Name : Salman Rafiwardhana Susilo

Student Number : S5287367

Entry Ticket for Second Tutorial - Introduction to International Business

Examining Honda’s Firm Specific Advantages and its Utilization in Capturing the
U.S. Market

Honda’s triumph as a behemoth in the automobile industry as we know today is

inseparable from its maneuver as an innovator in the 1970s. By then, Honda, a Japanese-origin
automobile manufacturer, was on its way to expand to the US market. However, this effort was
hindered by several major incidents, including the growing value of the Japanese yen, new US
tailpipe emission rules, and the rising oil prices. Instead of thwarting its efforts, Honda found an
opportunity in adversity by introducing Honda Civic, a fuel-efficient vehicle which did not only
comply with the US emission regulations, but were also able to satisfy the demand of an
economic car desired by the public amidst the surging oil prices. The presence of the Honda
Civic became the initial milestone of Honda's success in its entry into the US, before meeting
import restrictions by the US due to its success. The event triggered Honda to establish a
factory in the US and eventually making its way as the country’s fourth largest vehicle
company. Despite facing expansion challenges along the way, Honda was able to mitigate it
through the company's ability to build high-quality vehicles, execute solid management
practices, pick the right sites and suppliers, as well as hire and train the right employees. These
capabilities are embedded in Honda's identity and practices that makes it ‘Honda’, which makes
it among the Firm Specific Advantages (FSAs) it possesses. In this case analysis, the author
intends to examine Honda’s FSAs, its utilization upon market entry as well as when
encountering problems, the lessons learned from Honda’s growth, and the author’s
recommendations to the company’s management, with respect to the issues it currently faces.

As previously mentioned, Honda’s ability to strengthen its foothold in the US market is

inextricably linked to its ability to make use of its FSA. An FSA is a firm’s inherent and
distinctive skill or strength, proprietary to the firm, that offers it a competitive edge over other
firms in the market, e.g. the ability to produce goods better, having a more sophisticated
technology, implementing better governance within its workforce, among other strengths. These
strengths are considered to be resources which can emerge in many different forms. First form
of FSA, there are financial resources. Having access to financing, be it debt or equity investors
may set the firm apart from its competitors. To a further extent, having “smart money”, or in
other words investors that can bring value apart from capital in the form of time, advice,
knowledge, and network (Graham-Brown, Moreno, 2021) also allows a firm to grow
leapfrogging its competitors, which makes the capital itself an advantage. Another form of FSA
is physical resources, which in this case can be in the form of land, buildings, natural resources,
etc. For example, a winery owns a vineyard in a rare area that other wineries do not. This
allows the winery to produce wines that its competitors are not able to produce, which makes
the land a competitive advantage. Albeit often overlooked, a firm’s FSA may also lie within its
workforce and leadership, which is when a firm’s FSA is in its human resources. According to a
survey conducted by Harvard Business Review (Gompers, Gornall, Kaplan, Strebulaev, 2021)
on America’s most prolific venture capitalists (VC), 95% of the VC firms considered
companies’ founders to be the most important aspect in determining an investment, more than
the company’s business model, market, as well as industry. Considering that the people running
the business is a very integral part of the business’s outcomes, it can also be considered an FSA.

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The three forms of FSAs previously mentioned are the advantages that are not identical
to the firm. Its competitors can also have the same land, receive capital from the same investor,
and hijack the same company leaders. But there are also FSAs that the company develops on its
own, ingrained in its company like no other, such as knowledge and reputation. Knowledge
advantage includes upstream knowledge (a company’s key productions and technological
offerings), downstream knowledge (how a company interacts with its customers), and
administrative knowledge (a company’s internal code of conduct, culture, and way of doing
business). These knowledge builds the company’s brand equity which results in elevating its
reputation within the industry, making it another FSA.

