Komatsu Case Study Analysis

Komatsu Case Study Contents Executive Summary2 Evolution and Strategic Drivers of Komatsu (EME)3 Organizational Culture4 Five-Force Analysis: The EME Industry:5 SWOT Analysis8 Resource Based Competitive Advantage8 Financials & Future Course9 Company on The Right Path11 References12 Executive Summary Komatsu, the Japan based earth moving equipment taking on Caterpillar manufacturer has been studied by management students around the globe for years now. This story of David vs Goliath provides us an insight about the strategies followed by David in bringing down Goliath.Komatsu’s evolution and its strategies were studied in comparison with that of Caterpillar. Responses to each other’s moves in the global earth moving equipment industry have been analysed in the context of their international business strategies. An industry to analysis was done to understand the environmental factors that affected the competition between the giant and the emerging. A SWOT analysis identif ied the internal resources and capabilities of Komatsu that aided it to develop its distinctive competitiveness.How Komatsu achieve a sustained profitability, higher than the industry average despite the volatile international EME market was studied under the financial analysis. The role of organizational culture in enabling Komatsu to succeed in the highly competitive industry was also studied in the case analysis. Through all the above mentioned analysis, it was found out that the company was in the right track. Measures to ensure that the company continues to stay in the high profitability section have been discussed in the concluding part of the report. Evolution and Strategic Drivers of Komatsu (EME)Komatsu Limited  or  Komatsu  is a multinational corporation that manufactures construction mining, and  military  equipment, Industrial equipments such as press machines, lasers and  thermoelectric generators. Komatsu is the world's second largest manufacturer of  con struction and  mining equipments  after  Caterpillar. However, in some areas (Japan, China), Komatsu has a larger share than Caterpillar. It has manufacturing operations in Japan, Asia, Americas and Europe. Komatsu was especially dangerous to Caterpillar due to the fact that it was the second largest EME company worldwide.The 1920s to the 1930s marked major developments for Komatsu and prominent growth. The company stressed that the management should have two important perspectives * Overseas orientation * User orientation During World War II, Komatsu thrived by producing for the Japanese military surplus of products (military tractors,  bulldozers,  tanks,  howitzers etc. ). After the war, the company introduced commercial bulldozers and forklifts to its equipment line up meanwhile experiencing exponential growth precipitated by strong market demand in a post-war construction era. The company brought a wide range of new products to market by the late 1960s.The company c ontinued to expand through the 1970s but sales began to steadily decline as early as 1982. Komatsu now understood the competition it faced but still held a 60% market share within Japan. With the threat of the Caterpillar/Mitsubishi venture taking place Komatsu decided to attempt a revitalization of the company. Since Komatsu mainly exported whole machines, the company soon realized that needed to also expand into other markets and set up assembly plants. Unable to persuade dealers to sell its equipment, the company set up its own branch sales offices and authorized small repaid shops to be Komatsu service agents.The company set two goals during the 1960s. * The acquisition of the necessary advanced technology from abroad * The improvement of product quality within the company. In the early 1970s, Komatsu started to recognize its distributor network worldwide, aiming to supplement the direct sales offices with more servicing dealers (similar to CAT’s). The company entered lic ensing agreements with two major EME manufacturers in the United States – International Harvester and Bucyrus-Eric. They also launched quality upgrading programs in its factories.The program was used to reflect the Total Quality Control (TQC) concept. All personnel were expected to strive for TQC. In 1964, the company started Project A which aimed to upgrade the quality of the small and medium-sized bulldozers. In 1972, the company launched project B which focused on exports. In 1979 the company launched Project called â€Å"F and F† which stood for â€Å"Future and Frontiers† and its objective was to develop new products and new businesses. The project encouraged suggestions from all its employees by asking them to consider both the need of society and the technical know-how of the company.The company also began to focus more towards its Research and Development during the early 1970s. Efforts continued with some attention to basic research as well as product d evelopment. It had the distinction of introducing the world’s first radio-controlled bulldoze, amphibious bulldozer and remote-controlled underwater bulldozer. The management decided to focus on improving the competitiveness of its products. A four- part cost reduction plan was initiated. During the same time the company also accelerated its product development program.In 1981, they launched EPOCHS (Efficient Production Oriented Choice Specifications) whose main purpose was to allow the company to respond to the diverse market needs without compromising its cost position. Also, by the end of 1983, the company’s manufacturing had become fully