Getting Oriented

From Case: Project G

Komatsu Ltd. and

What kind of case is Komatsu? It's probably closest to an Evaluation Case. The assignment questions include a lot of evaluation words such as "well," "evaluate," "assess," and "grade." You could also interpret Komatsu as a Decision Case, however: Is Mr. Katada doing the right thing? Is he wise to be attempting this big change at this time? You could even argue that it is a Problem Case: What has gone wrong at Komatsu? How should it be fixed? What seems like the central problem or issue you'll want to focus on in analyzing the case? Write this down in one to three sentences. One possibility:

Is Mr. Katada's direction the right one for Komatsu? Will it succeed? How can Katada maximize the chances that it will? As you write this first draft problem statement, it will probably already seem clear to you that analyzing the problem will require that you examine how Komatsu got into its current situation, and how that situation has generated a need for change.

Identifying Problems

From Case: Project G

Komatsu Ltd. and

Among the principles, frameworks, and theories that might connect to the Komatsu case are these: Hamel and Prahalad's classic "Strategic Intent" framework (from Harvard Business Review May-Jun 1989, pp. 63-76), which could be assigned as a reading with this case Theories about core competencies and core rigidities (Prahalad, C. K., & Hamel, C. 1990. The core capability of the corporation. Harvard Business Review, 68(3):79-91; Leonard-Barton, D. 1992. Core capabilities and core rigidities: A paradox in managing new product development. Strategic Management Journal, 13:111-125) Change management frameworks, such as Kotter's 8 steps (Kotter, John. 2007. Leading change: Why transformation efforts fail. Harvard Business Review, 85(1):96-103) Don't worry if your answers are different. Depending on your course, these or any of many others might come to mind.

This approach of identifying and applying theories to a specific problem may differ from what you have encountered in other classrooms, where instructors teach a theory and then show examples. But the use of inductive reasoning, whereby you come to a conclusion or form an opinion after detecting patterns from evidence, is common in the business world and therefore can offer a powerful learning experience.

From Case: Project G

Komatsu Ltd. and

Our initial problem statement included the following: Is Mr. Katada's direction the right one for Komatsu? Will it succeed? How can Katada maximize the chances that it will? A revision after a careful read might lead you to develop a problem statement like this: The strategy that was very successful for Komatsu for some time has ceased to be effective. The problem at the heart of this case is to figure out why the old strategy has become ineffective and to assess whether new strategy proposed by Katada is likely to be more effective. Also, to formulate an action plan, a way forward, that will make success with the new plan more likely. Recommendations might include these: continue along the current path, following Katada's new strategy modify Katada's strategy abandon Katada's strategy, or replace it with something else

Performing Analyses

From Case: Project G

Komatsu Ltd. and

In the Komatsu case, three eras of the company's history are described in different sections. The numerical information in exhibits can also be analyzed by time periods. Your initial analysis should concentrate on what was going on in each era before you evaluate the current situation. Contrasting the eras and management styles of Kawai, Nowaga, and Tanaka will provide valuable historical perspective.

From Case: Project G

Example #1 - View In Full Case

Komatsu Ltd. and

By collecting, combining, and analyzing qualitative information from different areas of the case, you might synthesize a tentative summary, like this: Kawai's strategy was, in many ways, quite simple: The simple and clear long-term vision, "Catch up with and surpass Cat," drove the broadening of product offerings and the extension of the scope of the Komatsu market. This was all accomplished via a strong, highly disciplined, top-down implementation process, orchestrated by very concrete "projects" with simple

objectives (e.g., "cost down"). The PDCA cycle enforced the discipline by constantly comparing activities with objectives, leaving little room for deviation from the organization's single-minded mission.

Example #2 - View In Full Case

You might then build on your tentative summary by collecting more qualitative information from the case and using it to refine and elaborate on earlier analysis, like this: The text notes that this strategy was "an immediate and outstanding success." Quality improved enough for Komatsu to double its warranty period (p. 2, section paragraph 4). By 1970, market share had increased from 50% to 65% (same paragraph). Caterpillar reacted with great concern (p. 3, full paragraph 1: "Cat would not be able to compete against its Japanese rival at prevailing exchange and wage rates").

From Case:

Komatsu Ltd. and Project G

Exhibits 2 and 3 provide further information of interest, most of it confirming the above claims of success under Kawai's stewardship. Company sales trended generally upward (more than doubling between 1975 and 1982). Profits tell a similar story (Exhibit 2). Overseas share of construction equipment explodes between 1966 and 1982 (Exhibit 3), which means Komatsu is becoming a much more export-oriented company. Caterpillar's sales result for 1982 is also revealing, for its sharp downward trend (Exhibit 2), and helps explain why the 1982 annual report for Caterpillar expressed such concern.