Referring back to the case, as an automobile manufacturer, Honda was able to capitalize
on a demand that American manufacturers were not able to meet, which is a low-emission,
fuel-efficient vehicle, through its CVCC engine within the Honda Prius. This production
capability, on its own, is an example of Honda’s FSA in the form of upstream knowledge. This
was made successful due to its high-quality standards and “better real cost performance” in the
production process. Honda also bears the fruits of its own labor due to its strong philosophy.
Honda’s philosophy of prioritizing attitude, an administrative knowledge FSA, made the firm
resilient to challenges within hiring employees and developing a supplier network. Honda
prioritizes its employees candidates with an attitude of passion on top of those within better
experience, and prioritizes smaller suppliers with better attitude in responding to Honda despite
there being a larger supplier capable of producing more, considering the lack of attitude it
shows. The aforementioned employees and supplier network has led Honda to have a par
excellence manufacturing system, with less presswork and more integrated welding process,
also a crucial Honda upstream knowledge FSA. Transfer of knowledge from the Japanese
employees to the American employees, made possible by the experienced human capital that
Honda sent from the Sayama plant in Japan to the US is also Honda’s FSA in the form of
human resources. Prior to its entrance to the US, Honda has formed an unfair advantage by
building a strong network of suppliers in Japan, also an upstream knowledge FSA. But not all
of these suppliers are willing to build factories in the US. Yet through the US suppliers it
contracts, Honda intervenes with an attempt to ameliorate and standardize its quality through its
BP (Best Position, Best Practice, Best Process and Best Performance) programme also
contributed to Honda’s ability to win the US market. Last but not least, the area where Honda’s
plant is situated with close proximity to railroad transport and skilled workforce is also a huge
physical resources FSA for Honda.

Being originally headquartered in Japan, Honda’s entrance to the US is only made

possible if Honda’s FSAs are relevant to the US market. These FSAs are what is commonly
known as non-location bound FSAs. Non-location bound FSAs are FSAs that transcends
beyond country borders. It is transferable, making it able to be generated in another place, in
this case a Japanese-origin product in the US soil. Another different form of FSA is a location
bound FSA (Verbeke, 2009). Location bound FSAs are only applied in certain areas or
countries, and not easily regenerated elsewhere. Some FSAs are location bound because the
local advantage cannot be applied elsewhere due to its unique, immobile nature. Take an
example, is a land rich in minerals that allows crops to grow healthier. This advantage is not
transferable as it is embedded within a geographical area.

To be specific, in the case of Honda, the location bound FSA is the strong network of

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suppliers built in Japan. considering the unwillingness of some of these suppliers to open up
shop in the US. Another location bound FSAs are the low labor cost, yet still providing high
quality products, that can be achieved in Japan, but not achievable in the US as the labor cost
will definitely increase significantly. Alas, Honda managed to mitigate it by developing the BP
programme to incentivize the North American suppliers, and through recombination.

Meanwhile, the majority of Honda’s FSAs are transferable (non-location bound), which
allows Honda to expand exponentially in the US. Honda’s non-location bound FSAs start with
its strategic and management know-how. A lauded management practice by many, Honda’s
decentralization in authority that allows regional leaders to create their own decisions has
allowed the company to react to emerging challenges and remain afloat in a new market. This
administrative knowledge FSA is complemented with the uncommon, yet successful, approach
that Honda took upon its research and development. Having its R&D unit acting as an
independent entity apart from its parent company has allowed the engineers to innovate and
thus give birth to another upstream knowledge FSA which is its engineering and production. As
mentioned in the California Management Review: The “Honda Effect” Revisited, Honda was
able to exploit economies of scale after taking a position as a low cost producer (Mintzberg,
Pascale, Goold, Rumelt, 1996). Being a Japanese company, Honda has its main talents in its
home country Japan. But this does not hinder the US talents to learn as Honda sends its top
veterans from Japan to train the US engineers. This proves that the knowledge that makes
Honda the reputable firm it is in Japan is non-location bound, as it can be transferred beyond
borders. And lastly, the philosophy of Honda as a company which values attitude is also a non
location-bound FSA. After it was implemented within the business practices in the US as
practiced in the selection of employees and suppliers, Honda was able to flourish as a company.

