dichotomies as: ƒ A puzzle . If Honda managers would view the tensions/dichotomies as a puzzle, this would mean that they would strive for the one optimal solution for bringing together the two sides. In other words, seeing a tension/dichotomy as a puzzle means viewing the two sides as false opposites, which logically can be brought together into one best approach. ƒ A dilemma . If Honda managers would view the tensions/dichotomies as a dilemma, this would mean that the two opposites would be mutually exclusive demands. Honda managers would have to choose for an ‘either-or’ solution. ƒ A trade-off . If Honda managers would view the tensions/dichotomies as a trade-off, this would mean that meeting one demand would always be at the expense of meeting the other demand. In other words, Honda managers would accept a static zero-sum game between the two opposites. Rather, Honda managers believe that the tensions/dichotomies should be viewed as paradoxes , that is, as seeming contradictions. They believe that the two opposites can be bridged, in other words the paradox can be transcended. However, every new reconciliation is not the final resolution of the tension, but merely a better solution than previous ones. This leads to a constant drive to find even better ways of getting the best of both worlds. A follow-up question to gain more depth would be: Is it likely that Honda managers and employees think precisely in the way the case suggests, or is this in fact just another Western interpretative imposition? This is an open question to which we can give no definitive answer. There is some clear evidence that Honda managers and engineers think more or less explicitly in terms of reconciling dichotomies. The case study presents two examples. Figure 3 is Honda’s own figure, showing the relation between fuel consumption and the power of the VTEC engine, and Exhibit 4 (‘we aren’t interested in trade-offs’) with its overt dichotomy-resolving language. Mito 1 (1990), while less analytical, suggest other examples. Moreover, Honda’s ‘revealed strategy’ can be coherently interpreted in this way. On the other hand, some Western managers from Honda, as well as senior Japanese executives at the company, have seemed somewhat bemused when asked about this way of thinking. Wherever the ‘truth’ lies, simply posing the above question to course participants - particularly in tandem with a short discussion on explicit and implicit forms of knowledge (link to Chapter 2) - can generate useful discussion in class. Of course, it might be that the ‘revealed strategy’ at Honda described in the case study reflects what is in fact an implicit mode of thinking, possibly tied to Japanese culture, which the case study has misrepresented. Yet, it might still be valid to make this mode of thinking explicit, as the case study does, in order to communicate the underlying conceptual framework to a Western audience (link to Reading 1.4 on cultural diversity). 1 Mito, S. (1990) The Honda Book of Management , Kogan Page, London. CASE 2: HONDA MOTORS 3. What type of organization and mind-set do you think are needed to reconcile strategy tensions/dichotomies in the way Honda has? This question is intended to lead the discussion towards the issues in the following chapters, strategic thinking and strategy formation. The issue of mind-set refers to the discussion that will take place in Chapter 2: how much logic and creativity does the strategic thinker need to be able to reconcile tensions? It can already become clear in this discussion that it is necessary for strategists to understand the nature of the strategy tensions, but that analytical reasoning is probably not enough to break through dilemma or trade-off thinking. A certain measure of innovative ability is needed, which suggests that creative thinking probably is an important ingredient of a strategist’s art. The discussion on the organizational characteristics needed to encourage dichotomy reconciliation will anticipate the debates that will take place in Chapters 3 and 4, where questions of experimentation and learning are on the agenda. A follow-up question to gain more depth would be: Is it really practicable to resolve strategic challenges by first formulating them as dichotomies and then attempting to reconcile them? In the answer to this question a distinction needs to be made between using this method as a classroom teaching approach or as an in-company strategy problem-solving approach. This issue is already discussed at more length in the introduction to the teaching guide, of which this teaching note is a part. However, we would like to add the following reflections on the first version of the case (published in Baden-Fuller and Pitt, 1996) in which Martyn Pitt and Peter McNamara report on how the reactions were to the first classroom usage: Overall, students tend to polarize around three positions over the [...] issue. One group, the less experienced, tend to miss the point completely