Komatsu Case Analysis PDF PDF

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This is the PDF of the Komatsu case. This is necessary reading tobe completed for the class discussion....

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Harvard Business School

9-395-001 Rev. May 28, 1997

Komatsu Ltd. and Project G (A) On a breezy spring day in 1991, passers-by on the bustling street in front of Komatsu’s world headquarters stopped, pointed, and stared at the spectacle atop the building. Ten stories above, workers were dismantling one of central Tokyo’s most notable landmarks—a giant, yellow Komatsu bulldozer precariously perched on a tall pole. For 25 years, this corporate icon had symbolized Komatsu’s overriding strategic aim to become the world’s premier construction equipment manufacturer. Inside the Komatsu offices, the objective was more explicitly expressed in the oftrepeated mantra, “to catch up with and surpass Caterpillar [Cat].” President Tetsuya Katada and company workers watched, too, reflecting on the significance of the move. Katada and the directors and employee representatives on the so-called “Committee for the 1990s” had carefully timed the removal of this corporate symbol to mark recent changes in the company in preparation for Komatsu’s spring celebration of its 70th anniversary. Soon, a new electronic beacon would flash Komatsu’s new logo and new corporate slogan (“The Earth Company, Unlimited”), confirming the changes in strategy and management practices that Mr. Katada and the two management committees had started to implement. President Katada explained the significance of these symbolic changes: Pulling down the bulldozer is just one example showing the strong determination of the president to outsiders and, more importantly, employees that we can’t single-mindedly pursue production of the bulldozer. . . . Instead, we have challenged the organization with a new slogan, “Growth, Global, Groupwide”—or “the Three G’s” for short. It’s a much more abstract challenge than one focused on catching and beating Cat, but I hope it will stimulate people to think and discuss creatively what Komatsu can be.

Komatsu Company and Management History Established in 1921 as a specialized producer of mining equipment, Komatsu expanded into agricultural machinery during the 1930s and, during the Second World War, into the production of military equipment. The heavy-machinery expertise the company developed positioned it well to expand into earth-moving equipment needed for postwar reconstruction. Soon, Komatsu’s sales of Professor Christopher A. Bartlett and Research Associate Robert W. Lightfoot prepared this case as the basis for class discussion rather than to illustrate either effective or ineffective handling of an administrative situation. It is designed to be used in a single session with the companion (B) case (No. 395-002) or (C) case (No. 395-003). Copyright © 1994 by the President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School.

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construction equipment exceeded those of its other two businesses in industrial machinery and defense equipment. In the high-demand and capital-constrained Japanese environment, Komatsu held a market share of more than 50%, despite the low quality of its equipment at that time. This comfortable situation changed in 1963 when, after the government decided to open the industry to foreign investors, Cat announced it would enter the market in partnership with Mitsubishi. At this time, Komatsu had sales of $168 million and a product line well below world standards. Local analysts predicted three years of struggle before Cat bankrupted the puny, local company.

