Honda Is Significantly Smaller Term Paper

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¶ … Honda is significantly smaller

Honda - to consider M&a and JV or continue on its own?

The economic literature provides arguments for parnerships/take-overs and continuing on its own depending from which perspective we chose to analyze these options.

The international business theory focuses on how multinationals (MNEs), such as Honda enter foreign markets and later on evolve in these markets. The choice of entry mode influences the MNEs' performance. Those enterprises that have little knowledge about foreign territories may be better off by adopting a shared governance form by teaming with a local partner. The purpose for this measure would be for the partner's knowledge of the local market and institutions to reduce the entrant's "liability of foreignness" (Zaheer, 1995). The firm can also be better off by acquiring an existing firm, and often MNEs resort to this option. Duarte and Garc'a-Canal (2004) suggest that joint ventures are expected to perform better than acquisitions as company with a good performance is likely to be open to an international partnership rather than being sold by its owner. Conversely, an under-performing company may consider a foreign take-over as a good opportunity to improve its results.

The same international business theory argues that as companies increase their knowledge about foreign markets, they switch from joint ventures or acquisitions to greenfield investments. This can be explained from the perceived market risk perspective, which decreases as firms learn more about how to handle international operations or as they improve their multinationality (Kogut and Singh, 1988).

Honda has a vast experience in international markets, which would help the company enter new foreign markets or expand its activities in current foreign markets without incurring a significant liability of foreignness.

However, knowledge about foreign markets is a perspective that may overlook other aspects of crucial importance, such as global reach. It is not enough for a company to perform good abroad, but also to be able to compete against other players in the market and size starts to become more and more important as the globalization phenomenon expands. Larger companies are able to better exploit the advantages of global operations. Empirical evidence suggests that globalization has a positive effect on a company's activity measured in terms of productivity and growth rates (Lewis & Richardson, 2001).

One of the most important advantages is improved access to supply chains. The global reach enables MNEs to choose from a large set of suppliers those that optimize their costs, products and other efficiency-related parameters. It is worth mentioning at this point that the wider the global reach is the more complex and costly is to coordinate all interconnected activities. Highly internationalized companies usually resort to complex supply chain management solutions. For instance, Wal-Mart is very famous for its ability to permanently increase its efficiency, while holding tight to its motto: "Everyday low prices" and its successful supply chain management. The giant retailer was ranked #1 by Fortune 500 in 2006, made over $300 billion in sales and over $11 billion net income and is considered one of the largest employers in the world. The company has over 1,100 discount stores, 1,900 supercenters, 95 neighborhood markets and 575 Sam's club locations in USA and it has strategic presence in 13 foreign markets with 2,750 retail units, reaching over 175 million consumers. According to a PBS study (Smith, 2004), Wal-Mart is responsible for imports worth of $15bn from China alone, where the company has roughly 80% of its 6,000 international suppliers. In conclusion, taking advantage of global supply chains is costly and complex, requiring large resources and a company's size could turn out to be crucial in these instances.

Globalization increases mind share, also known as increased consumer awareness or popularity about certain products. Popularity increases the number of buyers, which in turn increase revenues through their purchases. Some companies for example are so famous that consumers derive actions or entire sets for products from their names, such as "googling" for online searching or Kleenex for tissues. Increased mind share is desirable, but also difficult to achieve. For instance, P&G, the largest household products U.S. manufacturer of and one of the largest companies in the world takes pride in having one product in virtually every American home and international exposure in over 140 countries worldwide. The company also markets products in over 50 categories, currently owning around 250 brands and engaging more than 7,500 scientists in its R&D activities to support its mind share. Again, resources turn out to be essential to reach this objective. P&G invests close to 4% (equivalent of roughly $3bn) of its worldwide revenue in R&D and $6bn in advertising (as of 2006).

Globalization translates into a more efficient allocation of resources and capabilities. Given the limits of these two categories, optimal results can be achieved at a global level, as both the optimal way of exploiting them is equally distributed across countries. Companies can take advantage of low cost labor or materials in cheap labor countries, special skills or knowledge embedded in people (e.g. foreign language skills in Europe where language diversity is high) and so on. Strategic partnership in various countries could be useful for companies looking to exploit specific advantages in certain locations without having to commit to those markets. However, even in the event of a larger commitment, partnerships can be translated into risk reduction.

Both the theory and the empirical evidence suggest that in many circumstances sustaining a business on its own could turn out to be a difficult task and sometimes a burden to heavy to carry. Nowadays we live in an era where MNEs have considerable power and influence over governments and societies. The competition between these players is increasing gradually, reaching proportions never encountered before. Given these circumstances, sharing and/or diversifying the market risk and increasing the scale and scope sound like success drivers. Thus, mergers, acquisitions and joints ventures to strengthen a company's position in the market and create competitive advantages, is not just a desirable option, but a "must" for companies like Honda, which have to compete against giants such as General Motors and Toyota.

2. Focus on core business and diversification

Companies resort to horizontal diversification when they adopt new technologies or products to enhance its customer base, despite these two categories being different or unrelated to the current technologies or products. Some of the advantages of this type of diversification refer to economies of scale and scope and increased market power. The economies of scale are achieved by selling customers a larger volume of products. The economies of scope are achieved by sharing common resources for a larger set of products, phenomenon also known as "synergy." Last, but not least, the market power is increased as the company increases its size and its negotiation power over suppliers and downstream channel member increases as well.

A second type of diversification is the vertical one. Businesses resort to it when integrating activities along the value chain. Vertical integration is one of the ways of minimizing transaction costs - by internalizing activities, companies reduce third party-related costs. The theory has also suggested that this type of diversification is meant to minimize risk induced by environment-related factors: uncertainty and small-numbers exchange relations - relations developed by the organization and a number of autonomous contractors that is considered to be small (Williamson, 1975).

Finally, a third type of diversification is geographic. Businesses resort to it when they want to explore and develop new markets. This type of diversification is usually meant to reduce market risk and increase economies of scale. The market risk is reduced as different markets are characterized by different factors and when the factorial effect is negative in one market, it is not the whole business that will be affected, but just a given subsidiary's activity. The economies of scale are increased because the company can sell to more people and thus increases its production to a larger scale and its negotiation power in its relationship with suppliers by increasing its size.

Generally speaking, for diversification to be successful, the company's capabilities, both resources and what the company can do with them should evolve in the same rhythm (Penrose, 1959). Thus, depending on the relationship between what a company knows and what the company is able to do the situations of under and over diversification can be noticed (Prahalad & Hamel, 1990), neither of which is desired.

Pilkington is the largest glass manufacturer in UK. The company was created in 1826 as a family business and its current annual revenue is around £2.7 bn, running manufacturing units on 5 continents and sales operations in over 100 countries.

Pilkington started its diversification geographically through international acquisitions in both areas closely related to its core activity and areas that didn't seem to be related with these. The company's capabilities were concentrated around upstream glass manufacturing and through the acquisitions, the company extended its operations to downstream automotive glass products manufacturing. Upstream glass manufacturing is a global activity, where core products… [END OF PREVIEW]

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