Tesla Strategic Management

Strategic management

It is true to consider strategic management as an evolutionary and a destination because it plays a significant role in ensuring that a corporation such as Tesla is successive in its endeavors. The success of the firm largely depends on the management that has the key role in making key decisions that will dictate the way forward by facilitating the achievement of organizational mission, goals, and objectives. By definition, strategic management covers all the company’s stakeholders interest by relying on the management to make decisions that safeguard each stakeholder’s interest by considering the available resources, how well they can be utilized and at the same time keep in mind both internal and external forces acting on the firm (Sekhar, 2009).

Among key roles that the management of a corporation is required to play is ensuring that the company chooses the best strategies that will give the company an advantage over its competitors to ensure that maximum profitability is achieved and maintained. Therefore, it is important for a company to be competent by ensuring that products offered are able to meet the customer’s expectations and also balance the needs of other stakeholder’s such as suppliers, the government and employees among others.

Examples of Strategic Management

Recently, there has been rising concern about climate change and the negative impact that the situation has on the environment with regard to environmental pollution which poses a threat to all existing life forms. Among the cause of environmental pollution include emission of greenhouse gases such as carbon dioxide as a result of human activities and depletion of natural resources such as oil. Consequently, Tesla Inc. being a strategic company, Elon Musk who is the company’s CEO has opted for the company to explore alternative renewable energy to ensure that sustainable development is achieved.

One of the ways that the company is practicing strategic management is through environmental preservation by manufacturing electric powered automobiles to get rid of carbon emissions in the atmosphere (Doeden, 2015). The company employs a supply chain management strategy whereby unlike most automobile manufacturers, the company owns that whole supply chain from the points of manufacture to distribution. It also facilitates a growth strategy whereby the corporation invests significantly on Research and Development so that it can be able to come up with new inventions such as the Model X and Model 3. Autonomous cars are among the latest inventions whereby vehicles will not only be able to drive themselves, but also will be powered by electricity instead of gasoline (Bilbeisi & Kesse, 2017).

Tesla Goals and Objectives

Among the companies goals are to have as many electric-powered cars as possible on the road after it launched the first semi-autonomous autopilot system back in 2016. Musk had the objective of having 500,000 cars on the road by this year depending on governments’ efforts to pass laws that will allow consumers to possess and drive the cars. This kind of technology is referred to as “level 4 autonomy.”

Another goal is to put in place the necessary charging infrastructure that will be able to supercharge the vehicles in 30 minutes or so. This will ensure that drivers will be able to add a range of 200 miles in their cars in half an hour. This makes the corporation the only manufacturer to offer drivers such a range in the shortest recharging time. In addition, the company has partnered with Panasonic to provide customers with lithium batteries (Bilbeisi & Kesse, 2017). This will not only ensure that the company cuts back on battery cost but also ensure that the same are available to customers at a reasonable price. To facilitate battery production, the company opened a Gigafactory in Nevada. The batteries are not meant for use by cars only but also supply alternative energy to residences and factories.

Corporate Governance

Traditional Roles of Board of Governors

The success of every business organization relies on the competency of the management which is why the Board of governors plays a significant role in corporations such as Tesla Inc. One of the roles is corporate governance. The board is responsible for overseeing the governance practices and structures to ensure that work ethics are adhered by seeing to it that corporate responsibility is followed to the latter. The board facilitates evaluation by conducting annual assessments which are meant to identify areas that need change or modification so that the firm can be able to improve its performance (Magliacani, 2014). Compliance is another issue of concern especially to companies that deal with emissions such as Tesla Inc. it is the duty of the board to ensure that the company complies with the relevant laws as stipulated in the constitution of the relevant government where the business is located.

Organizations are required to have a compliance and risk framework whose activities are monitored by the Risk and Ethics Officer and the Chief Compliance. These managers are required to report to the CEO and the Board of Governors to ensure that the company does not incur unnecessary costs such as lawsuits. Another role played by the board is strategic oversight. The company’s management is charged with the responsibility of the firm’s strategic planning to ensure that proper planning is facilitated.

As a result of strategic planning, the company is able to come up with strategies that improve performance by maximizing output thus making the organization effective, efficient and profitable. After the management has formulated and proposed new strategies, it is the duty of the board of governors to assess and evaluate the proposal and determine whether it is a viable option or not. Therefore, it is the responsibility of the board to oversee the company’s strategy and ensure that the most effective measures are undertaken in the firm’s activities (Ferlie & Ongaro, 2015).

Major Philanthropic Initiative/Program

Companies have a responsibility of ensuring that the practice corporate responsibility by giving back to society and also ensuring that they promote the growth of their employers apart from making a profit. In the case of Tesla Inc., the American company is involved in designing, manufacturing and selling electric power train parts and electric cars. The company was founded by Elon Musk, Ian Wright, Martin Eberhard, JB Straubel and Marc Tarpenning in 2003. The company realizes that environmental pollution is a major concern accompanied by negative impacts such as the depletion of natural resources.

In its initiative to safeguard mankind from the devastating effects of climate change, the company manufactures electric cars to eliminate the emission of greenhouse gases by automobiles (Doeden, 2015). By so doing, the company will reduce overreliance on oil to provide electricity and offer alternative renewable energy sources. According to Musk, the global population will be able to access electricity through harnessing wind and solar power which can be stored in batteries for later use.

Not only is the use of renewable energy conserve the environment, but it will also be accompanied by increasing the standards of living since people can access luxurious electric cars at affordable prices. The firm adopts a corporate social responsibility strategy that protects the interests of its various stakeholders through the design and nature of its products which are concerned with the ecological benefits of the aforementioned. The corporation has a lot of opportunities that will enable it to contribute to the global community. Its products for generating electricity and storing energy are all environmentally friendly and therefore makes it possible to achieve sustainability and environmental preservation (Blue, 2016). The organization’s management practices and products are designed to integrate corporate citizenship and also boost their brand and corporate image. Consequently, the company manages to balance both profitability and also consider the welfare of the society.

Porter’s Five Forces

Tesla Competitive Advantage and Core Competency

Tesla Inc. stands a good chance of maintaining the leading position in the electric car market segment given that it has a comprehensive leadership headed by competent managers led by the visionary CEO Elon Musk. As a result, the firm has a competitive advantage over its rivals some of which include the battery supply chain (Kauerhof, 2017). The factory in Nevada manufactures lithium batteries thanks to its collaboration with the electronics giant Panasonic. Tesla has included in its processes a supercharge network that will enable electric car owners to charge their automobiles incredibly fast. Unlike its rivals that have slow charging stations that are scattered, Tesla had approximately 3000 stations and intended to increase the number significantly.

Due to the numerous stations, the company has managed to build its customized supercharger network (Grant, 2016). In addition, the company has a software and electronics culture that ensures it keeps up with technological advancement which takes place on a daily basis. The company employs software that outperforms its competitors and ensures enhanced customer service and therefore customer experience. Among the software used by Tesla include Mobile App, Traction and Stability Control, Motor Control, Battery Voltage Management, and Core focus and Tesla DNA. Another boosting factor is that all these software are updated over the air.