Emergence and Expansion: The Kawai Era (1964-1982)1 It was in this context that Ryoichi Kawai assumed the presidency of Komatsu from his father in 1964. The older man had prepared the company by initiating a Total Quality Control (TQC) program in 1961. Building on this base, Ryoichi Kawai’s strategy for the company was straightforward—to acquire and develop advanced technology, to raise quality, and to increase efficiency to the level necessary to “catch up with and surpass Cat.” To galvanize the company around his challenge and to focus management on his strategic priorities, Kawai introduced a style of management which he called “management by policy.” Kawai explained the philosophy behind his new system: Personally, I believe that a company must always be innovative. To this end, the basic policy and value of the target must be clarified so that all the staff members can fully understand what the company is aiming for in a specific time period. This is the purpose of the management-by-policy system. Under the umbrella of the TQC philosophy that was now deeply ingrained in Komatsu, management by policy began with Kawai’s statement of an overriding, focused priority for the company. Launched the year after Cat announced its entry into the Japanese market, his first policy, “Project A,” sought to raise the quality of Komatsu’s middle-sized bulldozers to Cat’s level. To support this goal, Kawai instituted a new system of control, the “Plan, Do, Check, Act” (PDCA) cycle. While the TQC program had raised awareness of the many different dimensions of quality and had involved all workers in discussions about how to improve quality, the PDCA cycle of control was designed to ensure that constant progress was made toward those objectives and to focus them on the policy that Kawai established at all levels of the organization. Once Kawai announced the projects and priorities at the beginning of the year, the continuous PDCA cycle concentrated efforts within the company on attaining the broad policy objective until it was fully implemented (see Exhibit 1). Kawai’s new management approach, as reflected in Project A, was an immediate and outstanding success. Project A enabled Komatsu to double its warranty period within two years while cutting claim rates by two-thirds. And, in the face of Cat’s entry into Japan, it triggered an increase in sales that raised Komatsu’s market share from 50% to 65% by 1970, thereby confounding the experts’ forecasts of an early demise. An avalanche of policies followed, steering Komatsu through the turbulent environment. In response to the economic stagnation that hit Japan in 1965, Kawai targeted a “cost down” program at slashing costs. In 1966, his five-year “World A” campaign sought to make Komatsu internationally competitive in cost and quality, thus reducing Komatsu’s potentially dangerous reliance on domestic sales. And, in rapid succession, Kawai launched Projects B, C, and D to improve reliability and durability in large bulldozers and shovels, payloaders, and hydraulic excavators, respectively.

1For a detailed description of the Kawai era, see “Komatsu: Ryoichi Kawai's Leadership,” HBS case No. 390-037.

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Throughout the 1970s, not a year went by without a major project, campaign, or program aimed at catching and surpassing Cat. By the early 1980s, Komatsu had emerged as the major challenger in the construction equipment industry, putting Cat clearly on the defensive (see Exhibit 2). Nowhere were Cat’s concerns clearer than in its 1982 annual report, which opened with a picture of a Komatsu bulldozer and a stern warning that Cat would not be able to compete against its Japanese rival at prevailing exchange and wage rates.

Struggle and Turmoil: The Nogawa Era (1982-1987) Having guided the organization through an 18-year period of extraordinary growth, Ryoichi Kawai handed over operating leadership to Shoji Nogawa in 1982. Unfortunately for Nogawa, this date also marked the beginning of an era of falling demand, worldwide price wars, a rapidly appreciating yen, and heightened trade frictions throughout the industry. Nogawa was an engineer who had risen through the manufacturing side of the construction equipment division. A reputed strong-willed, hands-on manager, he had high expectations of his managers, and drove them hard to meet those expectations. In spite of the growing challenges facing the industry, Nogawa was initially reluctant to change Komatsu’s traditional policies, including the company’s reliance on its highly efficient, centralized, global production facilities.

In his first years in office, Nogawa made extensive capital investments to cut costs, launched a campaign to use assets more efficiently, expanded Komatsu’s product line, and boosted research and testing activities. As pressure mounted, Nogawa introduced new strategic goals in 1984, including faster product introduction and expansion of nonconstruction industrial machinery businesses. The situation reached a crisis pitch in 1985 and 1986, when the value of the yen surged from ¥239 per dollar to ¥169 per dollar. With domestic markets in turmoil, this rise exposed Komatsu’s foreign exchange vulnerability, putting Nogawa under pressure to internationalize production more rapidly. His short-term strategy included raising prices abroad, expanding overseas parts procurement, and cutting production costs. His “medium-term” strategy called for developing more marketable construction equipment products through increased R&D spending and capital investments in manufacturing facilities. In the long-term, he told shareholders, “Komatsu is gearing itself toward new business areas of high-growth potential.” In addition, in 1985 he responded to the growing initial and external pressures for internationalization, approving the establishment of two important overseas plants—one in Chattanooga, Tennessee, and the other in a closed Cat facility in Birtley, United Kingdom. “As a drastic means of efficiently managing the sensitive trade friction and volatile foreign exchange environments,” he told shareholders, “we have secured manufacturing bases in the world’s major markets.” Even after the plants were established, however, Nogawa seemed reluctant to embrace them fully into Komatsu’s strategy. For example, when U.S. distributors began lobbying the head office to move additional production overseas, he rejected their proposals outright, finally relenting only when the yen appreciated even further to ¥140 per dollar. The rising tide of problems, rapidly deteriorating results, Nogawa’s apparent resistance to faster and more dramatic change, and the deleterious influence of his unpopular autocratic management style eventually resulted in his replacement. Chairman Kawai explained: “With this serious appreciation of the yen . . ., we have no time to lose. We need to have a complete change in people’s attitudes so that we can build a new organization, aiming at progress in the 1990s and the twenty-first century.” 3 This case is for use only with the Harvard Business Publishing ‘Case Analysis Coach’