integrated, producing all of its parts in-house. Komatsu has been a leader in innovative quality-control initiatives ever since President Yashinari Kawai decided to leverage MITI’s opening of the EME industry in 1963, and fight back in the face of the Caterpillar/Mitsubishi joint venture.The company had managed to overcome v olatile market fluctuations over the last few years, particularly in key construction markets, as a result of aggressive organizational restructuring and corporate mergers and joint ventures. Organizational Culture We can analyze the organizational culture on the basis of the following parameters: 1. Strength/Weakness of the Culture: Komatsu’s culture can be classified as a strong culture because of their strong alignment to organizational values, which makes them respond to stimulus and help the firm operate in a highly efficient manner. 2.Power Distance: Due to hierarchy being a very important aspect of the culture in Japan, the power distance is quite high in Komatsu with a well defined hierarchy though the interactivity between different levels of the organization is also fairly high. The power is also mainly concentrated in the hands of the chairman who maintains a tight control. 3. Individualism vs Collectivism: Again in line with Japanese culture, the organizational cu lture is more collectivistic with every employee striving towards a common goal. Yet certain individualistic natures are also encouraged to satisfy the intrinsic needs of the workers. . Goals and Objectives: The culture of Komatsu underlines the clear goal it has, i. e. beating Caterpillar and becoming the number one in the EME industry. In fact Komatsu’s internal slogan is Maru-C, which when roughly translated means encircle Caterpillar. 5. Employee relations and empowerment: Komatsu maintains very strong employee relations and ensures that each employee has satisfaction in terms of work, cooperation with colleagues and winning approval from others, making them feel that they’re contributing to the organization greatly while ensuring that they’re in line with the organization values and goals.Five-Force Analysis: The EME Industry: I. Threat of New Entrants| 1| 2| 3| Remarks| 1. Economies of scale is low | X| | | The industry is based on ‘Build to Orderâ⠂¬â„¢ and the machine specs differ from customer to customer. | 2. Experience effects are high; therefore| | | X| Experience in running the business in this industry is vital because huge capital is invested. | 3. Product differentiation is medium| | X| | Differentiation in the product quality and the customer requirements is moderate during the time of sales but the differentiation factor lies in the after sales service & availability of spares| 4.Brand identification is high| | | X| Customers blindly rely on branded equipments. E. g. Caterpillar (55% market share)| 5. Capital requirements are very high| | | X| Because of the capital intensive nature of the product/ industry, new entrants would stand weak comparatively| 6. Incumbents control of distribution channels is high| | | X| Access to distribution channel for new entrants is difficult because the branded players maintain strong relationship with the partners| 7.Incumbents proprietary knowledge is high| | | X| Ease of startin g business in this industry is low for an individual. It demand high degree of prior knowledge| 8. Incumbents control of access to raw materials is low| | X| | Procurement of raw material (basically steel) is not too difficult as there is cut throat competition in the steel industry| Overall Threat of New Entrants| Low| | 6. II. Bargaining Power of Buyers| 1| 2| 3| Remarks| 1. Buyer concentration is low | X| | | Not many are involved in buying these equipments. Even the amount is high but the distribution is concentrated. 2. Buyer purchase in small volume, and less frequently| | X| | The number of transactions is low (non-recurring) but post-sales the dependence on the vendor increases due to spares & support| 3. Buyer switching costs are high| | | X| Because of the huge initial investment, high life span of the product & the dependence for the after-sales support makes the buyers immobile| 4. Buyers have good information| X| | | The buyers are well experienced in their particular b usiness and hence have full knowledge of the product| 5.Buyers’ ability to integrate backward is low| | | X| It is almost impossible for a retail customer to start up such a business (capital intensive, knowledge based)| 6. Close-substitute products are rarely available| | | X| A tractor cannot be replaced by other equipments or a bullock-cart| 7. Product differentiation of suppliers is low| X| | | Players tend to match the product quality is very low because of the cut-throat competition| 8. Buyers’ profitability is very high| | | X| EMEs in these industries (mining, forest, agriculture) holds high importance | Overall Bargaining Power of Buyers| Medium| | . III. Bargaining Power of Suppliers| 1| 2| 3| Remarks| 1. Concentration of suppliers is low | X| | | The number of suppliers is less. | 2. Availability of substitute products is moderate| | X| | Raw Materials involved are normally irreplaceable except in highly innovative product. | 3. Importance of customer to the supplier is moderate| | X| | Steel industry has other customers also (automobile, real estate/housing, other mfg. industries) but due to lower margins the volume is also important for them. Thus, moderate. | 4.Differentiation of supplier’s product & service is low| | | X| Basic raw materials required are almost of equal quality from other suppliers. | 5. Switching costs of the buyer are moderate| | X| | Due to strong relationships and credit dependence, the buyers would resist switching very often. | 6. Threat of forward integration by the supplier is low| | | X| A steel supplier is least likely to start the EME business. | 7. Importance of the input to the quality of the buyer’s product is high| X| | | The quality of the raw materials determines the quality of the final product. 