Five Forces Including the Sixth Force

Like all other firms, Tesla is not immune to Porter’s five forces which means that its performance is affected by both internal and external factors. These forces can be categorized into two groups namely that which is beneficial (opportunities) and the other which might have negative implications (threats). The company is affected by the bargaining power of customers and through its cheaper electric cars compared to its rival companies, the firm stands a chance of commanding market presence. Furthermore, customers prefer energy efficiency since it saves their money and also there has been increasing awareness in the global arena on the negative impact of environmental pollution.

Although the company has rivals, the threat of new entrants is not a major concern since entering into the disruptive technology is an expensive venture and therefore most companies lack the required capital (Krippendorff, 2011). On the other hand, there are negative forces such as the bargaining power of suppliers. Most parts required by the company are manufactured by a few specific suppliers who are in a position to determine the prices according to what is in their best interest. Tesla faces competition from rival firms that manufacture cheaper combustion engines that are also efficient. Also, the companies can innovatively produce hybrids and low-end electric cars and parts.

Diesel engines are also a threat to the company since they are cheaper while some are capable of using hydrogen which is environmentally friendly. Another factor that threatens the existence of the firm is rivalry whereby the company competes with large firms that have already established good relations with suppliers. In addition, competitors also produce brands that are internationally recognized. According to Wheelen and Hunger, there exists a sixth Porter’s force which they call complementary and it involves other companies that compete with a firm by producing products that are complementary to the one being offered by the firm in question. Considering this aspect, it may not be always necessary for Tesla customers to recharge their vehicles only at the company’s outlet. They have the option of going to other recharging stations to charge their cars although they may not necessarily provide fast charge.

Blue Ocean Metaphor

To make the company relevant and successful at the same time, the company incorporates four elements in its strategy to increase its value innovation potential. These elements are illustrated in the figure below.

Tesla's Blue Ocean Strategy
Figure 1: Tesla’s Blue Ocean Strategy (Source: Frontier Strategy LLC)

Value Chain

Tesla’s Business Model

Tesla has used creativity and innovation to ensure that it provides consumers with an alternative renewable energy source thus making its business model different from other companies. To begin with, the company has a comprehensive supply chain management whereby it has reduced the number of middlemen by owning the whole chain from manufacturing to distribution. This supply chain has enabled Tesla to reduce the costs of doing business significantly.

A reduction in product costs and manufacturing costs has ensured that the company is able to achieve sustainability. In addition, the company has digitized its supply chain by using the latest software to ensure that its products are up to date (O’Marah, 2016). Tesla’s vehicles are a hybrid of both digital and mechanical technologies which enables the firm to ensure that it has products that offer customer satisfaction. To expand its supply chain and add value, Tesla has put in place supercharger stations in different parts of America and intends to put more in other countries once the relevant governments enforce regulations that will allow the use of electric cars and also have the necessary technology compatible with the automobiles’ (Adam, 2016).

Supercharger Stations Tesla
Figure 2: 613 Supercharger Stations that are equipped with 3,628 Superchargers (Source: Tesla)

Tesla Inc.’s supply chain ensures that the company maximizes its profitability through cost reduction and eventually keep minimal inventory. In its production process, the company has an order-production strategy that enables customers to wait for their car to be produced and therefore it is possible to customize the automobiles according to their preferences. Furthermore, order-production avoids storage of excess inventory and therefore risk associated with inventory can be mitigated. Considering the growth, inventory and supply chain management strategies, Tesla’s business model can be said to be unconventional.

Areas That Need Improvement and the Profit Margin/Goal

When Tesla was venturing into the electric cars market segment, the company had anticipated producing 55,000 units in 2015 but was faced by challenges especially since the company had projected that it would stock sales worth $500 million but this was not so and the management had to adjust the value to $640 million. The reason for the necessity of the change was a decrease in cash reserve accompanied by increased feasibility costs (Crawford, 2016). The company had also opted to invest in assembly robots to reduce the overall production cost and the robots incurred additional costs exceeding the anticipated value. As a result, the robots required reprogramming and therefore the company was forced to delay the anticipated time to complete installation and setting up the production plant (Young, 2015).

The increased usage of assembly robots leads to a reduction in the number of human workers required since the option is perceived to be more economical. Consequently, job opportunities become less which means that the company hires fewer people than it would if it relied more on human labor. Therefore, the company needs to find ways of ensuring that it provides more job opportunities for the sake of corporate responsibility. According to a report released by Tesla, the company recorded an increase in production of Model 3 with the number of units reaching 2,270 on a weekly basis. In the first quarter, the gross margin for the Auto GAAP went up by 80 bp and also the non-GAAP rose by 500 bp. At the end of the first quarter, the cash balance was $2.7 billion and the amount was expected to rise in the following third and fourth quarter. The company’s financial position is indicated in the figure below.

Tesla Consolidated Statements
Figure 3: Unaudited Condensed Consolidated Statements of Operations in thousands except per share data (Source: Tesla Inc., 2018)

Central Pillars Of Elon Musk’s Corporate Theory And Tesla’s Unique Assets And Activities

The key to the success of Tesla is the company’s CEO and co-founder Elon Musk. Elon is known to be a person who makes decisions based on values. Often than not he disagrees with others but always has reasonable explanations as to why he does not concur with the ideas he disputes. He is also known to be respectful as he allows others to be themselves and values everybody to the extent of interacting personally with all workers regardless of their status. He has also offered employment opportunities to people who do not have a college education by simply looking at the individual’s interest in engineering and considering whether that person has built anything in their life. He is humane as he deems others as human beings and does not elevate himself to levels that he is unreachable to his junior workers. Elon is of service to others and does not leave others to do everything for him. Instead, he is always active and works long hours to achieve organizational goals and visions.

Elon practices justice as he treats all his followers equally. From the sentiments of his workers, working around Elon is very hard as all of them are expected to work equally hard due to the high expectations that he has not only from himself but also his workers (Northouse, 2013). Elon practices honesty with his workers and is not afraid to speak out his mind regarding organizational matters. Musk’s honestyenables him to win the trust of his fellow investors and even governments as he is predictable and also reliable. He has been known to fund Tesla ‘through financial difficulty with his own money by investing approximately $100 when the company was manufacturing the electronic car (Jacoby, 2011). The company’s unique assets are its management and employees that apply creativity and innovation to design and manufacture remarkable products such as its Sedan, Model X, Model 3, software and its supercharge network among others.

Tesla General Strategy

Current Business and Corporate Strategies

After the release of the first quarter report, the management adjusted its goals and among the corporate strategies is to increase production. The company intends to do this by reducing bottlenecks experienced across lines and the plan is to shut down production for approximately 10 days. However, the company did not change its 25% gross margin target for model 3. Tesla intends to increase Model 3 production to 5,000 units weekly. The corporation plans to advance sustainable energy by increasing its energy storage products up to three times. It intends to achieve this by enhancing its solar power harnessing (Tesla, 2018).