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Steadying the Ship: The Tanaka Transition (1987-1989) In June 1987, Ryoichi Kawai chose Masao Tanaka to replace Nogawa as president. A former general manager of the domestic sales division and, more recently, three-year general manager of the overseas division, Tanaka emphasized that his basic policies would not differ from his predecessor’s, though the way he implemented them would. Tanaka explained: One of my personal beliefs is based on this philosophy: “All matters are a result of one’s incentives.” Thus, if a leader opens up his heart in relating to others, they will understand his true intentions. Operationally, he responded quickly to the crisis competitive situation in the domestic market before turning to the larger strategic goals of internationalization and product diversification. Chosen, in part, for his diplomatic skills, Tanaka demonstrated his conciliatory approach by emphasizing that his most pressing policy goal was “restoring order to the domestic marketplace.” He argued: Market share is certainly a source of profit, but there can be no such thing as market share that ignores long-term profitability. We are trying to establish a situation where we can recoup the money spent on development and investment. If Komatsu cannot do this, there is no other company in Japan that can. If business conditions become worse, we should cover this not by carrying out a price war, but by reducing production. Domestically, Tanaka ended the practices of price discounting and high-pressure sales. He laid the groundwork for more rational, fair and orderly competition in the domestic market. Slowly, the industry responded and Tanaka’s efforts culminated in a spate of collective OEM supply agreements within the industry and the creation of the Japan Construction Equipment Manufacturers Association in March 1990. More important from Komatsu’s perspective, restoring order improved the bottom line. In the hydraulic excavator market segment alone, for example, while Komatsu’s market share fell from 35% to 31%, overall profits rose. Tanaka’s pricing and sales policies were controversial within the company. When Komatsu developed the first mini-excavator that used advanced microelectronic controls, for example, some managers contended that with its traditional lower prices and aggressive sales methods, the company could capture a 50% market share. But Tanaka’s philosophy prevailed, and the product was introduced at a 10% premium to existing prices. More broadly, in 1988 Tanaka raised U.S. prices 7%, the seventh mark-up since September 1985. (Collectively, these represented a 40% aggregate price increase.) Tanaka also pursued internationalization much more aggressively than his predecessor. More than internationalizing sales or market exposure, Tanaka wished to establish autonomous bases with headquarters’ capacities for manufacturing, sales and finance in the three core markets—Japan, the United States, and Europe. Explained Tanaka: On the assumption that the yen will further appreciate to, let’s say, ¥100 per U.S. dollar, I believe any extension of conventional measures such as management and production rationalization will no longer be effective. Much of the driving force behind this emerging strategy came from his director for corporate planning, Tetsuya Katada. Concerned about Komatsu’s dwindling growth prospects in construction equipment and its dangerous reliance on domestic production, Katada pushed the company toward regionalizing production in Europe and the United States.