8. Cost of the input, relative to the total product cost is high| X| | | The raw material contribution to the final product comprises of ;50% of the total cost| Overall Bargaining Power of Su ppliers| Medium| | 8. IV. Threat of Substitute Products| 1| 2| 3| Remarks| 1. Profitability of industry producing substitute is NA | | | X| There seems to be no substitute industry for EMEs| 2. Rate of improvement in price-performance relationship of substitute product is NA| | | X| NA for the same reasons as above| 3. Buyers switching costs are high| | |X| As mentioned earlier, dependence for after sales support and big life span of the product makes it difficult for the buyers to switch| Overall Threat of Substitute Products| Low| | 9. V. Competitive Rivalry & Barriers to Exit| 1| 2| 3| Remarks| 1. Concentration of competitors is high | X| | | There is close competition among the existing players. There are around 10 competitors in the industry. | 2. Industry growth rate is moderate| | X| | The growth rate of the industry is moderate (6%-7%) because of maturity in the industry (more competitors coming in and depleting margins)| 3.Fixed Costs are high| X| | | The CAPEX involved in setting up facilities is high and this is lowered by JVs to an extent. | 4. Product differentiation is low| X| | | There is not much difference in the main equipments the competitors make except the after sales service| 6. Switching costs are high| | | X| Because of the huge initial investment, high life span of the product & the dependence for the after-sales support makes the buyers immobile| 7. Exit barriers are high| X| | | Asset specialization is high & huge investment makes it difficult to quit| 8.Strategic stakes are high| X| | | Caterpillar was exposed to loss in Europe due to Komatsu eating up its market share. | Overall Intensity of Competitive Rivalry| High| | 10. *1-High 2-Medium 3-low 11. SWOT Analysis STRENGHTS * Wide range of products – Full Line offered * Excellent quality levels in terms of products and processes with Total Quality Control (TQC) being adopted for all practices and supplemented by the Plan, Do, Check, Act (PDCA) cycle. * Price advantage with r espect to major competitors. Large international presence and market leaders in its home country as well as a few other countries, especially in the eastern bloc. * Low cost and highly productive nature of the labor force. * Excellent R & D facilities and development of breakthrough and specialized products and adaptation of products to suit user requirements in various countries. * Able to respond to diverse market needs without compromising on the cost position (EPOCHS project). * Fully integrated manufacturing with production of all components and parts in house. WEAKNESSES * Centralized production system which will lead to less flexibility on account of changing competitive factors like protectionism, exchange rate fluctuations etc. * Logistical difficulties in shipping and high landed cost. * Weaker sales and distribution network as opposed to that of Caterpillar. * CAT still has wider brand recognition and a larger brand value * Product range still smaller than that of Caterpi llar. | OPPORTUNITIES * Increase in infrastructure development in developing countries in Asia and Latin America. * Mining boom in Australia. A number of unique products in its kitty like amphibious and remote controlled bulldozers which can be used for specialized purposes such as working at toxic dump sites and underwater mining. * Ever increasing usage of robots in manufacturing will give a large market share for its industrial robots. | THREATS * Reduction in demand for EME equipment due to the decline of the construction boom, especially in developed countries. * Fluctuating nature of the Yen. * The rise of trade frictions between the US and European Community and Japan. The rise of smaller domestic companies in the international market. | Resource Based Competitive Advantage Let us now analyze Komatsu on the basis of its Physical, Reputational, Organizational, Financial and Intellectual resources. 1. Physical: The physical resources of Komatsu are quite valuable and some of it is quite rare such as its unique products such as the amphibious bulldozer but is not hard to copy and is substitutable. In fact CAT still has advantages over it in terms of sales and distribution and factory locations. 2.Reputational: The reputation of Komatsu is quite valuable and is widely known as a maker of good quality EME machines at competitive prices but CAT still has a higher reputational advantage over it. 3. Organizational: The organizational set up of Komatsu is highly efficient and it is one of its most valuable resources. It has one of the best labor relations in the industry. 