Strengths and Weaknesses of Current Strategies

The major strength of the current corporate strategy is the increased production of Model 3 and one of the reasons is that the model is very energy efficient which means that customers will be exposed to a unique organizational experience. Also, the model will enable the achievement of sustainable development goals while at the same time remaining profitable. The major weakness of the strategy is that the decision is based on a crucial assumption. The performance of Model 3 is assumed which may be affected by external factors such as competing models from rival firms (Tesla, 2018).

Tesla – The Most Urgent Decision Required

Tesla Inc. registered a decline in its solar deployment in the previous quarters which means that the firm had not reached its profit maximization potential. Therefore, the most urgent decision that the company ought to make is maximum tapping of solar power. The main area of concern is the Buffalo Solar Roof facility. As a result, the company should come up with a manufacturing and design process that will increase the quality of electricity and also reduce the cost of manufacturing. Consequently, it will lead to improved customer experience.


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Young, A. (2015). Tesla Motors Inc. (TSLA) Says Robots Are Holding Up Its 2015 Sales Growth.

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Toyota Strategic Analysis

Toyota Strategic Analysis

Toyota is a multinational automobile organization that has its headquarters in Japan. The success of the organization has been its ability to develop lean production and manufacturing philosophy that focuses on creating organizational and workforce capabilities. The success of Toyota is because of its core philosophy which is to focus on enhancing its competitive advantage. The organization has sought to focus on continuous innovation and creativity as strategic tools that help in accomplishing the key targets. Toyota has the expertise, capabilities, and capital to dominate the global automotive industry. The efficient distribution and production network of the organization has been responsible for achieving critical targets. Moreover, the organization has sought to focus on achieving dynamic capabilities that can be employed for attaining strategic competitive advantage. The development of a comprehensive strategy has been considered to be important for the success of global firms like Toyota. The firms must be able to apply the business strategies that can lead to long term success and innovation within short time period. The competitive position of Toyota is that it has been facing threats in the current environment. The company needs to develop effective and appropriate strategies that can be used to counter such problems. Moreover, the organization needs to focus on achieving its critical objectives by using innovation and creativity at multiple levels.

Comparative Analysis of Toyota’s Competitive Position

Porter’s Five Forces

Toyota operates in a highly competitive market that is characterized by the presence of organizations that are striving to dominate it through their strategic positioning and marketing strategies. The threat of new entrants in the industry is still low because of the huge capital that is needed to compete with leading companies like Toyota. Porter’s five forces analysis for Toyota is discussed as follows:

Threat of New Entrants

New entrants might be able to bring innovative products and ideas but the major companies are able to dominate the market through their capital and market control (Bennett, 2003: p. 44). Theoretical framework argues that companies that are dominant in any market are able to achieve success because of their brand image and reputation. The automobile industry is characterized by the success of companies that are able to focus on design and engineering quality. Large companies are able to attain economies of scale that helps to ensure their domination in an efficient and effective manner.

Bargaining Power of Suppliers

The power of suppliers in the automobile industry is weak because of the huge presence of suppliers. Toyota retains control over the behaviors of suppliers that are keen to do business with it because it represents a huge portion of profitability for the suppliers (Chris, 2005: p. 92).The procurement of raw materials is easy given the fact that outsourcing has now become a major trend because of the advent of globalization. Automobile companies like Toyota are now able to establish offshore manufacturing plants in countries that have low labor costs.

Bargaining Power of Buyers

The power of buyers in the automobile industry is large because individuals are continuing to focus on cars that meet their needs and requirements. Toyota has a strong and loyal customer base because its products are known for versatility, robustness, quality, power, endurance, and fuel efficiency. Toyota offers products for different customer segments based on their lifestyle and incomes. This helps to increase the power of buyers that have high levels of choice with respect to the purchase of automobiles (Chris, 2005: p. 92). In addition, they are able to focus on achieving critical success through the use of integrated and innovative strategies.

Threat of Substitute Products

The threat of substitutes in the automobile industry is relatively small because bicycles, motorcycles, trains, and buses have limited efficacy in meeting the needs of the customer segments. The convenience offered by automobiles cannot be replicated by other substitutes which mean that Toyota has been able to focus on achieving its critical goals within a short time period.

Competitive Rivalry

Competitive rivalry in the industry is very strong as Toyota has to face competitors from the United States like General Motors and Ford. It has to compete with Japanese manufacturers like Honda in different markets. The state of the automobile industry is very huge which means that customers are loyal to their brands (Chris, 2005: p. 92). Pricing and other factors need to be taken into account as competitors can change the dynamics of the market in an efficient manner.

Bowman’s Strategy Clock

Toyota’s competitive advantage has been because of the fact that it has been using a flexible production and management strategy. It uses capital equipment that is managed through the use of well-trained and well-qualified workers in order to achieve critical success. The presence of a talented workforce helps to achieve the goals of the organization because there is an emphasis on employee empowerment and engagement (Graham, 2005: p. 85).The organization strives to create a collaborative environment that focuses on attaining the critical goals within a short time period. Work teams are divided on the basis of operational, administrative, and strategic entrepreneurial actions that leads to long term success. Another competitive advantage for Toyota is that it has a 360 tier supplier network that is integrated with accurate scheduling and coordination. The firm is able to achieve success so that it can be used to create a flexible, lean, and agile supply chain management system. The goal of the strategic alliances is to ensure that the supply chain partners can be reliable and flexible in meeting the needs of the organization. Toyota’s competitive advantage is based on its equity ownership and technical exchange that helps to create reliable supply chain partners (McDonalds, 2002: p. 52).A symbiotic relationship between Toyota and its suppliers is based on knowledge sharing and developing strategic partnerships for long term growth and development.

Porter’s Generic Strategies

Empirical studies argue that corporate innovation is based on ensuring the economic growth of organizations. Innovation is a broad concept that goes beyond the notion of simply creating new products and services. On the contrary, it is concerned with the development of processes, systems, ideas, and competencies that can be used to resolve problems in the work environment while enhancing the strategic competitive advantage of the organization (Jobber, 2001: p. 56).

New production methods and functions have been identified as a core competitive advantage for Toyota which has been able to focus on achieving its critical goals through the use of long term approaches. Toyota’s manufacturing philosophy has been based on innovation which seeks to focus on flexible batch production. Just-in-time inventory system is utilized together with the goal of removing waste. The use of an integrated strategy has been considered to be an important step towards achieving efficiency and effectiveness (Jobber, 2001: p. 56).Moreover, the empowerment of front line workers ensures that assembly line problems can be analyzed in an efficient manner. Toyota’s efficiency has been based on creating centralized design and decision making that has helped to achieve the critical goals. The application of smart and innovative strategies has been Toyota’s competitive advantage.

Toyota’s Competitive Position

Core Competencies

Toyota’s core competency has been its ability to develop automobiles that have superior quality. The competitive prices of the company’s products mean that it has loyal customer base. The core competency has been because of its innovative production methods and processes. Toyota has created strategic management and philosophy as the core element of its growth strategy. Moreover, the company has sought to create a collaborative structure for success that is based on implementing cost leadership strategy (McDonald, 2002: p. 83).The Toyota Production System (TPS) has been considered to be instrumental in enhancing the innovative practices like Six Sigma and Just in Time in the production facilities of the organization.

