Change Management: The Komatsu Case

Organizations are in constant interactions with their environments.  A change in the environment will subsequently cause a change in the organization that interacts with it.  This change can be positive or negative, and in both cases, it alters the organization’s status on many different levels.  Dealing with this change on all the levels is a key factor in minimizing disruptions to the organization’s functioning and growth.  In other words, change management is “a managerial and organizational process that realigns an organizations strategy, structure and process in pro-action or reaction to chaos in the environment” (Worthy et. al., 1996, p. 16).  The process of change management, and how it influences an organization’s strategy and management, is analyzed herewith in context of the Komatsu company.

Brief History

Komatsu Iron Works was a subsidiary of Takeuchi Mining Industry, manufacturing industrial tools for the parent company.  In 1921, the founder of the company, Mr. Takeuchi, incorporated Komatsu Ltd. as an independent company.  Komatsu originally manufactured mining equipment, but started making agricultural equipment such as tractors by 1931.  During the second world war, it was an important manufacturer of tanks, bulldozers, and other heavy machinery.  Post-war, Komatsu began focusing on the earth moving equipment (EME market).  In the 1950s, the company’s machinery was in demand because of the ongoing postwar construction in Japan.  Although its customer base was strong at that time, Komatsu did not command a significant market share, and the quality of its machines was inadequate.  This was a major factor in customer dissatisfaction, however, the Japanese manufacturers operated in a protected environment at that time, with no significant foreign competitors.

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Competition

Major heavy machinery manufacturers like Caterpillar, J.I. Case, Fiat-Ellis and John Deere were all technologically more advanced than Komatsu, and had widespread dealer networks and manufacturing bases.  The most formidable competitor in the EME segment was Caterpillar, the world’s largest manufacturer of heavy machinery.  Caterpillar’s equipment was much more sophisticated and of a higher quality, and its distributor and dealer network was very solid.  Komatsu realized then that it was imperative for the company to upgrade its products and operations, in order to survive the competition.

The company was headed at the time by Yashinari Kawai, who recognized the urgent need to revamp the company’s product quality, both technically and functionally.  In order to bring Komatsu products up to date, the company signed licensing arrangements with two major EME manufacturers, International Harvester and Bucyrus Erie.  This gave Komatsu the opportunity to improve the equipment quality for the agricultural and the industrial sector.

In addition, Kawai implemented the Japanese concept of TQC (Total quality Control), which led to a huge improvement in the performance, reliability, and durability of the equipment.  This was one of the major change management challenges that Kawai handled successfully.  Kawai realized that in order to change the customers’ perception of Komatsu products, it was first necessary to change the employees’ own view of the kind of products that the company made.

Changing the mindset of every employee and incorporating the philosophy of uncompromised quality at every level in the company required a strong, skillful leader.  Kawai manouvered this change implementation by open communication, reward, and most importantly, setting an example for all employees by involving everyone from the top management to the shopfloor workers, in this endeavor.   When Komatsu was awarded the Deming Prize for quality control just 3 years later, it served as a huge morale booster for the company.

Another major change measure implemented at this time was Project A.  In the first phase of this project, the employees were instructed to ignore costs and concentrate solely on achieving the best possible quality for their equipment.  Once this goal was achieved, the second phase of Project A was implemented, focusing on cost reduction.  Each and every aspect of design and manufacturing was closely scrutinized, checking for bottlenecks and wastage of resources.

This resulted in a lean, finely-tuned manufacturing process, that complemented the high quality of Komatsu’s equipment.  From 1965 to 1970, the company’s domestic market share grew from 50% to 65%, despite the presence of Mitsubishi-Caterpillar.  According to Kawai, this feat was achieved largely due to the employee morale and drive at Komatsu.  In his words, “the prevailing atmosphere was that of a crisis, resulting in a spirit of unity between the management and the staff”.  This company-wide presence of a common goal took precedence over management and labor issues, and resulted in highly successful change management.

Komatsu had implemented a two-pronged strategy to achieve success – vertical integration and TQC.  Vertical integration meant that the entire line of business had to be perfectly aligned and free of defects, right from the bottom.  To ensure this, they started with quality raw materials.  The second aspect was TQC – incorporating the philosophy of quality control everywhere and within everyone in the company.  Komatsu also extended the TQC strategy to its dealerships, encouraging them to implement the system.  This strategy of tackling the problem at the root and improvising upon it was the key to strong growth, and enabled Komatsu to offer formidable competition to Caterpillar – accomplishing what other companies such as J.I. Case and John Deere could not.

Business Environment

From the time Komatsu started implementing change, the business environment was constantly shifting, in terms of demand, cost advantage, and regulations.  By mid-1970s, the domestic market for EME was stagnating, with Komatsu having 60% of the market, and the Mitsubishi-Caterpillar partnership having 30%.  Growth was slowing down in the less developed countries too.  Komatsu’s management responded by developing the V 10 plan, aiming to reduce costs by 10% while improving quality.  In 1976, an unexpected event in the financial markets caused further concern.  The Japanese Yen was appreciating rapidly against the dollar, rising from 293 in 1976 to 240 in 1977.  To cushion the company’s exports, Komatsu’s management followed an internal exchange rate of 180 yen to the dollar.  This ensured that Komatsu’s costs and pricing were well-adjusted to the market conditions, and their exports did not suffer.  Komatsu’s policy of anticipating change and fortifying the company against any adverse effects again worked to its advantage.