4. Financial: The financial position of the company is quite stable at the moment but is subject to a lot of risks on account of various factors like the fluctuating Yen, decreasing demand for EME equipment etc. . Intellectual: The intellectual resources of Komatsu is one of the best in the industry, making it highly valuable and rare, leading to the development of its excellent R & D infrastru cture and highly productive nature of its labor force. Financials & Future Course From the limited and abridged version of the financial performance of Komatsu, we can see that the company has shown consistent growth. Yet, there has been considerable fluctuation in the sales revenue and net income over the years. Plotting the data in a graph gives us a clear picture of this trend.The above three figures show that the market-share of Komatsu, in the global EME market, has steadily grown between 1978 and 1984. It is interesting to note that the net sales and net income of the company does not correspond to the steady growth in the market share. These ups and downs can be explained in a case by case basis. In the early 1970s, the company started focusing on upgrading the quality of its products to compete in the global market. MITI’s decision to open the EME industry to foreign investments led to an obsession for quality and acquisition of advanced technology.Licensing technolog ies from International Harvester and Bucyrus-Eric and implementation of quality improvement programs led to high costs but they started paying off in the late 1970’s in terms of increased market penetration and lower cost of manufacturing. Aggressive exports to Western Europe and other parts of the world in the early seventies led to the sustenance of growth in market share and sales. But poor dealer network and lack of global servicing facilities led to a overkill of inventories and parts in international subsidiaries that led to substantial decrease in net income.Pricing its products at 30-40% less than that of CAT’s products enabled Komatsu to sell high number in LDCs. Komatsu’s ratio of exports grew from 20 % to 55 % in 1975. Late 1970s saw an increased investment in R to facilitate the V-10 program to reduce cost by 10 %, reduce the number of part of by 20 %, focus on value engineering and rationalizing the manufacturing process. This dented the balance she et. Rapid appreciation of Yen against many major currencies led to further constraints. Though the engineers used pessimistic internal yen/dollar exchange rate, the volatile nature of Yen had an impact on the net income.Buying its way out of the licensing contracts between International Harvester and Bucyrus-Eric again led to a major expense in the early 1980s, but they saved the company a great deal of trouble and licensing fees. This led to the unrestricted introduction of products like hydraulic excavators and wheel loaders to the world market. This led to a spike in the net income and net sales of the company in early 1980s. The rise of trade friction between European community and USA on one hand and Japan on the other slumped Komatsu’s international sales after 1982.Subsequent freight costs from shipping heavy earth moving equipment with poor volume to value ratio, simultaneous initiatives such as EPOCH, PDCA and increase in R spending to 5. 8 % in 1983 pulled down the net income figures. These are temporary downtrends which will be turned in to rapid up swing once these efforts start to paying off. Company on The Right Path The company is on the right track. Results of R efforts like superior cast iron development, 1000 bhp bulldozer, and diversification to arc-welding robots, heat systems etc have ensure the future of the company.It has spread its risk and has capitalized on changing trends like the embargo by Reagan’s administration which got Komatsu the Siberian natural resource project. Through it initiatives like F, it has identified the future course of the organization with the participation of its employees. But a competitor like CAT will definitely bounce back stronger than ever. CAT has its distinctive competitiveness built through strong dealership, huge financial reserves, global learning and experience. Innovation, operational efficiency, quality and consumer responsiveness are the key factors in achieving distinctive competit iveness.Komatsu has already addressed the needs of innovation, quality and operational efficiency. But there is a big gap in the consumer responsiveness aspect. CAT offers service and spare parts in 24 hours in any part of the world. Inventory overkill is a not a sustainable solution, hence the company’s immediate concern should be of improving the consumer responsiveness to ensure repeat purchase and nurturing customer loyalty. Company’s internal exchange rate has kept it buoyed during turbulent times in the money market, but initiatives like hedging revenues from international business will reduce forex risk.Innovation is vital, but innovation should be backed by organization commitment. If these innovations are not deftly handled, the sunk cost in R will scuttle the company. Komatsu should hence avoid falling in to the ‘Chasm’ between the early adopters and early majority of its new products. This can be achieved by sensing the different needs of the ea rly majority and perfecting the design of the products, adopting the distribution network to commercialization and revamping its business model based on the new requirements.If Komatsu fails in these fronts, it will fall in to the ‘Pioneers’ category of the Icarus paradox Danny identified by Miller. References * http://www. cat. com/about-the-company * http://www. komatsu. com/CompanyInfo/profile/ * C. W. L. Hill & R. Jones, ‘Strategic Management- an integrated approach’(2009). Bizantra, New Delhi. * C. W. L. Hill & Arun. K. Jain, ‘International Business – competing in the global market place’ (2009). Tata McGrawHill, New Delhi.