Toyota’s Market Share

Toyota has a strong market position in different markets as evident in the fact that it has 45% share in Japan while 12% share in the North American market. Strong market position has resulted in the organization striving to expand into international markets. A strong product portfolio helps the organization to achieve competitive advantage. Research and development has been identified as being critical for success of organizations. R&D helps to enhance the product quality and functionality. Toyota’s strategic drive has been to offer safe and efficient products with an emphasis on environmental compatibility. Strong emphasis on R&D ensures that Toyota is able to become a technological leader in the automobile industry. Another critical success factor for Toyota has been its ability to have a massive distribution and production network that enables it to produce 7,400,781 vehicles in the year 2011 (Andrews et al, 2011: p. 1064). The geographically dispersed production base shields the company from global business risks while an extensive distribution network helps to enhance the global reach of the organization.

Product Diversification

Toyota’s strategic competitive advantage has been reduced because of high number of product recalls in recent years. For example, the company had to recall some vehicles that had problems with their hybrid systems in the year 2011. Some 180,000 vehicles were recalled in Japan after complains of oil leakage and abnormal noise (Kakuro, 2004: p. 3691).There have been some problems with the safety mechanisms of the company that has created negative reputation for the organization. Another critical weakness is that there have been declining sales in some geographical areas due to stiff competition. North America and Middle East were the regions that have seen a decline in demand for the products of the company. Another significant weakness for Toyota has been the fact that it has poor allocation of resources when compared with its competitors. Honda and Nissan have been able to have higher return on equity (ROE) as compared with the company that has resulted in weaknesses for the company.

Toyota group has faced a severe negative feedback on their quality and safety matter. This has led to a shrinking of loyal customer base while creating declining revenues and profits. It is essential for the Toyota management to amend their existing strategies and introduce a new method of production setup (Amasaka, 2004: p. 10).This can be done by enhancing leadership capabilities that focus on retaining customer loyalty and satisfaction. Toyota’s management needs to implement transformational changes into the situations. They have introduced the Toyota Production System (TPS) which can be used for identifying the quality of the product and mainly to eliminate the waste.

Toyota Strategic Analysis
Toyota Strategic Analysis

Re-engineering of the finished products has created robust and durable products. This leadership style has captured back the customers’ loyalty towards the product. Hiroshi Okuda has used the power to make necessary changes during the time of crisis in business. The workers were forced to accept certain changes in the company. Here Toyota group has efficiently utilized the situational leadership style (Amasaka, 2004: p.10). Okuda states that changes are threatening, but at certain situations there is no alternative but to accept change in order to maintain the competitive edge of the organization. Political power will be used in any organization when there are different opinions during tough situations. Toyoda has used such power when the U.S government has blamed the Toyota Company for the bad quality in production. There occurred a lot of accidents due to brake complaints. This has forced Toyoda to accept certain changes in the organization, and which was also neglected by some of the executives. But Toyota has pushed too hard, violates too many interests for achieving the success. Toyota will be able to focus on the recent growth of the global automotive industry that is recovering from the global economic downturn. The profitability of the global automotive industry has been $1,600 billion in the year 2013. This means that there is enough demand for the company which can fulfill the increased customer demand.

A strategic partnership with BMW will bring benefits for the company as it can achieve joint ventures. The collaboration on sports vehicles and power train electrification are projects that can increase the capabilities of Toyota. Strategic marketing and development of organizations is based on their ability to have clear and precise goals for success (Amasaka, 2004: p. 10).Companies must be able to conduct a complete analysis of the external and internal environments in order to succeed in an efficient manner. Moreover, the goal should be to create a collaborative environment through the use of cost leadership and product differentiation strategies that are successful elements of surviving in a highly competitive market.

Toyota’s Globalization Strategy

Global environmental factors play a critical role in the development of marketing strategies. These factors help the organization to develop a robust and reliable response to business problems. Toyota’s marketing department needs to take into account the various global environmental factors in order to make smart business decisions. Globalization has created opportunities and challenges for large organizations. An effective marketing campaign should seek to conduct extensive research and analysis of the external environment. Some global environmental factors like technology have revolutionized business processes. The Internet has become a powerful medium for conducting business transactions. Customers can purchase goods using online portals at any time (Aaker, 2008: p. 92).Toyota has sought to use this medium by devising efficient and effective internet ads. Websites can have content in native languages for specific countries. This approach helps to improve the revenues and sales of the organization. Similarly other technological advances like communications enable the rapid coordination between the head office and branches. RFID is a powerful and versatile technology that allows the organization to keep track of its inventory. Similarly there are other factors like corporate governance and responsibility. Multinational organizations have come under the limelight due to a series of high profile corporate scandals.

Corporate Social Responsibility

Toyota has sought to focus on corporate social responsibility as a means of creating positive image and reputation. Marketers need to demonstrate that the organization is offering safe and secure products and services (Rothaermel, 2012: p. 82).An advertising campaign must also focus on the corporate social responsibility of the organization. Organizations like Toyota need to take into account the economic fluctuations in the global market. Marketers must be able to devise cost effective strategies that can enable them to survive in times of economic recession. This means lowering operational and administrative costs. Marketing procedures should seek to evaluate cost effective products for new target segments. Marketers must be able to identity and recognize new business opportunities and threats. The global nature of business has created diverse source of suppliers and distributors for organizations.

Competitors seek to purchase goods that are produced at low costs. Marketers must evaluate the cost effective way of obtaining raw materials and finished products. This can be achieved only through a logical and practical manner. It requires the pursuit of dynamic and prudent business strategies (Rothaermel, 2012: p. 81).The organization must be able to achieve excellence and quality. Toyota uses strategies to become acquainted with the political regulations in the global market. Government regulation for instance has become a standard practice following the sharp economic recession. This means that marketers will need to revise and restructure their business strategies in coordination with global fluctuations.

Strong and Robust Marketing Strategy

Toyota’s management knows that targeting international consumers requires the presence of customized and specified marketing strategies. Marketers need to conduct an extensive analysis of local requirements and preferences. An effective strategy for a specific consumer segment might not work for another segment. Diversification, innovation, and creativity are the key to success when operating in a global environment. Toyota has sought to have flexible, reliable, and agile business structures. Marketing activities must develop unique conceptual frameworks that can be utilized for efficiency and effectiveness. Global environmental factors have become crucial for marketing processes and strategies. This is due to the global nature of corporate business in the twenty first century. Factors like technology, corporate governance, local preferences and industry trends need to be taken into account by marketing departments. Robust and logical strategies help to ensure optimum results.

The organization must conduct an extensive appraisal of new business markets (Rothaermel, 2012: p. 80).Appropriate strategies should be devised in order to achieve excellence and quality. Cost effective solutions need to be devised by marketers in order to maximize investments. These various factors need to be analyzed and assessed in a smart manner. The organization should be able to conduct an extensive audit and appraisal of the global market. Appropriate strategies should be in place in order to achieve superior results. Contingency plans should be in place in order to response to problems in marketing strategies and plans. A comprehensive approach towards marketing in the global environment will produce positive outcomes for the business organization (Rothaermel, 2012: p. 80).

