XAVIER INSTITUTE OF MANAGEMENT & ENTREPRENEURSHIP

International Business Case Analysis

Komatsu Case Analysis
Deepika Rao (49) Fahd Malik (55) Vinay Gatagat (58) Geetanjali Goel (59) George Paul (60)
12/5/2012

Prof. C. P. Ravindranathan

Change Drivers:
Post second world war period, Komatsu faced very little competitive pressure to either augment the product line or to improve the quality of products. The deteriorating quality of the products was a major concern for Komatsu. This resulted in inability to attract dealers to sell its equipment. Customer complains about the poor service capability increased. However there was a turn in the situation when Japanese Ministry of International Trade and Investment (MITI) decided to open the EME sector for foreign investments. This gave their archrival Caterpillar a great advantage and they decided to enter Japan through a joint venture with Mitsubishi which was opposed by Komatsu. However Japanese government agreed to delay the investment only for two years. This urged the Komatsus President Yashinari Kawai, to take advantage of the opportunity and establish their foot hold. This was a major change driver for Komatsu. The company entered into licensing agreements with two major EME manufacturers which left them in a very vulnerable state. They had to pay a huge amount not only financially but also in terms of export restrictions. This induced them to start their own R&D laboratory to focus on the applications of the electrical engineering developments. As a part of their initiative they also started focussing more on the quality aspect of the products using the quality control circle systems. In 1964 they received the prestigious Deming Prize for quality control within three years of launching the quality control programme. In the early 1970s Komatsu sensed the need to expand abroad as they felt that the domestic market was nearing maturity. The rise in the natural resource activity throughout the world and the construction boom in the Middle East were considered as a great opportunity for the company to expand. They build trade relations with Argentina, USSR, China, Europe, America etc. The constant indication that market growth in the future was less, Komatsu focussed more on improving the competitiveness of their products as a part of they launched a four part cost reduction plan. The first phase was to reduce costs by 10% while improving or maintaining the quality, followed by reduction in the number of spare parts by 20%, then value engineering to redesign the product to gain economies and finally rationalization of the manufacturing systems. This lead to a huge success and Komatsu was able to introduce new variants as well as new products. Major chunk of Komatsus demand was from the developing countries where the demand was very erratic. In order to establish their foothold, it was necessary for Komatsu to become a full time manufacturer with an extensive sales and service network. This meant revoking their

licensing contract that restricted them from exports. Komatsu objected to the export restriction and filed a case with the Japanese fair trade commission. The agency agreed with Komatsu that it was restrictive business policy that impaired their growth. This helped them in entering new markets with more products. F and F strategy; Future and Frontiers was there strategy that they created in the light of the depressed state of the construction industry. The objective of this strategy was to develop new products and new businesses. The encouraged employees to provide suggestions and as a result of this they received a total of 3500 suggestions. These suggestions helped them develop diverse new products. In the administration of Ronald Reagan, an embargo on the sale of Caterpillars pipe-laying equipment to Russia resulted in the entire contract being handed over to Komatsu. This slowly paved their way into the Soviet Union. Komatsu signed a contract with the Soviets to develop a scraper based on Russian design and Japanese components. This indicated a soon overtake in Komatsus sales to Soviet Union in comparison to Caterpillar. 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 manufacture certain standardized component parts to achieve economies of scale, lower cost and certain components customized to local needs

Issues & Recommendations

Marketing Perspective 1) Dealer Network Komatsu lacked a very strong dealer base which could be attributed to various reasons; first, Caterpillar its archrival had a first mover advantage in most of the countries. Second; the quality of the product offered by Komatsu initially was very sub-standard and there were a lot of customer complaints. Third, Komatsu narrow product line made it difficult to attract dealers for exclusive dealerships. Recommendations: Acquiring small dealers who will be willing to enter an exclusive dealership.

Open their own exclusive stores in key locations so that they can save training costs, establish direct communication with customers, identify new needs and constantly improve on the current products.

Dealers to be induced by attractive offers which Komatsu later started practicing.

2) Komatsu's narrow product lines Komatsu previously was active only in a limited number of product lines which made it difficult for dealers to enter in exclusive partnerships. This was basically limited due to the licensing agreements Komatsu had with the two US companies- International Harvester and Bucyrus-Eric. Komatsu realized that in order to increase their number of product lines and diversify they need to revoke their licensing agreements. They filed a case against Bucyrus-Eric to the Japanese fair trade commission. Japanese government supported Komatsu saying that Bucyrus-Erics contract was restricting their growth and therefore is anti competitive in nature. Apart from this Komatsu also set up their own R&D centre and introduced the new scheme Future and Frontiers whereby the employees were encouraged to provide their valuable suggestions. They received a total of 3500 suggestions and these helped Komatsu create many new products. 3) Lack of promotion Komatsu did not promote itself when it diversified abroad. Due to which most dealers and customers were not aware of their product and offering. Later when they realized their mistake, they started by participating in the International Construction Equipment Exposition (Conexpo). They exhibited their 1000 hp bulldozer which was bigger that Caterpillars top most bulldozer 700hp machine. The best way of publicizing their products would be through word of mouth and improved services. They could use their government contracts to popularize their products. Financial Perspective Yen had seen large fluctuations from 1971 to 1978, which created a huge obstacle for the export division. Recommendations: The strategy they used during this phase was to achieve a cost structure that would be profitable even in the worst case scenario. In order to minimize their risks they can use hedging techniques like forwards, futures, options or swaps.

Operations Perspective Centralized Production: Unlike Caterpillar whose operations were widely spread across the world, Komatsu was a bit more conservative in their approach. They had operations only through a limited number of places. This hampered their flexibility when compared to its archrival; Caterpillar. In order to overcome this issue Komatsu entered into a few joint ventures and at other places they assured that any part would be replaced within 48 hours in order to increase their reliability. Recommendations: In order to be more responsive to its customer needs and reduce the time required to introduce new products, Komatsu has to ensure its presence in more countries. Komatsu should obtain global sourcing arrangements through: a) Wholly Owned Subsidiary May be established in a country with low-cost labour to supply components to the domestic plant, or the subsidiary may produce a product not made in the domestic market. b) Overseas joint venture Established where labour costs are lower than those in the domestic market to supply components to the domestic manufacturer. c) In-bond plant contractor The domestically located plant sends components to be machined and assembled or only assembled by an independent contractor in an in-bond plant. HR Perspective 1) Komatsu had good labour relations: This improved the efficiency of the workers. Mr. Ryoichi Kawai believed that the employees had monetary as well as other needs like conducive working environment etc. So he tried to please his employees and conveyed to them that they were the company's greatest assets and was valued. He made them feel they were making great contribution to the company which indeed was true. 2) Comparatively Lower wages: the average wages paid by Komatsu to its workers were less than that paid by Caterpillar, but still there were harmonious labour relations because the workers were satisfied and happy to work with Komatsu. No labour unrest.

3) PDCA and management by Policy: Plan, Do, Control and Action was a management cycle which started with the long term plans announced by the top management team and the company president's policy statement issued at the beginning of the year. This was also referred to as Management by Policy. By this system the company ensured that the employees knew the basic policies, values and the company's targets extremely well. The PDCA and Management by policy made the goals very clear to the employees, thus providing them with guidelines to work and improve their productivity. They could make use of the learning curve and innovate to keep the company competitive.