From Case: Project G

Komatsu Ltd. and

At the end of the analysis of the Kawai era, you may have noticed the coming shift in exchange rate. Exhibit 3 is very revealing. Komatsu had dealt with unfavorable exchange rate shifts during the Kawai era. Exhibit 3 shows that the yen strengthened from 360 to 236 yen/dollar between 1966 and 1982 (when Kawai turned over the reins to Nogawa). That's about 16 years, at a rate shift of 124-on average, a little less than 8 per year. In the five-year period from 1982 to 1987, the exchange rate shifted by 111, or more than 20 yen/dollar per year. In fact, if you look closely, between 1984 and 1987, it shifted (after a favorable move in the rate between 1982 and 1984) by 131 in just 3 years, or almost 45 per year (Exhibit 3). So a very big factor that hit Komatsu in the mid-1980s was a new and dramatic shift in the exchange rate. Combine that with the overseas percentage of construction-equipment segment sales (67% in 1982, according to Exhibit 3), and you've got the makings of a very big problem. The case also mentions "falling demand, worldwide price wars," and "heightened trade frictions." In short, market conditions shifted very rapidly in a manner very unfavorable to Komatsu in the mid-1980s. Results are discernible from the exhibits:

After growing almost 15% per year from 1975 to 1982, Komatsu's construction equipment sales declined by 20% between 1982 and 1984. Net income dropped 35% between 1982 and 1984. Percentage of sales outside Japan, after rising for many years, declined from 58% in 1982 to 31% by 1988. Given that total sales were stagnant or declining, this implies an overseas sales drop of almost 50%. The percentage of sales from construction equipment declined from 80% in 1982 to 69% in 1988 (Exhibit 2).

From Case: Project G

Komatsu Ltd. and

Bringing In Outside Concepts "Strategic Intent" is a concept developed by Gary Hamel and C. K. Prahalad to explain the success of certain Japanese companies against bigger and better-resourced international rivals in the 1980s. In an influential 1989 Harvard Business Review article, the authors explained that while Western companies focused on scaling back ambitions to match resources, Japanese companies leveraged resources by accelerating the pace of organizational learning, trying to attain seemingly impossible goals, fostering the desire to succeed among their employees, and maintaining that desire by spreading the vision of global leadership. Hamel and Prahalad describe four techniques involved in strategic intent: building layers of advantage, searching for "loose bricks," changing the terms of engagement, and competing through collaboration. If you had read their article before encountering the Komatsu Ltd. and Project G case, you might see ways to use the concept in your case analysis (in fact, Hamel and Prahalad discuss Komatsu in developing their notion of strategic intent). Here are a few ways you might relate this concept to the case: Kawai's goal, in 1964, to "catch up and surpass Caterpillar" describes a desired leadership position and establishes criterion for the organization to use to chart progress. This goal "captures the essence of winning," as Hamel and Prahalad put it.

From Case: Project G

Komatsu Ltd. and

Building Layers of Advantage Komatsu builds advantages in quality, cost, and brands, moving from less-defensible advantages, such as lower wage costs, to more-defensible ones, such as high quality, improved processes, and global brands. Searching for "Loose Bricks" Komatsu went after product segments (e.g., hydraulics) and geographic territories (e.g., newly industrialized countries) in ways that were not immediately threatening to Caterpillar, thereby muting the larger company's inclinations to respond. Changing the Terms of Engagement Komatsu, like some other Japanese companies during the 1980s, drove quality much higher, while also driving down costs. This shifted the basis of competition toward quality and debunked the historical presumption that higher quality came only at much higher prices. Competing Through Collaboration International partnerships such as a 50/50 venture with Dresser / International Harvester The idea of strategic intent may also be used in other ways when analyzing this case. See if you can find more evidence of the usefulness of strategic intent in the case, or other examples that show how the concept fits with Komatsu's actions.

From Case: Project G

Komatsu Ltd. and

Result of reflection: You have now analyzed the Kawai, Nogawa, and Tanaka eras. To begin to address the assignment question about how effectively Mr. Katada has taken charge, you will probably want to examine the state of the company he inherited. After comparing the three eras of the Komatsu leadership, you are well positioned to rewrite this statement so that it is a bit more specific: How do core competencies that serve a company very well in certain contexts become core rigidities when conditions change? [You have largely seen how this happens through your analysis so far.] How might one arrive at a strategy after a shift in environments that has made core competencies into core rigidities? Also, how can one formulate strategies to adapt to changing conditions? More specifically, how should Katada move forward to overcome core rigidities, successfully adapt to new conditions, and develop a strategy that will be adaptive to future shifts?