Leadership and Management Styles

Toyota’s work culture emphasizes on efficiency but the management has awareness that this is insufficient to meet the needs of global workforce. The company perceived employees as knowledge workers that can apply their wisdom for the benefit of the work environment. There is heavy investment with respect to people and organizational capabilities. The work environment focuses on taking ideas from individuals so that success can be attained within a short time period. The senior executives of the company remain Japanese men that have played a crucial role in the development and evolution of the company. The concept of workplace diversity is still foreign in the environment as expatriate managers are also hired from Japan. The concept of Japanese management philosophy is that managers have the expertise and work ethic to drive success in an efficient manner (Hines, 2011: p. 34). However, this can be problematic as globalization encourages workplace diversity.

The concept of diversity is that individuals with different knowledge and expertise will be able to enhance the overall competitive advantage of the organization (Hines, 2011: p. 34). The hierarchy remains strong in the company culture as managers and top executives rise above the ranks in a slow manner. This means that there is an element of considering managers to be individuals that must be obeyed and respected in accordance with Eastern cultural notions about business.

Organizational Structure

Toyota’s organizational structure does have hierarchies but it does have concept of employee empowerment and engagement. The workforce is given freedom to successfully resolve complex business situations. Moreover, the organization strives to create a collaborative environment in which the workforce can perform at optimum levels. The goal of the management is to create a collaborative environment that can nurture and grow the competencies of the workforce. Safe and healthy environment has been identified as being vital for the success of Toyota as it leads to long term efficiency and effectiveness (Humphrey, 2011: p. 94).The workforce is encouraged to work as teams so that they can support each other and divide the work activities. The goal is to enhance the capabilities of individuals and organizations while striving to gain respect among the different members.

The duties must be performed in an efficient manner so that long term efficiency can be attained. Team work is based on creating cohesive and disciplined workforce. The goal of the organization has been to focus on achieving the critical targets through the use of innovation and creativity. The company places an emphasis on customer opinions as being vital because the information obtained can be employed to create superior and safe products (Schmitt, 2011: p. 74).

Global Business Strategies

Toyota uses different marketing strategies when it strives to expand into different markets. Diversified business strategies have been identified as playing a critical role in the success of business organizations. This is because of the fact that organizations strive to create integrated and coordinated approaches for success (Johnson, 2008: p. 62).The organization strives to create integrated and innovative approaches that can be employed for long term success. For instance, Toyota’s expansion in North America was to adopt a sequential strategy when it sought to introduce environment friendly automobiles in the market. Successful global marketing strategies occur when companies are able to conduct a comprehensive analysis of the external and internal environments. The goal of organizations must be to create an integrated strategy that will be able to achieve strategic focus. This helps the organization to successfully develop an integrated strategy in which the organization is able to focus on long term goals. The organization must be able to complete a comprehensive analysis of the internal and external environment.

Each market in the global industry works in different ways (Johnson, 2008: p. 61). The company must have knowledge regarding the dynamics of the market by studying the political, social, economic, and legislative variables. Toyota’s global business strategy has been based on steady expansion. The company for instance has training centers that helps in the training of the local workforce. The core concepts of lean production are introduced so that the workforce can implement quality and reduce wastage. Such a strategy helps in the development of the organization as it leads to long term efficiency and effectiveness. Toyota ensures that it is able to apply its global strategy at all its production facilities. The standardization approach is beneficial because Toyota is able to implement consistency and reliability in the multiple business units. This approach is also beneficial since it facilitates the process of enhancing the core competencies of the organization (Johnson, 2008: p. 66).

However, globalization can have disadvantages for Toyota because each market operates in a different way. This can create problems for the organization in terms of adapting to the risk and disruptions that are present in the local markets. Localization is also beneficial because the workforce in each country has different attitudes and notions. The workforce must be able to create an integrated strategy that will help it to achieve the critical goals within a short time period.

Critical Evaluations and Analysis: Toyota’s Improvement Strategy

Hiroshi Okuda, CEO of Toyota, has taken drastic measures in recent years to ensure the profitability of the organization. He has focused on transformational changes which can assist in winning back the loyalty of customers. There has been a focus on action centered leadership as a means of ensuring high levels of efficiency and effectiveness. Furthermore, annual growth plans have been created and forwarded to supervisors. An integrated approach towards meeting objectives and devising strategies has been implemented within the organization. Managing resistance to change can occur through the adoption of innovative and creative approaches. The leaders should have a complete knowledge about the apprehensions and concerns about the employees (Johnson et al, 2006: p. 71).They need to address employees’ needs by opening communication channels. Employee suggestions or opinions should be welcomed because it can be a fantastic way to address concerns in a smart manner.

Realistic expectations should come from the leadership. This can be addressed by analyzing employee reactions and interpretations with respect to the change process. Obtaining feedback from the workforce is critical for success in the environment. Identifying areas of change is essential for critical success in the environment. Empirical studies demonstrate that the need for change should be explained to the workforce. This helps the workforce in understanding the corporate objectives behind the change process (Prahalad & Hamel, 2005: p. 93).Information should be disclosed rather than hiding it because workers will feel a sense of responsibility as they will be able to align their personal goals with the organizational targets. Consulting and negotiating with the employees can also lead to positive outcomes for the organization. It helps to develop a sense of security and trust which can lead to effectiveness in the short term and long term. Toyota’s outdated management philosophy and corporate culture need radical changes. This can be achieved by taking employees into confidence. A gradual process for change can lead to superior outcomes. It is through the use of integrated approaches that the organization can attain success in a competitive environment.

Healthy organizational cultures are characterized by the presence of accountability and transparency. The management seeks to ensure that personal responsibility is embedded inside the minds of the workforce. This helps to create positive relationships and minimizes the chances of denials and conflicts. Furthermore, the organizational culture should promote change by ensuring that risk-taking is rewarded within the limits created by the management (Prahalad & Hamel, 2005: p. 83). Employees work at optimum levels if they are delegated work duties and have the freedom to implement new ideas within the limits created by the firm. Empirical studies have found evidence that an organizational culture should facilitate the process of change through the constant search for excellence. Superior quality of work by the employees can pay off dividends at the organizational level while mediocrity tends to inhibit the change process. Healthy organizational cultures should also focus on learning from mistakes by transforming negative outcomes into positive expectations. The change process is often retarded when employees engage in turf wars and promote negative thinking.

