5.3. Marketing and complex systems
5.3.3. Honda and the global automobile market
To illustrate the marketing approach to complex systems, auto manufacturer Honda serves as a good example. Wollin and Perry (2004) analyzed this case that, in their
opinion, illustrates how a firm adapts to complex systems. Indeed, the automobile market is a relatively open global market with a large number of interacting agents (large
purchaser firms, manufacturers of numerous parts, consumers and multiple commercial intermediaries). This industry regularly undergoes cycles of profound transformation: the
introduction of mass production (1920), the development of European manufacturing (1950), the growth of Japanese manufacturers (1970), intensified collaboration (1990) and the development of electric vehicles (2010), to name a few. This reinforces industry’s internationalization at each step (Jones 1985; Amatucci and Mariotto 2012).
Honda played a special role in building the ties between the United States and Japan in the late 1970s and 1980s. This firm also has witnessed marked growth and strategic variation since the 1990s.
5.3.3.1. Micro-diversity within the firm and the sector
The global automobile market is characterized by macro-uniformity. There are in fact many characteristics common to all manufacturers; and vehicles around the world have too many points in common (number of wheels, seats, etc.). Consumers expect vehicles to be equipped with more options in pricing terms. However, we observe great micro- diversity. Thus, the distribution of parts on the market varies from one country to another; the same brands are to some extent not available elsewhere. Firms choose to produce a complete or partial range of products, to offer a variety of options and
complementary services. Not all management methods are identical, nor are the choices for the geographic distribution of factories.
Not all firms have the same micro-foundations, either (Augier and Teece 2008). We can therefore conclude that this market proves the hypothesis of micro-diversity in complex systems.
5.3.3.2. Irreversibility and path dependence
The second characteristic that we can attribute to this sector matching the description of a complex system is path dependence. Future behavior is influenced by the actors’ history (Arthur 2014). This path dependence can be more or less pronounced depending on the systems and actors (Cowan and Hultén 1996).
Honda started manufacturing cars in the mid-1960s, after establishing their leadership on the motorcycle market. This late entry onto the automobile market was initially a
disadvantage for Honda, which had held a very modest position in Japan for nearly 20 years. Honda long held fifth place in terms of market share in its country of origin, partly because of its adverse location in Japan. However, Honda was the first Asian
manufacturer to build a factory in the United States.
In the United States, Honda was less constrained by path dependence, as there was a lesser degree of social and cultural rigidity there. The primary competitors in the United States suffered the same problems that Honda has experienced in Japan. Unlike large American manufacturers, Honda, with its new factory in Ohio, had no long-term
agreements with unions or suppliers. Honda also had not made irreversible investments in production goods. American manufacturers had problems shifting production to bring out more compact vehicles as they hoped to first make profits on the investments made on existing production lines which otherwise seemed to be irrecuperable costs to them
(Besanko et al. 2017). Thanks to this favorable strategic position, Honda began
manufacturing and commercializing the Accord in the United States where it remained the most sold vehicle in its category for more than 20 years.
The automobile market belongs to a set of industries in which the weight of investments to innovate and commercialize innovations is so great that it imposes a timeframe on global system evolution. Firms in this sector have long succeeded in developing thanks to their massive investment in productive capital rather than in R&D. This phenomenon was particularly pronounced in the United States after World War II, when technological
innovation in manufacturing processes and vehicles present were comparatively much less than economies of scale linked to modifications in manufacturing.
Honda, unlike American manufacturers, established multi-product production lines very early to enable the production of vehicles such as the Accord or the Civic. It demonstrates that the complex system of auto manufacturers, in which Honda finds itself, is sensitive to initial conditions of operation and presents a certain degree of path dependence.
5.3.3.3. Variety of results
A third characteristic of complex adaptive systems is the variety of results obtained by different actors. There is simultaneously a group presenting average results including actors performing at a higher or lower level.
These variations in performance within a complex system, such as the automobile sector, are caused by several elements. First, the market in question is not in a state of pure, perfect competition, but in a state of oligopoly. Thus, it is possible for the actions of a small number of firms to noticeably change the median result. This play between the results of average and median creates particular industrial dynamics.
Next, there are positive and negative feedback loops within this market. Thus, the fact that Honda established itself in the United States initially had a positive effect leading the entire group to evolve, to change certain practices and to some extent its culture.
However, the great success experienced by Honda thereupon generated a negative
feedback loop too. Actually, considering the size of the market in North America, Honda began focusing its vehicle design on the tastes of North American consumers, yet the specificities of the vehicles desired by these consumers differ greatly from those of Japanese consumers. For a while, Honda established the design including some of its rules primarily for the American market but failed to develop satisfactorily on the Japanese market.
Finally, different results produced imply no occurrence of coevolution between the general system and all the firms. Indeed, some firms will evolve faster than others. For Stacey (1993), this situation of partial coevolution is a supplemental factor that makes the system’s global evolution harder to predict. This is also the case of differential in
coevolutions that supports heterogeneity within the system.
Honda won shares on the American market because the firm rapidly evolved towards the
production of compact vehicles. Many manufacturers took time to enter this market segment, long considered to be a small niche of little interest to the giant industries in Detroit. However, successful coevolution does not indicate capability to repeat the operation and always perfectly stick to the market. Thus, Honda was ahead in certain aspects, but took longer to begin manufacturing four-wheel drive vehicles. Other
Japanese competitors such as Toyota and Mitsubishi were able to take advantage of this market segment’s growth.
5.3.3.4. Evolution of interaction rules
In a complex system, firms do not have constant interaction rules with one another nor with other elements in their environment. It is therefore necessary to question the factors bringing change to these rules and the factors that are likely to create resistance to
change.
The points that we highlighted in the preceding sections illustrate the evolution of interaction rules. Indeed, actor micro-diversity leads to a need to adapt the interaction rules of the actors on the same level. Thus, introducing a radically new vehicle, that creates a previously unseen market sector, forces competitors to become followers, imitating the predecessor. This was the case in France with the release of the Twingo, which changed consumer and manufacturer interest in small vehicles (interest that had been lost since the end of models such as the R4, R5, 2CV, 104, etc.). The interaction rules also change based on external shocks. Thus, in the late 1990s, when the Japanese market suffered its first significant slowdown, manufacturers felt threatened. This was notably true for Mazda and Nissan. Nissan underwent a clear change in its interaction rules within the scope of its alliance with Renault.
Finally, the firm may determine the evolution of interaction rules with the environment.
This was the case when Honda decided to deliberately enter the North Korean market, drastically changing the actors with which it interacted.
In the early 2000s, Honda faced many challenges. The new manager saw no need to change some of the lower-level rules but to modify the higher-level rules that would themselves lead to changes at the micro level. In particular, the company was reproached for following its founder’s logic. Engineers were in charge of everything and little room was made for marketing and interaction with clients. The release of the Accord was less to satisfy clearly identified customer needs and more to show off the engineers’ technical exploits: attempting to bring together all the options in a smaller vehicle while controlling costs and making manufacturing tools more flexible. This profound cultural change
allowed different firm operations to work together better, as the hierarchy between them was no longer dominated by the engineers. This change in one higher-level rule led to modifications at the micro level throughout the firm.