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In Europe, Komatsu pursued a number of initiatives to reduce its yen exposure, respond to political pressure, and flesh out its product line. In response to an antidumping suit, the company began producing wheel loaders in its U.K. plant. It began sourcing mini-excavators for the European market—the subject of another antidumping suit—from the Italian company, FAI, using engines made by Perkins, a British diesel manufacturer. And it began sourcing articulated dump trucks from Brown (U.K.) and vibratory rollers from ABG Werke (Germany), marketing them around the world under its own name. It even imported backhoe loaders from FAI into Japan. In the United States, the company’s moves were even bolder. In September 1988, Komatsu’s U.S. company entered into a 50/50 joint venture with Dresser, the American oil services company that had acquired International Harvester’s construction equipment business in 1983. The new $1.4billion company (Komatsu Dresser Corp., or KDC) combined the U.S.-based finance, engineering, and manufacturing operations of both companies, while maintaining separate sales and marketing organizations in KDC. Using all four of the two parent companies’ plants in the United States and Brazil, the joint venture produced most major construction products including hydraulic excavators, bulldozers, wheel loaders, and dump trucks. The joint venture was controversial within Komatsu, partly because many within the company had heard the industry speculation that Dresser entered the joint venture as a means of exiting this money-losing business segment in which it had a neglected product line, lagging quality, and out-of-date plants. Furthermore, it represented a radical departure from several of Komatsu’s closely held strategic maxims and traditional management policies: In this way, the KDC deal served notice that the company was committed to a major change in the way it managed its international operations.

Entering the 1990s New Leadership: Tetsuya Katada In June 1989, Masao Tanaka stepped down as president and was replaced by his internationally oriented vice president of corporate planning, Tetsuya Katada. With a degree from Kyoto University of Law, Katada had risen through Komatsu’s ranks in personnel, labor relations, and corporate planning. After 36 years in the company, Katada was well-known. Colleagues saw him as a “quiet and cool-headed commander,” who spoke freely and honestly with superiors and subordinates alike. His introduction in the press signaled that he intended to take bold action. In response to questions about yet another change in Komatsu’s leadership, the new president differentiated his strategy and style from his predecessor’s: Mr. Tanaka placed defense above anything else in his management policy. [Defense] was necessary because of the persistent high-yen environment. I, however, will be on the offensive in my own management policy. When pressed on his relationship with Ryoichi Kawai, Mr. Katada added: “I have never hesitated to talk straight with my superiors. . . . [Chairman] Kawai is indispensable at Komatsu. He is, however, nothing more or nothing less than an important advisor.”

Questioning the Past The situation Katada inherited was anything but promising. Despite Komatsu’s recent yet belated internationalization, sales were virtually unchanged from their level seven years prior, and 5 This case is for use only with the Harvard Business Publishing ‘Case Analysis Coach’

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profits were only half those of 1982 (see Exhibit 4). This stagnation was made all the more painful by the incredible growth taking place all around Komatsu. In the same 1982 to 1989 period, while Komatsu’s profits plunged, Japan’s GNP grew 43%. Although the worldwide demand for construction equipment had rebounded since the 1982/1983 downturn, a simultaneous shift toward smaller, lighter, and therefore, less expensive equipment such as the hydraulic excavator and the mini-excavator had dampened the impact of the recovery (see Exhibit 5). Worse still, worldwide industry demand was expected to dip again, at least over the next few years (see Exhibits 2 and 5). (Indeed, demand had already peaked in the United States in 1987.) With the global political economy in the midst of major upheaval and large-scale development projects on the wane, Katada was pessimistic about the industry’s long-term prognosis, and even more concerned about the suitability of a strategy tightly focused on this declining sector: There are doubts about the future demand for construction equipment. Central and South America and Africa are having problems with accumulated debt; the Soviet Union and China also have their problems; and the price of oil is [depressing demand for construction equipment]. In the places where there is latent demand, the market is dormant. As a result, 90% of our demand is in America, Japan, and Europe. . . . We cannot hope for growth by relying simply on construction equipment. We need to take an objective look at the world economic situation and to discuss future moves within the company. In other words, I want everyone to stop concentrating simply on catching up with Caterpillar. This ...