Komatsu Case Analysis

Group 3 Komatsu Case Analysis

Submitted by, Shayani Barman (109) Shelly Agarwal (113) Sherman Ben Serrao (114) Shirish Gandotra (115) Shiva Kumar (116)

EXECUTIVE SUMMARY

This report examines the competitive strategy that needs to be adopted by Komatsu to continue its impressive performance over the years, along with its internal management policies. We have done an industry level analysis, we have used Michael Porter’s Five Forces Model for competitor analysis to analyse the competitive edge of Komatsu over its rival firms. We have also discussed the key management issues of the organization, across the spheres of Functional Departments over the time frame. We have done a detailed analysis of current strategy being followed by various divisions of Komatsu and came out with few issues which need immediate attention in terms of strategy formulation and suggested few strategies to be adopted to fix those identified issues. We have concluded the report by providing an overall strategy to be adopted by Komatsu and Recommendations, based on our understanding of the case. All these recommendations are to either address existing issues faced by Komatsu, or to enhance its operations to make it more profitable and have a sustainable growth and also to compete with market leader Caterpillar.

Industry Level Analysis According to the case the industry is highly concentrated, with the 50 largest companies holding more than 80% of the market. The industry is unstable (currently, as mentioned in the case) because of multiple factors like the 12% downturn in the US construction industry in 1979 , poor forecasts for the next few years ,At the same time there was an uncertain economic environment in LDC’s like low commodity prices, problem associated with debt servicing and recession . While price rises have been significant over the past few years the net industry position has dipped into negative figures. But even though the US market continues to fall as a proportion of the World construction industry (from 50% to 45%) Asia/Pacific will increase significantly at the same time (26% to 31%). Therefore the companies need to ride out the current US/European recessions, enable customers to cope with increasing cost pressures and importantly, take advantage of the Asian growth to be profitable in the longer term. Characteristics of the Industry    

Impacted by Global economic trends Cyclical demand patterns Impacted by fluctuations in price of minerals due to dependency on mining Industry Shifting demand to developing countries

Critical Success Factors in the Industry      

R&D for product development, product design, operational efficiency and others. Intertwined system of TQC, PDA cycle and management policy Focus on Quality and productivity improvement Projects like EPOCHS Product diversification Twin Orientation of overseas market and Customer Satisfaction

Competitor Analysis(Based on Porter’s Five forces model): Competition among Industry rivals: High Komatsu is the second largest player in the world EME industry with a market share of 60% in Japan and 25% worldwide. Caterpillar is the major competitor with a market share of 43%worldwide. It faces competition from other established global players like J.I.Case, John Deere, Clark Equipment and Fiat-Allis. Along with these global players it also faces competition from specialized local players in Europe and North America.Komatsu has focused on lower price and higher quality of its products to maintain the competitive position in the market. Threat of Substitutes: Low The threat of substitutes is minimal. There are no other comparable products which could perform the job done by Komatsu’s products. Human labour is the only possible substitute but it requires a lot of time to perform the same function.

Buyer’s Power: Medium Presence of a good number of local firms and other global players gives the customers fair amount of choice for purchasing the equipment. To attract the customers, Komatsu has priced its products 3040% below the similar Cat’s equipments and Komatsu has a broad product line with number of variants. Supplier’s Power: Low The suppliers have a little influence on Komatsu as it is a vertically integrated player. Most of its components are produced in-house. Vertical integration has helped Komatsu to price its products at lower prices. Threat of new entrants: Low EME manufacturing business requires huge capital investment, R&D expenditure and a differentiating product feature. This poses huge entry barriers in EME industry so threat of new entrants in this industry is very low.

Strategy during 1960’s Strategy followed       

Taking advantage of Japan’s MITI’s new policy which allowed to open EME Industry to foreign capital investment by acquisition of necessary advanced technology from abroad Focusing on improvement of product Quality Entered into licensing agreements with its two potential competitors international harvester and Bucyrus-Eric and technology collaboration with Cummins Engine Established its first R&D laboratory to focus on application of electrical engineering developments Quality up gradation program was set up in factories. Focusing on TQM and quality circles to ensure maintaining highest quality standards in all its operations by providing high performance, reliability and durability. Planning and implementation of Project A whose initial phase focused on quality up gradation and 2nd phase of cost reduction

Problem faced 

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Focusing on two strategies - Differentiation and Cost leadership simultaneously showed their eagerness to capture global market but not a sustainable competitive advantage as both strategy requires different business models. Expanding the global market at expense of domestic market. No Strategic Global Expansion Planning or adopting any strategy to study new market demands

Recommendations 

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They should follow a strategic process in which they are concerned with the interactive relationships between an organization and its environments, and with the functional decisions required in order for an organization to effectively interact with its environments. The strategic process, thus, requires the identification of market segments, the development of product strategies, the development of pricing strategies, the development of distribution strategies, and the development of advertising and sales promotion strategies and not just investment in R&D and enhancing quality standards. Strategic planning is the process of determining the mission, major objectives, strategies, and policies that govern the acquisition and allocation of resources to achieve organizational aims. Strategic planning is a process which generates specific actions which are required to carry out a particular strategy .Thus they should design a constructive framework for their expansion plans. They should not overlook the Japanese standards in their eager to enter foreign markets because domestic markets are their major revenue generators. They should adopt a transnational strategy from the current international Strategy and adopt its product to suit the user requirements in different countries and diverse applications

Komatsu had been deliberately trying to compete with Market leader Caterpillar by enhancing quality standards but at same time not realizing that this might adversely affect their customer segment who are more cost focused rather than Quality.