Creating a congenial environment is possible if the organizational culture is able to enhance the strength by creating cohesive and talented employees into work teams. This helps in distributing work activities and creating mutual respect among the workforce (Prahalad & Hamel, 2005: p. 88).Toyota needs to restructure its organizational culture so that it can be healthy and vibrant. Fostering the workforce through constant support and encouragement helps to create a productive workforce (Prahalad & Hamel, 2005: p. 93). Toyota’s managers should encourage employees to act on what they know to try to make the company better, even if their knowledge is imperfect or incomplete. Making mistakes and encountering obstacles should become acceptable factors in Toyota’s culture. For example, starting in 2002, Toyota’s operation in Thailand produced the International Multipurpose Vehicle (IMV), which used a single platform for a sports utility vehicle, minivan or truck. The plan to sell the IMV in 140 markets hit a snag: Meeting each nation’s governmental regulations and driving challenges (from sandstorms to floods) bogged down the IMV team and made delay seem inevitable. Rather than avoiding accountability or blaming someone else, Toyota’s executive vice president, Akio Toyoda, took responsibility. He allowed the IMV team to continue working without pressure. Toyoda said that even if the effort failed, it offered an opportunity for a great deal of learning. Toyota’s management allows failure because it wants people to experiment boldly. If leaders punish failure, people won’t take the risks that could move them to new levels of performance. Toyota’s leaders encourage employees to experiment and to learn from their mistakes. When staff members want to communicate “the essential information needed to solve a problem,” they use the “A3 reporting process,” named after the 11-by-17-inch sheet of paper on which they must clearly condense their information. Managers picked the A3 size because it was the biggest sheet that fit the fax machines available at the time.

The process of change is facilitated through many variables like organizational power, politics, and leadership. The leadership in essence should sponsor elements of the change management process through active participation and communication with employees. This should be supplemented by a desire to transform managerial behaviors by creating new business models. The appropriate organizational politics also impacts the process of change. This is because the goal of the leadership should be to ensure that the change process can be managed in a sound and viable manner (Prahalad & Hamel, 2005: p. 93). Proper evaluation systems can be used in order to achieve high levels of efficiency and effectiveness. Taking proper feedback can be a smart strategy to achieve success in order to produce superior outcomes. For being a global competitor, change is very much essential to any organization. Toyota needs to realize the fact that they will not survive in the competitive market with old techniques and strategies. Thus they need to freeze the old strategies by learning from the past experiences and by foreseeing the future through appropriate changes (Prahalad & Hamel, 2005: p. 93).


Diversification, innovation, and creativity are the key to success when operating in a global environment. Toyota has sought to have flexible, reliable, and agile business structures. Marketing activities must develop unique conceptual frameworks that can be utilized for efficiency and effectiveness. Global environmental factors have become crucial for marketing processes and strategies. This is due to the global nature of corporate business in the twenty first century. Factors like technology, corporate governance, local preferences and industry trends need to be taken into account by marketing departments. Robust and logical strategies help to ensure optimum results. The organization must conduct an extensive appraisal of new business markets. Toyota’s core competency has been its ability to develop automobiles that have superior quality. The competitive prices of the company’s products mean that it has loyal customer base. The core competency has been because of its innovative production methods and processes. Toyota has created strategic management and philosophy as the core element of its growth strategy. Moreover, the company has sought to create a collaborative structure for success that is based on implementing cost leadership strategy. The Toyota Production System (TPS) has been considered to be instrumental in enhancing the innovative practices like Six Sigma and Just in Time in the production facilities of the organization. Toyota has a strong market position in different markets as evident in the fact that it has 45% share in Japan while 12% share in the North American market. Strong market position has resulted in the organization striving to expand into international markets.


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Rothaermel, F. (2012). Strategic Analysis Management. McGraw-Hill.

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Strategic Management Toyota

Strategic Management at Toyota

Strategic management is a technique used by managers to give a firm a long-term direction and involves a systematic analysis of decisions, actions that create a competitive advantage. It involves the analysis of strategic goals, vision, and mission and the internal and external environmental factors in a firm. SWOT is an acronym standing for strengths, weaknesses, opportunities and threats. SWOT analysis involves the assessment of a firm’s internal strengths, weaknesses and the external opportunities and threats (Henry, 2008). This analysis helps to identify the strengths and capabilities to minimize weaknesses, along with identifying opportunities to overcome threats. In reference to Toyota Company, leading automobile firm, a SWOT analysis on the Companies Strengths, weaknesses, threats and opportunities are as follows.

The Toyota Corporation has a strong production process that is effective and efficient in saving costs, this creates a competitive advantage. Cost savings helps to set affordable prices of their products to end users, over the competitors. The firm utilizes resources and eliminates unwanted costs in the production process. This strategy creates a competitive edge for Toyota, by reducing costs and increasing the production capabilities and efficiency.

Toyota has strong horizontal integration merge verses the competitors who have vertical integration relationships. Strong relationship with supplier creates a competitive advantage, and it informs of updates or any developing changes (Henry, 2008) Horizontal merge proves to be cost effective, reduce risks and increase benefits. Merging helps to pool together resources of the combining companies, creating a favorable business environment. Synergy is one of the benefits of combining companies, and sharing of resources e.g. distribution channels. Toyota opts for best suppliers in Japan.

Toyota has a strong culture advantage, employees’ devotion in their jobs, performance and desire to improvement. It treats it employees with legitimate sense of respect and loyalty. The Japanese value work differently from competitors for instance the Americans this is reflected in their quality products they offer to the market. Toyota in invests more its employees empowers them to be creative and innovative (Hino, 2012). A strong sense of respect of hierarchal authority enables fast decision-making and implementing Strategic plan.

A weakness is something or a condition that hinders a firm from achieving it objectives. It is a competitive deficiency (Henry, 2008) Toyota offers financial services such as insurance, credit cards. These services report low profits to the firm than other segments. Such financial services can render a competitive edge as well as a deficiency in for firms the financial strength.

Toyota use the just in time system which gives Toyota a competitive advantage, but too much dependency of this system can lead to malfunction if the supplier provision does not meet the requirements of the firm. Failure to meet these requirements affects the products quality in addition, to the manufacturing system.

Strategic Management Toyota
Strategic Management Toyota

Toyota capitalizes on the strengths to meet its threat and take advantage of the external opportunities. Toyota has a strong cultural advantage that enhances the organization structure, focuses on teamwork rather than individual efforts. It inspires creativity and innovativeness to employees to improve the quality of its products. Top managers make decisions, the employees respect their high figures, and this enables quick decision-making. It internal leadership and management helps Toyota to dominate the automobile industry. Toyota depends too much on its suppliers, this leads to a strong reliable relationship with it suppliers (Hino, (2012). Although this could be a weakness but it gives Toyota a competitive advantage over the competitors such as General Motors

Toyota is a dominating automobile firm, its produces affordable cars and other automobile related products. A SWOT analysis identifies Toyotas strengths, weaknesses, threats and opportunities. Internal analysis involves the assessment of the firm’s internal environment factors such as the organization structure, leadership and management among others. Toyota has a stable structure and principled leadership design (Hino, 2012). The quality of the products and employees loyalty dictates the strengths of the firm. Toyota is loyal to employees and produces quality products.

However, Toyota faces threats such as competition from existing and emerging firm in the automobile industry. It takes advantage of the internal strengths to take advantage of opportunities and minimize threats. Toyota Company has a strong relationship with its suppliers. This helps to fight the upcoming firms and the existing firms in the industry. A complex distribution channel discourages competitor’s efforts. Toyota uses it strengths to take advantage of opportunities, it has high producing capacity at minimum costs. They produce quality and affordable cars in the market (Hino, 2012). They differentiate their products to meet the consumers emerging desires. Toyota has incentives and discount programs that help improve the profitability of its financial services segment.


