External And Internal Analysis Of Honda Motor Company Limited

PESTEL and Porter’s Five Forces model analysis

Discuss about the Capabilities Strategic Analysis of Honda.

The current report would focus on analysing the external environment in the context of Honda Motor Company Limited, which is a Japanese multinational entity popular for manufacturing automobiles, motorcycles, aircraft and power equipment. It is the biggest global manufacturer of internal combustion engines in terms of volume and eighth biggest global automobile manufacturer since 1959 (Global.honda 2018). The external analysis would use PESTEL and Porter’s five forces model along with the opportunities and threats inherent in the global automobile industry. The latter segment of the report would focus on analysing the key capabilities of Honda by using trend analysis, ratio analysis, product/service portfolio and operations for identifying its key strengths and weaknesses.

There are six macro-environmental factors, which could have direct impact on the business operations of Honda in the global marketplace and they are evaluated briefly as follows:

In UK, there has been decline in the sale of cars after the enforcement of the new proposal of the government. This would have negative impact on the revenue of Honda, as they might not be able to manufacture the same number of cars like before. Moreover, the individuals residing in Europe and in some Asian nations like Australia have to incur higher tax payments. The stability in the political environment would formulate the modern standards while boosting the endowment (Frynas and Mellahi 2015). Since the political changes would have direct influence on the innovations of the automobile industry. Honda needs to act responsive to its enhancements safely.

As the exchange rate fluctuates from time to time, impact would be inherent on the car prices of the organisation. Moreover, with the rise in the purchasing power of the consumers, new models are introduced every year at economical prices. However, its future growth might be restricted due to the petrol consuming vehicles (Frynas and Mellahi 2015).

As the individuals tend to purchase cars more from their domestic nations rather than imported ones, Honda has introduced eco-friendly cars for changing their thinking pattern. It is observed to deal with English language for minimising language barriers and expansion purpose (Grant 2016). Moreover, the prices of cars in UK are significantly lower and thus, the people from Western nations purchase more cars. These factors influence the consumer needs and potential market size.

Due to the widespread popularity of GPS amongst the global consumers, Honda has added satellite navigation system in their new cars. Moreover, in order to ensure that such cars are environment-friendly, it ensures fuel economy, ample torque and clean emissions. Thus, it has made considerable investments in innovating technology and advancements in mobile technology could be observed as well (Helper and Henderson 2014).

Opportunities and threats in the global automobile industry

The production of an organisation is hampered due to legal restrictions (Hill, Jones and Schilling 2014). However, the impact on the governmental laws has direct impact on the business operations of Honda. It needs to concentrate on its pricing strategies, propose to reduce vehicles for enabling the opponents for confrontation. Moreover, the wage rates of the employees are high in the Western nations and safety is to be ensured in the workplaces. Furthermore, Honda is required to cope up with issues such as training, reporting accidents and safety equipment for assuring the security of the employees.

Adequate reliance is placed on climate changes for car engines. Due to global warming, increasing trend could be observed in the petroleum prices. As a result, the organisation is manufacturing eco-friendly cars such as Honda-Hybrid for protecting global warming. Moreover due to the varying climate and weather conditions in different nations, the organisation is manufacturing different types of cars for resolving this issue.

The Porter’s five forces model of Honda could be described in the form of a table as follows:

Forces	Analysis
Bargaining power of the customers	·       Medium bargaining power, as the customers are looking for specific models, which are manufactured by Honda only ·       The customers do not have any bonus of purchasing from private sellers
Bargaining power of the suppliers	·       High bargaining power, as Honda is selling some unique cars to meet the expectations of its customers ·       Limited suppliers are available in the market from which Honda buys raw materials and other spare parts
Threat of substitution	·       Low threat to substitution, since adequate transportation modes are not available (Hiraki et al. 2017)
Threat of new entrants	·       Limited threat of new entrants, as the global automotive industry is highly competitive ·       Huge initial investment required for setting up business operations
Threat of competition	·       High threat of competition due to the existence of big players in the global market ·       Competition is faced constantly from Toyota, Ford and Nissan in terms of price; quality and market demand (Pisano 2017).

Honda could take advantage of a number of opportunities in the global automobile industry, which are enumerated briefly as follows:

Majority of the global governments have formulated standards for the automobile firms to minimise greenhouse gas emissions, while encouraging fuel efficiency initiatives. Honda could take advantage of these regulations by manufacturing car models having only hydrogen fuel cells and the government regulations could be bypassed related to greenhouse gas emissions (Schilling and Johng 2017).

It has identified that 17.5 million cars have been sold in US, which is 5.7% higher than the figure in 2016 (Shu and Lewin 2017). Moreover, the government is charging a lower interest rate and it is expected to remain constant in future. In these conditions, Honda could exploit the opportunity of capturing greater market share by increasing sales in the US automobile market. However, Honda is confronted to certain external threats, which are elucidated as follows:

It has been observed that in Asia, the automobile market is saturated for Honda. This is because the revenue has increased by 4% only in Asia, while in North America; revenue growth rate is observed to be 20.3% (Global.honda 2018). The global competitors like Ford, Toyota, Volkswaagen and others have high budgets and such budgets could be used to capture greater portion of market share from Honda.