Strategy during 1970’s: The strategies followed by Komatsu during 1970s are as follows:    

Komatsu launched project B which focused on the upgrade of the quality and reliability its large bulldozers Penetrate the market for LDCs Developing its own exclusive dealer network Research on cost reduction and new product development.

Strategies during 1980’s Licensing agreements with Bucyrus-Erie and International Harvester: Komatsu benefitted immensely from the technical know-how obtained from these two companies. This helped Komatsu to emerge as a full line competitor and export its products worldwide thus strengthening its position globally. Reorganization of its worldwide distributor network: After emerging as a full line competitor, Komatsu promoted heavily about its full line capability and product reliability. It strengthened its presence abroad by establishing regional centres for parts distribution and service and made available Japanese engineers to help dealers with service issues. Launch of Efficient Production Oriented Choice Specifications (EPOCHS): This approach helped Komatsu to build products according to the user needs without giving away its cost advantage. Due to this aspect its products were preferred over that of Caterpillar’s. Commitment to research and development This aspect has brought worldwide recognition to Komatsu and it is now seen as a serious player which could bring out innovative and cost effective products. Launch of the Future and Frontier (F&F) project It led to development of new and diverse products like welding robots, heat pump etc. It entered into a joint research agreement with Cummins Engine for sharing information of the fuel efficient engines indigenously developed by Komatsu. It was able to develop breakthrough technology in Cast iron alloy used in the manufacturing of diesel engines and became one of the top manufacturers of arcwelding and material robots. Good networking and Strong relationships. This helped Komatsu in reducing its dependency on the local Japanese market and further expand its exports globally. Continuous emphasis on quality through TQC and PDCA It won the Japan quality control prize which was considered as the world’s supreme quality-control honour and also twice won the gold medals from Union of Japanese Scientists and Engineers. This

emphasis on quality helped Komatsu to differentiate itself from its competitors by providing high quality products at prices lesser than its competitors. Environment in which Komatsu Limited is currently operating Komatsu Ltd. headquartered in Tokyo, Japan, manufactures and markets a wide variety of products such as construction and mining equipment. Founded in 1921, Komatsu currently has close to $8 billion in sales annually. Although Komatsu’s line of bulldozer was in demand through the 1950’s, it wasn’t too highly revered. Komatsu was following an International Strategy. They diversified into the production of agricultural tractors, bulldozers, tanks, howitzers, etc. But later after the World War II it began to concentrate mainly on the EME sector. But one of the obstacle on the way of Komatsu’s growth as a worldwide competitor were the protectionist policies of Japan which insulated the company’s from any exposure to competition from multinationals and thus their efficiency was low. In 1970’s there was market maturity for CAT and Komatsu’s EME. Komatsu identified this market maturity and developed relationships with Eastern Bloc countries. In the 1980’s the management practice of TQC system and the “PDCA” management cycle contributed to company performance and employee development. INTERNAL – Strengths and Weaknesses

Strengths

Weaknesses

•High Quality : Komatsu name has became synonymous with quality and value.They implememted quality management techniques like TQM, PDCA • Low Manufacturing cost : A lower salary base and lower raw material costs enables Komatsu to offer eqiupments at a low cost •Efficeint Management : Komatsu's efficient management made Komatsu the industry leader. From the 1970's it focused on improving the competitiveness of its products

•Logistics : Caterpiller has production sites throughout the world whereas Komatsu had centralized production facilities. They needed to shift production due to protectionism, exchangerate fluctuation and changes in the competitive scenario •Industry stage : Komatsu’s market was reaching maturity stage and Komatsu didn’t have an extensive sales and service network.

Problems faced by KOMATSU 1. Lack of a strong distribution, sales, and service network The biggest weakness of Komatsu was in poor operations management and lack of strong distribution channel, a dedicated and experience external sales force, and a strong service and support network. Komatsu’s strength was in the quality and cost reduction projects that enabled Komatsu to develop a product line where their quality is as good as Caterpillar’s for lesser price to the consumer. Caterpillar’s extensive distribution channels and sales and service areas weakened Komatsu’s ability to compete with them. 2. Centralized Production Centralized production has been a strong factor for Komatsu in terms of controlling quality and reducing costs, but they lose out on location economies. Due to high transportation cost Komatsu can lose out on contracts in developing nation. 3. Volatile currency YEN The fluctuation of YEN has threatened Komatsu's ability to grow. For example, if the Yen increases in value against the dollar then this causes a net effect of raising Komatsu's product prices. 4. Earlier customer complaints on poor quality The machine was of poor quality and its customers complained of the company’s poor service capability. So no dealer agreed to sell its products due to which they had to set up their wholly owned branch sales offices and repair shops.