Strategic management at Toyota needs inspires its employees to continuously think of strategic management changes that enhance improvement in quality of products in the future. It requires strong strategic management plans difficult to duplicate, corrective actions to maintainable a competitive position of a leading automobile in the world.


Henry, A. (2008). Understanding strategic management. Oxford: Oxford University Press.

Hino, S. (2012). Inside the mind of Toyota: Strategic Management principles for enduring growth. New York, N.Y: Productivity Press.

Pearce, J. A., & Robinson, R. B. (2004). Strategic management: Formulation, implementation, and control. Boston, Mass: McGraw-Hill.

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Human Capital Management

Human Capital Management in Banking

In an address to MIT graduates, Carly Fiorina, the legendary HP leader has been quoted as saying, “….the most magical, tangible and ultimately the most important ingredient in the transformed landscape is people” (Fiorina, 2000).

The pervasive question in strategic management on why some organizations are more successfully than many others is answered by their varying management of human capital (Hitt et al 2001). According to the resource-based view of organizations, organizations vary in their performances because of their varying resources and associated capabilities. Resources can be tangible and intangible. The intangible resources and capabilities are difficult to replicate and are socially complex and can be built or changed only in the long run (Hitt et al 2001). Thus, the competitive advantages produced from intangible resources are very unique, rare and difficult to replicate. The intangibility of human resource management is removed with an approach called human capital management which urges the organization to view its human resources as a financially quantifiable function – to analyze impact of people on contribution to shareholder value, to demonstrate value of HRM with ROI calculations and provide direction for future HRM practices (Angela & Armstrong, 2007).

Human capital theory views human resources and its skills as an asset of an organization and that the organization must strive to grow and safeguard this asset (Lepak & Snell, 1999). Human capital is a term applied to the approach of considering people as assets for the organization, putting people on the right side of the balance sheet, in a lighter vein. The human capital approach puts the HR function at a more quantifiable level thus rendering it strategically relevant. The approach enables the organization to orient and align its human resources to effectively meet organizational objectives (Lepak & Snell, 1999).

The scope of human capital management covers reporting the human capital of an organization. Such reporting enables stakeholders to develop another performance metric to evaluate the organization. The human value of an organization points to the potential it possesses for future performance, the strength of its internal processes and the sustainability of the business model.

The Implications of Human Capital Management

Human knowledge can be classified into articulable knowledge which can be codified and passed on easily and tacit knowledge which is based on organizational routines and social in context (Lane & Lubatkin, 1998). Tacit knowledge is unique and cannot be replicated and gained on the job and are unique in every organization for a particular role (Lepak & Snell, 1999). Hence there is a need to classify and segregate knowledge into core and peripheral assets.

The value of human capital is dependent on its potential to contribute to the organization’s core competencies and thus to achieve organizational objectives. The core assets contribute most and hence need significant continuous internal development and nurturing. As organizations move to more advanced technologies, the role of knowledge workers increases and hence the need to effectively manage core assets is more important (Lepak & Snell, 1999). Human capital is not owned by organizations, but merely secured through relationships (Angela & Armstrong 2007, p9) and hence the need to manage the same and ensure that the asset stays within the organization.

The pressures on efficiency and costs drive organizations to make or buy labor. This make or buy decision is based on the importance of a particular skill. Core assets cannot be outsourced and an organization that does this is under peril of losing its competitive advantage (Porter, 1985). Developing peripheral assets within the organization leads to higher overhead and transactional costs. Thus, these peripheral assets can be externalized or acquired from other parties for whom this is the core asset.

The implication of human capital management is that there is a positive correlation between leveraging human capital and organizational performance. The value of human capital is defined as the ratio of strategic benefits to customers derived from skills related to the costs incurred (Lepak & Snell, 1999). Human capital management forms the bridge between HR practices and strategic business performance. This argument places human capital management as a value creating activity for the organization. Thus, human capital is always measured in relation to the value it creates for the customer.

Investment in Human Capital – Theoretical Analysis

An employee gains knowledge on-the-job, by schooling and through other sources. The fact that an employee gains in experience and knowledge and thus becomes more skilled leads to the development of innate knowledge which is very important in the understanding of the uniqueness of a particular individual. What he gains through formal education is the foundation on which his social behaviors and personality are rooted within the organizational context. The other sources include access to information, inquisitiveness and developing skills out of the scope of the role (Becker, 1962). Hence, the education or the prior preparedness of the employee to be based within the organizational context in social behaviors and attitudes is very important to how effectively he is able to contribute to the organizational goals and objectives.

Human capital management focuses on the following HR processes (Angela & Armstrong, 2007 & Lepak & Snell, 1999):

  1. Resourcing strategies – the process of acquiring human capital, and managing them effectively to utilize them to achieve the organizational objectives. These strategies define the forecasting of skills required and the measures to acquire such skills through internal development or external acquisition – the make or buy decision. The make-or-buy decision also implies that the organization can outsource some of its competences to be effective, thus bearing significant ramifications for organizational effectiveness.
  2. Reward strategies – the fact that individuals expect return on their own investment in organizations – in skills and efforts spent on the job. Human capital theory encourages skill and performance base reward fabrication and to compensate an individual by fixing his market worth because the individual owns his own human capital. the fixing of the market worth of an individual is similar to accounting for the value of a physical asset, only that in human capital the value of an individual is in the skills and competencies of the individual.
  3. Retention strategies – the contribution by individuals to the organization make the organization find ways to retain this human capital either by increasing its valuation or by forming strategic alliances with its human capital for long term relationship. Thus, the role of promotions and awards play a part in ensuring that organizations are able to protect their human capital from leaving and thus aiding competitors. This multi-faceted approach to retention aids in reducing attrition and loss of human capital.
  4. Development strategies – organizations always try to develop their human capital – the core competencies of individuals. Core skills need to be developed internally and thus organizations go for training and knowledge acquisition for their employees. This increases the market worth of the employee by making him more skillful, and thus reiterates the importance of retention and reward strategies. The buying of core competencies results in the erosion of human capital in the organization, leading to loss of competency in many core business areas.

Valuation of Human Capital

The concept of human capital also means that the human capital has to be measured in financial terms and thus the significance and implications of the process be known. The economic value of people in the organization has to be accounted for through human asset accounting – for measurement, enumeration and analysis. Measurement and analysis help the human resources function to work at a more strategic level. It also provides investors and other stake holders with a better feedback on the working and sustainability of the business. There are three types of human resource accounting models (Bontis et al, 1999):

  1. Cost models, which consider the historical, acquisition and retaining costs of an individual or an asset
  2. Human resource model which also goes into non-monetary behavioral attributes
  3. Monetary models which account for discounted estimates of estimated future earnings

Human capital accounting models attempt to calculate contributions made by human assets by capitalizing expenditures in retaining the asset – salaries. Instead of putting total wage bill in the expenditure side in an income statement, a discounted cash flow of wages is classified as an asset in the balance sheet (Bontis et al, 1999). This requires a number of assumptions on the HR practice’s estimation. The average increase in wage per year and the tenure of expected employment are estimated for the workforce and all these cash flows for many years are discounted back to year one. The remaining figure is represented as the human capital value for the organization.