Honda generates nearly 88% of its revenues from the global markets, which denotes that it needs to convert cross-border currencies to Japanese Yen for computing its revenues in order to send the profits back to Japan. If the Japanese Yen exchange rates rise significantly, drastic decline could be observed in its profit level and as a result, its business operations might be hampered in future.

Trend analysis and ratio analysis of Honda’s financial performance

The trend analysis of the financial performance and ratio analysis of Honda have been depicted in the form of tables (Refer to Appendices, Appendix 3 and Appendix 4). From the trend analysis, it could be observed that both revenue and gross margin have experienced fluctuations in growth over the past five years, in which gross profit has declined in 2017 due to rise in cost of revenue. However, significant fall could be observed in the overall expenses in 2017 due to which Honda has earned sufficient net profit in the year. Hence, from the trend analysis, it is evident that the organisation has performed strongly in the global market.

Various ratios are computed for evaluating the current financial standing of Honda in the global automotive industry. From the profitability ratios, it could be observed that increase in net margin is evident followed by return on equity and return on assets. This is because it has managed to minimise its expenses, while the asset base is increased due to which greater returns are provided to the shareholders of the organisation (World.honda.com 2018). The liquidity ratios computed imply that the organisation has maintained its inventory base adequately by rightly estimating the market demand. Furthermore, the efficiency ratios suggest that Honda is able to roll out its manufactured cars from the factories at a faster rate and cash base is increased due to fast recovery of the credit sales. Finally, the debt ratios suggest that it has placed adequate emphasis on raising funds through debt, which has increased its overall financial risk. Based on the above evaluation, it could be inferred that Honda is enjoying stable position in the global automobile industry.

Honda manufactures different types of vehicles like motorcycles, pick-up trucks, small cars and large trucks. Majority of its service portfolio is targeted towards the common individuals and for encouraging the customers in purchasing its products, it provides financing services through Honda Financial Services (Wagner et al. 2015). These services include retail lending and leasing to customers for purchasing or leasing Honda products and wholesale financing to the dealers for aiding them in maintaining effective inventory at different dealership locations (Petty et al. 2015). This denotes that Honda lays adequate emphasis on the customer needs before design any product and process selection as the main aspect of its operational process.

Conclusion:

Based on the above discussion, it could be stated that Honda is enjoying stable position in the global automobile industry due to the adoption of innovative technologies in manufacturing its main products. However, it is facing increased competition from the global rivals, which might minimise its profit in future. As a result, it has to come up with new strategies for coping up with such increased rivalry. Moreover, the financial analysis conducted states that the organisation has a healthy financial position in the market; however, it needs to focus on minimising its debt burden, as it would help in eliminating the financial risk.

References:

Frynas, J.G. and Mellahi, K., 2015. Global strategic management. Oxford University Press, USA.

Global.honda., 2018. Honda Global | Honda Motor Co.,Ltd.. [online] Available at: https://global.honda/ [Accessed 17 May 2018].

Grant, R.M., 2016. Contemporary strategy analysis: Text and cases edition. John Wiley & Sons.

Helper, S. and Henderson, R., 2014. Management practices, relational contracts, and the decline of General Motors. Journal of Economic Perspectives, 28(1), pp.49-72.

Hill, C.W., Jones, G.R. and Schilling, M.A., 2014. Strategic management: theory: an integrated approach. Cengage Learning.

Hiraki, T., Honda, T., Ito, A. and Liu, M., 2017. Financial Conglomeration, IPO Underwriting, and Allocation in Japan.

Petty, J.W., Titman, S., Keown, A.J., Martin, P., Martin, J.D. and Burrow, M., 2015. Financial management: Principles and applications. Pearson Higher Education AU.

Pisano, G.P., 2017. Toward a prescriptive theory of dynamic capabilities: connecting strategic choice, learning, and competition. Industrial and Corporate Change, 26(5), pp.747-762.

Schilling, M.A. and Johng, J., 2017. Honda insight: Development and launch of a hybrid electric vehicle. In New Horizons in Research on Sustainable Organisations (pp. 125-145). Routledge.

Shu, E. and Lewin, A.Y., 2017. A resource dependence perspective on low-power actors shaping their regulatory environment: The case of Honda. Organization Studies, 38(8), pp.1039-1058.

Wagner, D., Block, J.H., Miller, D., Schwens, C. and Xi, G., 2015. A meta-analysis of the financial performance of family firms: Another attempt. Journal of Family Business Strategy, 6(1), pp.3-13.

World.honda.com., 2018. Honda Worldwide | Investor Relations | IR Library | Annual Reports. [online] Available at: https://world.honda.com/investors/library/annual_report.html [Accessed 17 May 2018].