and will need help from the instructor to help them through the issues. A second group argues that it is ‘academic tosh’, while a third group argue that Andrew Mair is ‘really onto something here’. An example of a debate in one executive MBA group illustrates how polarized this debate can become. Individual A, who believed the [dichotomy reconciliation] idea to be valuable, lambasted individual B, who believed the idea to be academic tosh, saying that he believed the relative decline of B’s firm over many years was largely the result of the inflexible, collective black-or-white but never grey mind-set so well exemplified by B’s reaction in class!” This diversity of reactions indicates that the case study is a potentially challenging one, for two groups of students. Even so, the value of the case in the context of Strategy: Process, Content, Context as a whole is that it permits some of the book’s key issues to be brought out, debated, and rehearsed through a single, encapsulating, case, towards the beginning of a course. As such, the case can generate enthusiasm and/or be rewarding for some participants - those who were already implicitly converted (the third group above), and those (the first group above) who can thus be more gently shepherded into the daunting intellectual world presented in the book. As ever, the existence of a few skeptics (the second group above) willing to voice their views permits the enthusiasts to deepen their own understanding and sharpen their thinking by defending the case study’s analysis of Honda. Meanwhile, the first group can be encouraged to follow the debate in hopes of an intellectual breakthrough. As for the skeptics - sometimes ‘hard’ managers used to making ‘tough’ decisions’ - they can only be converted to at least accepting such different and ‘non-natural’ ways of thinking at their own pace. Although this can perhaps be accelerated, if you are working in a traditional academic setting, by a requirement to answer an examination question on the subject. STRATEGY BOB DE WIT AND RON MEYER, 2010 What Happened After the Case? The reconciling strategy of Honda, as clarified in the case, seemed to be very successful at the time this case was written. But did they manage to continue this strategy in the years after and if so were they successful? The Company has grown to become the world’s largest motorcycle manufacturer and one of the leading automakers. Honda incorporates a global network of 396 subsidiaries and 105 affiliates by March 2009. Honda develops, manufactures and markets a wide variety of products, ranging from small general purpose engines and scooters to specialty sports cars, to earn the Company an outstanding reputation from customers worldwide. Honda and the automotive industry In the past decade the automotive industry faced a strong force towards consolidation. The DaimlerChrysler merger created a new giant and the acquisition of Volvo by Ford and the alliance of Nissan Motor and Renault were signs of this trend. The reason for this radical move to consolidation is the strong belief that in the future there is only space for tiny boutiques and giant sellers. ‘ There will be room for niche players with strong brands. Otherwise you’ve got to have volume ’. This is a quote of the president of GM North America in 1999. But Honda was and is not willing to choose between these two strategies and tries to survive in the middle between the ‘goliaths’ and the ‘dwarfs’ (niche players) in the market. In order to outperform their competitors, Honda introduced flexible manufacturing systems. In this way they can produce up to 8 models on 1 production system and by doing so Honda strives to manufacture as cost- efficiently as possible. The positive side effect is that Honda is able to respond quicker on market changes than their competitors. Not a trade-off is made between these two elements, but Honda combines both of them. Did this way of dealing with this dichotomy pay off for Honda or were they wrong and was scale the most important aspect in the automotive industry? To show this, the stock prices of Honda will be compared with Ford and Daimler Chrysler, two giants in the automotive business. Source: tools Morningstar.com The figure before shows that Honda outperformed two of the biggest competitors in the market in the past ten years. The figure also shows an intensive increase in return for Ford in the years 2004-2005. As a reason for this success, Ford states it reduced overheads, cut product expenditures, and slashed warranty costs. At the same time, it boosted revenues by targeting incentives and increasing the product mix. Apparently they were not able to continue this track since the returns decreased to the old level after 2005. International context Honda states they are following a ‘glocalization’ strategy, because they have a global focus but still use local knowledge, combined with effective operations. In practice this means for Honda that they