Echoing Friedman (1970), a business's main objective is to earn profits for its
shareholders. This can be achieved through expansion, which was the case in point in Honda
and it was done through transferring its non-location bound FSAs from Japan to the US. While
it is apparent that there are certain FSAs which can be utilized to capture the market in the US,
there are limitations within the market entry that are influenced by bounded rationality and
bounded reliability. These phrases depict the biases and doubtful behaviors exercised by
humans as a Homo economicus in doing business that may or may not impact the attainments of
the business he/she runs. According to Simon (1990), bounded rationality occurs when an
economic actor creates a decision that takes into account his/her cognitive limitations in the
form of both knowledge and computational capacity. Meanwhile, bounded reliability reflects
how an economic actor being reliable, but only to a limited extent, which led to their efforts in
doing business become imperfect as they are unable to make open-ended commitments (Kano
& Verbeke, 2015).

Despite its meteoric rise in its early years of entering the US, Honda’s international
expansion was not always smooth sailing. After successfully expanding to Africa, Australia,
China, Europe, the Middle East, and South America, Honda was faced with internal problems.
Despite being a customer favorite, in the eyes of investors it has rather been disappointing.
According to Yahoo Finance, Honda’s industry's operational profit plummeted 27% year on
year to 153.3 billion yen for the fiscal year ending March 2020, with an operating profit margin
as low as 1.5%. This was due to the Honda growing large, yet not followed with proper
governance thus resulting in coordination difficulties. As mentioned earlier, this downfall was

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also caused by the bounded rationality within the Honda leadership. Unlike its competitors and
other major corporations, Honda initially resisted transformation from functional silos to
integration (Levin, 2020). The cognitive limitation within the leadership to embrace change,
evidenced by letting the SEDB structure remain as it is and allowing continuous autonomy in
its R&D subsidiary, have taken a toll on Honda’s profitability which perfectly illustrates the
bounded rationality. Honda’s global business activities which tried to serve all markets
irregardless of its production capability is also a form of bounded rationality as it led to quality
decline within the manufacturing. Being a multinational corporation like Honda also poised
major risks if its business operations are not executed wisely. These risks due to failure to
execute as promised is a form of bounded reliability. This was proven with the failure in
producing safe spareparts with 11 million vehicle recalls due to faulty airbags after killing 22
people globally (Levin, 2020). This happened due to imperfect effort exercised by Honda in
producing its goods. Another potential bounded reliability may also happen to Honda from the
eyes of its investors. As it is a public company, the downfall it faced may hinder the investors to
receive the dividends it may hoped.

Honda could have expanded to the US through multiple means, be it through exporting
goods, producing through multiple geographies, and crafting a new identity. Yet, Honda choses
to clone its home operations from Japan to the US, making it an international projector.
According to Alain Verbeke (2009), there are four typologies of international firms. The first is
a centralized exporter, which is a firm managed in its home country but also selling its products
internationally through exports. An Example of a centralized exporter is Rolex the watchmaker,
or movie producers like 20th Century Fox, whose transferable FSAs are customers that desire
their products outside its home country. The second is an international coordinator, which
manages a global value chain with different activities done in different countries. For example
is British Petroleum (BP) where its extraction, refining, and marketing are done separately, and
its transferable FSAs are the ability to spot advantages in different geographies. The third is a
multi-centered MNE, which is a collection of large independent businesses that operates on its
own from ideation to sales in its respective markets. The example of a multi-centered MNE is
Nestle, as they are operating globally, but each country has its own ways to satisfy the local
consumer preferences, and its transferable FSAs are its routines. Last but not least, the typology
of the company that Honda is today, is an international projector. As an international projector,
it transfers the FSAs that have made Honda great in Japan to foreign markets, attracting the
customers that are attracted to Honda. Yet prior to being an international projector, Honda
started as a centralized exporter. Not until the import restrictions imposed by the government
and a feasibility study was conducted to build a factory in the US was Honda an international
projector.