From Case: Project G

Komatsu Ltd. and

Many answers are possible, but here are a few: When formulating a strategy for current conditions, look closely for factors on which the success of the strategy depends (such as the exchange rate in this case). A strategy that depends crucially on a factor outside management's control (e.g., exchange rate) is not as good a strategy as it may seem in the short term. Even in the midst of the greatest success of a business system, it is important to attend to the adaptiveness of the system. Even if your business is going well, you should look forward to and prepare for scenarios in which that might change. Core competencies have a way of becoming core rigidities. The longer they're sources of success, the more rigid they'll be when they're no longer sources of success. Line-management experience gives a leader credibility to create change (+, Tanaka). It may, however, also give a leader habits that make it difficult for him or her to adapt or even see the need for change (-, Nogawa). Many other possibilities exist. You might, for instance, use the example of the case to refine your interpretation of a framework, if applicable.

From Case: Project G

Komatsu Ltd. and

The last statement we made, after our careful read of the case, was this: The strategy that was very successful for Komatsu for some time has ceased to be effective. The problem at the heart of this case is to figure out why the old strategy has become ineffective, and to assess whether

new strategy proposed by Katada is likely to be more effective. Also, to formulate an action plan, a way forward, that will make success with the new plan more likely. We are arguably now well positioned to rewrite this statement to something a bit more specific: How do core competencies that serve a company very well in certain contexts become core rigidities when conditions change? [We have largely seen how this happens through our analysis so far]. How might one arrive at a strategy after a shift in environments that has made core competencies into core rigidities? Also, how can one formulate strategies to be adaptive to change conditions? More specifically, how should Katada move forward to overcome core rigidities, successfully adapt to new conditions, and develop a strategy that will be adaptive to future shifts? While this new problem statement is more specific it has not changed very much. It seems clear now that it is time to stop.

Action Planning

From Case: Project G

Komatsu Ltd. and

The case contains relatively little detail on actual implementation. Nevertheless, your analysis probably provides what you need to recommend whether to move forward with Katada's new approach, to adjust it, or to abandon it. You can also easily anticipate that the change to the new approach will be difficult, for many reasons: The organization and its processes, as well as the instincts and reflexes of managers, have long evolved to execute the Kawai strategy. Control was traditionally centralized, and now it will need to be coordinated to a much greater extent across large geographic areas in the newly distributed business. Managers accustomed to the centralized system will need to relinquish some control. Local managers in overseas offices must learn that they can and should take control. They might, however, need new skills that were not required when control was more centralized. As managers move up through the ranks in overseas offices, the company will experience cultural differences and challenges. No longer will most managers come from the same corporate and national culture. As Komatsu moves away from centralization as a means of control, this must be replaced by formalization or socialization. Socialization could work if Japanese managers worked as expats in key overseas roles, but this doesn't seem like a robust long-term solution. Thus, the company must develop effective formal processes that it hasn't traditionally employed.

From Case: Project G

Komatsu Ltd. and

In 1991, Komatsu President Katada decides to radically change the company's organizational structure and strategic objectives, from simply "surpassing Caterpillar" to the broader "Three G's-Growth, Global, Groupwide." He also wants the company to change its image from that of a construction equipment manufacturer to one of a "total technology enterprise."

To achieve the stated growth goal of doubling Komatsu's sales by the mid-1990s and diversifying into nonconstruction activities, Katada will need to change a centralized organization into a more decentralized, nimble network that can better anticipate and respond to trends in new market segments. To implement the globalization goal, Komatsu must acquire new subsidiaries in foreign locations and relinquish more decision-making control to the existing ones. For example, if previously a central Komatsu procurement person had sourced the raw materials for the entire company, now the subsidiaries will need to strike deals with local vendors (if, for example, they could provide faster delivery, more specialization, or better knowledge of local market needs). To support the groupwide goals, Katada must find expertise in various parts of the company that could be redeployed to building the new market segments. Komatsu will also need horizontal knowledge-sharing processes, such as regularly rotating key engineering staff among project teams and management among geographical locations. Ways to encourage innovation also need to be developed, such as reserving a certain percentage of R&D funds for new-idea testing, without unrealistic expectations regarding future returns on those projects.

From Case: Project G

Komatsu Ltd. and

Results from reflecting: Carefully developed core competencies can be eroded by rapid changes in the external environment (currency appreciation, stagnating industry demand, political pressures, etc.). Don't let the success of such core competencies keep you from planning for a rainy day when those competencies are no longer helpful. Core competencies can actually become obstacles to changei.e., core rigidities. Laser-like strategic focus that drives successful behavior in one set of conditions can be counterproductive in changed conditions. In reconfiguring an organization to build new sources of competitive advantage, the structural realignments might be the easiest part of the job. Much more time consuming and difficult will be altering interpersonal processes and individual mind-sets. Thus, it might take many years to rebuild the strategic competencies and organizational capabilities that will make Komatsu more flexible and adaptable as it strives to achieve competitive advantage.