Suggested Overall Strategy Strategic focus The best overall strategy for Komatsu would be to move from International Strategy to Transnational strategy. They should streamline their operations to reap the benefits of transnational strategy where they can have certain standardized component parts by manufacturing which they can achieve economies of scale and lower cost and certain component parts customized to the local needs.

Alternate Strategies 1. Address the lack of strong distribution network I. II. III.

Acquire a larger extensive network (comparable to Caterpillar) Attract more dealers Invest more to strengthen the service and sales network

The lack of a strong distribution, sales, and service network has long been a disadvantage in Komatsu’s ability to compete with Caterpillar. Komatsu has focused on these problems and has implemented several projects to address the lack of a strong distribution, sales, and service network by increasing the size of their product line. Komatsu should continue to attract more dealers, acquiring a

larger network, and strengthening their service network and attempt to set up limited partnerships with companies with strong existing distribution channels, sales, and service networks. 2. Relocate plants needing expansion to developing nations to reap the benefits of Location Economies The concept of centralized production was to gain high degrees of quality in Komatsu’s products, and lower cost. This has been a critical success factors in Komatsu’s operations. But with changing times firms need to renovate their business model to stay afloat in competition. So Komatsu needs to expand to a developing nation. This would allow Komatsu to lower cost by reaping the benefits of Location Economies and reduce transportation cost. Komatsu should position itself right in the Upsala model focusing on wholly owned subsidiaries to gain greater control. Wholly owned subsidiaries may be established in a country with low-cost labor to supply components to the domestic plant, or the subsidiary may produce a product not made in the domestic market. A wholly owned subsidiary would also ensure strict control over quality standards. Overseas joint venture can be established where labor costs are lower than those in the domestic market to supply components to the domestic manufacturer. 3. Shifting along the lines of the Upsala Model As we know, initially Komatsu followed the export model (Upsala model), i.e., it manufactured everything in Japan and exports it to the different countries. The success of Komatsu is highly dependable on the fluctuating exchange rate. If the Yen appreciates then the company suffers from losses, if it depreciates then it enjoys more profits. But it is better not to leave the position open for gain or loss. According to the trend shown in the balance sheet we can see that the Yen has consistently depreciated against the $ in these 6 years. But even then in between a year also the Yen$ fluctuations have been quite tremendous as we can see in the High-Low spread given in the balance sheet. Thus the company has to immune itself from sudden shocks of an appreciating Yen. Options 1. Forward Contract 2. Hedging 3. Selling at local currency price Komatsu should go for Forwards and Hedging with its buyers, i.e., agree to sell the goods at a predetermined price on a particular date in the future at a rate agreed to by both the parties now. So it can decide (depending on the trends they have seen in the past as to the currency fluctuations and also the external market variables) on a profitable price at which they want to freeze their forward contract. This will definitely limit their losses but it can limit their profits also. But it depends on the risk appetite of the Komatsu management. They can also sell their products at the local currency in every market, thus even if the Yen-$ value undergoes a lot of change it will barely have any effect as it will be having their payments in terms of domestic currency of every country. The diversified currency payments will mitigate the market risk of fluctuations.

4. Improve the competitiveness of its machinery by reducing of costs, reducing the number of parts, redesigning the products to gain economies in material or manufacturing and rationalization of the manufacturing system 5. Creating Strategic Intent for the future in terms of not only matching existing resources and capabilities to current strategy but also building resources and capabilities for maintaining future competitiveness.

Strategy selection and implementation: Of all the alternate strategies the one with the highest impact would be Strategic intent which is a high-level statement of the means by which your organization will achieve its vision. It is a statement of design for creating a desirable future (stated in present terms). To summarize a strategic intent is the company's vision of what it wants to achieve in the long term. Strategic intent focuses on decomposition of exploration rules into the next level of detail, the linkages to the exploration rules and the transition rules that define how it will migrate from its current design and ecosystem to a future business design and ecosystem. The logic, uniqueness and discovery that make the strategic intent come to life are vitally important for employees as they have to understand, believe and live according to it. Strategy should be a stretch exercise, not a fit exercise. Expression of strategic intent is to help individuals and organizations share the common intention to survive and continue or extend themselves through time and space. Hence, Komatsu would need to re-strategize their operations along the lines of the alternate strategies outlined in the previous section, i.e., to tackle issues of distribution and service, yen fluctuations, and centralized production. Also, they need to look at the importance of improving overall product quality, and creating a strategic intent for the future.