The case of Honda has taught the author that international expansion for a firm is a
multidimensional and complex process. Especially when the market it aims to enter is an
extreme opposite of its home country. In order to make a successful international expansion
rather more achievable, a firm must start with determining its FSAs that are non-location bound
and thus transferable in new markets. Honda’s ability to capitalize on the demand of
fuel-efficient vehicles through its production FSA paved the way for a successful entry to the
US. Honda was also able to deploy various of its non-location bound FSAs, including its human
resource FSA and administrative FSA, and mitigate the shortcomings of the location bound
FSAs through different methods. On top of the key learnings of the ability to determine a firm’s

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own FSA and utilizing it, the author also learned that as part of a conglomerate leadership, one
must not be confined with bounded rationality and must be open-minded to new changes.
Honda was too comfortable with its old practices, including lenient R&D and SEDB
departments that are failing to integrate, and not realizing that its profits are hemorrhaging. The
author fully agrees with the latest organizational restructuring with the R&D unit being focused
on robotics, new mobility, and long-term R&D, as it will open doors and possibilities to new
profits in years to come and will avoid the past calamities to reoccur. (Hara, 2020). Above all
else, from the learnings that the author took from reading this case, the author suggests that as
an automotive company whose product craftsmanship is the core of its identity, Honda should
not risk to reduce quality just for the sake to provide different variations to serve more
customers. As at the end of the day, variation means nothing without durability and safety that
must have been the priority of the customers.

References

Friedman, M. The New York Times. “A Friedman doctrine- The Social Responsibility Of Business Is to
Increase Its Profits”, 1970.
[https://www.nytimes.com/1970/09/13/archives/a-friedman-doctrine-the-social-responsibility-of-busines
s-is-to.html].

Gompers, P., Gornall, W., Kaplan, S., Strebulaev,. Harvard Business Review. “How Venture Capitalists
Make Decisions”, 2021. [https://hbr.org/2021/03/how-venture-capitalists-make-decisions]

Graham-Brown, C., Moreno, D. TechCrunch. “Capital is a commodity”, 2021.

https://techcrunch.com/2021/12/23/capital-is-a-commodity/].

Hara, Y. Nikkei Asia. “Honda drives drastic R&D reforms to reverse slow auto business”, 2020.
[https://asia.nikkei.com/Business/Automobiles/Honda-drives-drastic-R-D-reforms-to-reverse-slow-auto-
business.

Kano, Liena & Verbeke, Alain. (2015). The Three Faces of Bounded Reliability: Alfred Chandler and
the Micro-Foundations of Management Theory. California management review. 58. 97.
10.1525/cmr.2015.58.1.97.

Levin, D., Seeking Alpha. “Honda, Stellar Name Among Car Buyers, Restructures To Win Regard From
Equity Investors”, 2020.
[https://seekingalpha.com/article/4356464-honda-stellar-name-among-car-buyers-restructures-to-win-reg
ard-from-equity-investors].

Mintzberg, H., Pascale, R.T., Goold, M. and Rumelt, R.P. 1996. CMR Forum The “Honda Effect”
Revisited'. California Management Review, 38, 78-117

Simon, H.A. 1990. Bounded Rationality. In: Eatwell, J., Milgate, M., Newman, P. (eds) Utility and
Probability. The New Palgrave. Palgrave Macmillan, London.
https://doi.org/10.1007/978-1-349-20568-4_5

Verbeke, Alain. 2009. International Business Strategy: Rethinking the foundations of global corporate
success. New York: Cambridge University Press.

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