Problems faced by Komatsu

Exporting their equipment to other countries had always been a part of Komatsu’s vision.  This goal constituted the company’s Project B.  With their improved and technically capable equipment, by 1970 Kawai was eager to launch major international operations for the company.  However, there were considerable barriers to this end – Komatsu’s limited international recognition and dealer base, fierce competition, and legal regulations.

The technology license that it had obtained from International Harvester and Bucyrus Erie had imposed export restrictions on them.  Komatsu recognized this as an impediment, and established its R&D laboratory in 1966.  But there were still significant requirements for establishing an international market presence.  Caterpillar, for example, had its dealership centers across the globe, some of which were exclusive dealerships.  This made it difficult for Komatsu, with its relatively limited product line and manufacturing base, to create the required dealer network.  In order to overcome this obstacle, Komatsu priced its products 30 to 40 percent below Caterpillar’s.  This allowed them to get the intial foothold in the international markets.  Komatsu also benefited from the increased demand for construction machinery in less developed countres in Asia and Mexico, and in Saudi Arabia.

In the 1970s, Komatsu had also started expanding its product line.  Ryoichi Kawai, now the president of Komatsu, made special efforts to build and develop international client and dealer relationships.  He also instructed managers to regularly visit customers, and get first hand information on their requirements and issues.  Keeping abreast of technological changes and being one of the first to adopt and incorporate new technology in its equipment was a key factor to success.

Komatsu incorporated electronic technology into all its machinery, creating differentiated, high quality products.  In 1979, the worldwide construction industry was at a low.  To combat the depressed economy, Komatsu’s management launched the “F and F” or Future and Frontiers program, formulated to develop new products and new businesses.  Once again, a companywide buzz was created, and suggestions were welcomed from every level within the company.  These suggestions resulted in the production of diverse new products such as arc-welding robots and an excavating system for deep-sea sand.

In the early 1980s, Komatsu objected to the export restrictions which still continued to be imposed on it by Bucyrus Erie.  Komatsu won this appeal and gained export rights from Bucyrus Erie.  It also managed to free itself from the agreement with International Harvester, and gained full freedom to export its equipment worldwide.  This was a major milestone for Komatsu, and the company took full advantage of its established quality and dealerships.  It also capitalized on the embargo that prevented Caterpillar from exporting to Russia in the early 1980s.  In 1981, the Siberian Natural Resource Project was handed over entirely to Komatsu.  In a short while, Komatsu was expected to outperform Caterpillar in the Russian market.

As their international customer base increased, so did the need for customized equipment for different countries, based on the type of work, environment, and legal regulations.  Designing customized equipment for each customer separately was not cost effective.  To counter this, the management adopted the policy of EPOCHS – Efficient Production-Oriented Choice Specifications.  The idea was to save costs by standardizing production modules for core projects along with the required number of parts, and adding different specifications as necessary.

Around this time, the increasing freight and shipping costs, and Japan’s strained trade relations with the US and Europe were increasingly becoming a cause for concern.  It was during this time that the US automakers opposed the import of Japanese cars in the market, and Komatsu was fearful that a similar plea might be raised by Caterpillar and other heavy-machinery manufacturers. In order to curb these potential problems, Komatsu manufactured the core parts of its equipment in all its plants.  This reduced the shipping frequency as well as the freight costs.  It also developed assembly bases in Brazil and Mexico, and was working on a joint venture proposal with its dealer in Indonesia.

Current Situation and Options

The case refers to the scenario in 1984, a period of recession around the world.  The building and construction industry was also affected, with most players assuming some losses.  The biggest source of concern for Komatsu, however, was Caterpillar.  Caterpillar had experienced its third consecutive year of losses, and was in the midst of a major labor strike.  Kawai knew that this was an opportunity to take over where Caterpillar faltered – but it was also an indication of the increasingly difficult  business environment.  Witnessing a large, successful company like Caterpillar struggling to retain its position in the market, Kawai became concerned about Komatsu, and what it could do to avoid being in a similar situation.

Komatsu’s options were centered around keeping a close watch on the market and on Caterpillar.  Komatsu employees were in the habit of reading Caterpillar’s monthly news bulletins and press releases, in order to stay informed regarding their competitor’s activities and plans.  Komatsu also realized the need to keep its labor force functioning, and continue keeping the costs down.  Their international operations also had to be strengthened at this time, capitalizing on Caterpillar’s compromised position.   These options are evaluated in the following section.

Recommendations

In keeping with its established policy, Komatsu should place particular emphasis on anticipating change and devising measures to optimize the benefits while curbing the negative effects.  To an extent, it was complacency that had cost Caterpillar – the managers’ priority was on increasing the customer base without addressing customer value or employee needs.  Therefore, managing labor relations is one of the most important issues for Komatsu.  The workers at Komatsu earn significantly lesser than their counterparts at Caterpillar.  However, this is offset by high employee morale and   strong labor-management relations.  Maintaining this status is extremely important for Komatsu, both in terms of employee productivity and controlling costs by minimizing overhead.

The second recommendation for Komatsu would be to strengthen its international presence.  With the capital that it has accumulated, Komatsu is in a position to either buy out a number of smaller competitors, or acquire a successful ally.  This would further consolidate Komatsu’s manufacturing operations and distributor channels.  It should also continue its R&D efforts and product diversification plans, and stay ahead of the competition.  If necessary, Komatsu can form a joint venture with a company to ease the manufacturing and operations of diversified products.

References

Worley, C.G., Hitchen, D.E., & Ross, W.L. (1996). Integrated strategic change: How OD builds a competitive advantage. Reading, MA: Addison-Wesley.

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