The assumptions made in the model explained above necessitate planning and predicting workforce strength and composition for many years ahead. Often, this proves very difficult to do accurately. Assumptions about tenure of employees, wage rises and turnover rates are not determinable accurately. Hence, all these models suffer from uncertainty and inconsistency (Bontis et al, 1999). Also, the practice of treating humans as assets is debated to be morally unacceptable as here it is assumed that the organization owns individuals.

HRA data can be utilized for three purposes (Bontis et al, 1999):

  1. To report human capital in audited financial statements for external stake holders
  2. Feedback on achieving strategic goals internally
  3. Developing future plans and strategy by assessing the uniqueness of the human capital prevalent in the organization

Only one of the purposes stated above needs auditing authentication – financial reporting. The other purposes are to help the organization assess and plan and strategize for itself the direction it has to take in evaluating its own human capital, its uniqueness and planning for additions or reductions or acquisitions of human capital. Hence, the focus of human capital management is in aiding in organizational effectiveness and thus to deliver more value to stakeholders. The lack of orientation towards human capital in financial statements is because of the fact that the field is constantly evolving and human capital management is still considered only a sustainability issues and not a purely financial issue.

Human Capital in Banking

The Service Organization Perspective

In service organizations human capital represents a significant portion of organizational value. In a service business, the service offered to customers is readily perishable, consumed immediately and irreversible (Kotler, 2002). When a product goes wrong or malfunctions, the company can satisfy a customer by replacing the product or just by a repair, but in service, the problem created cannot usually be reversed or rectified. The experience the customer gets when accessing the services is all the more important to ensure that the customer is satisfied. This goes a long way in achieving organizational goals. When a customer is accessing a service in a bank, he is effectively touching its employees. The role of employees in ensuring a great service experience for the customer is highly critical.

The above argument implies that the quality of service delivered can vary according to human capabilities – both the server and the served. The participation of the employee and the customer in a service rendering process is equally important. The role of the customer also plays a part in ensuring that the process goes effectively. Hence, customer management through interaction with employees forms the basis of customer satisfaction. Service delivery is just one aspect of the business. But intellectual capital is a very important part of a bank, as it works primarily on accumulated knowledge and experience. Relationships are another important reason why human capital is very important. Some information is codified and present at the push of a button, but much more is tacit knowledge within employees which need careful nurturing and planning. The tacit knowledge is more social..

Professionals gain knowledge through education (articulable) and on the job (tacit). Service professionals receive extensive education and training prior to entering the profession. The quality of the knowledge they acquire varies as per the quality of the scholars and teachers they have access to. Universities and schools are ranked and evaluated by the quality of teacher’s it employs. Individuals from the best schools and universities are said to possess the highest level of knowledge in their field and membership to elite social circles (D’Aveni & Kesner, 1993). Consequently, such professionals get the highest salaries, because of the knowledge and their social networks.

After completing their formal education, professionals enter organizations in trainee roles or apprenticeships. In these roles they acquire tacit knowledge, by observing and doing things in the organizational context (Szulanski, 1996). They bring in articulable knowledge from outside and develop tacit knowledge within the firm. The tacit knowledge thus developed during employment is a very important human capital component of the organization. Such firm-specific knowledge is unique cannot be replicated. This is truer in service organizations, where people are the first interface for customers and also for the bank.

Human Capital Management in Banking Industry

The broad nature of the discussions above indicate three well definable parts of human capital management – the implications of human capital management, how it is measured and how it is managed to create positive outcomes (Sherwin, 1983). As technology evolves, global expansion has become a reality, paving the way for fast growth, leading to significant challenges in human resource management. There is also an increased demand for more information from external stakeholders on human capital and its implications on organizational performance (Bontis et al, 1999). These challenges coupled together call for focus on human capital management in banks, with global footprint, widely dispersed service delivery networks and great diversity.

There are several levels of understanding human capital in the context of banks depending on the sophistication and detailing of the metrics and subsequent managing required (Whitaker & Wilson, 2007).

Impact of Existing Processes

The impact of the existing people management processes, mechanisms and systems forms the first level of understanding. The understanding required for this is that the organization must understand the people levers or capabilities that are critical to the business performance. Once these are understood, then metrics are developed to assess how well these capabilities are developed. This understanding helps the bank to understand present effectiveness of its processes and its people.

Strategic Focus

The next level of focus is the impact the organization’s people strategy has on business performance and quantifying the same. An example of a strategic people initiative is engagement. An organization can measure employee engagement through organization-wide surveys and playing it back to understand its correlation to business performance – key metrics like transactions per teller, profit margins and employee attrition (Bartel, 2004). This is possible only with the commitment of the top management of the bank and their understanding of such measurements and metrics. Thus, the dimension of managing human capital has to woven into organizational strategy and form the basis of evaluating business leaders.

Actionable Elements

After measurement discussed in the points above, it is important that the bank or the organization translates this into action to improve on its standing with those parameters and benchmarks. Improving processes to enable people to contribute more to the business is important. Else human capital management will be stuck at number of days of training per employee (Lepak & Snell, 1999). The bank must measure the highest employee engagement levels of managers across the organization and try to find attributes and qualities which lead to such high engagement levels and try to replicate this to other managers whose employees are not measuring up so high in engagement scores, taking the example of employee engagement in point 2 further. Thus, human capital management is much more than a measurement tool. It is a management style wherein the probability of achieving the organizational goals is improved.

Human Capital Management
Human Capital Management

Drivers of Human Capital Management – Banking

There are many human resource practices within the organization and these are organized into drivers which necessitate human capital approach. Human capital drivers for an industry can be divided into five categories with each driver having human capital practices associated with it (Massi & McMurrer, 2007):

Leadership practices

The role of leadership in any organization is important. In the financial sector, where the implications of a business failure are destructive socially, the importance of leadership practices is doubled. The most important consistent factors are open and effective communication, rational decision making and systems thinking. Unless these characteristics are displayed, there will be no coordination and direction for a bank, especially a large multinational bank.

Employee Engagement

Employee engagement starts with a good job design and ends with evaluation. The intermediate processes are workload and job stability. In the banking scenario, employees handle significant amounts of money, hence errors are bound to be costly. The evaluation of organization-wide data on employee engagement is a pre-requisite in any bank or financial services firm. Employee engagement scores must be actively used in assessing leaders and thus form a synergy between good leadership and engaged employees. This stops attrition.

Access to Knowledge

Organizations must have the information and its enablers within the reach of its employees. Also the data available from across the organization must be able to be consolidated and analyzed to create understanding and hence value to the firm. This is true with banks, where business locations are spread out, even across continents. Also, various divisions could be operating on different solution platforms, necessitating high level commitment o data integration and subsequent knowledge creation. Hence, access and availability of data is very critical to success.

Workforce Optimization

Effective training and well defined work processes, the right working environment and fair recruitment and reward practices ensure that individuals have a satisfying career experience with the firm and also for the firm to be able to retain its human assets. The process of evaluating this driver leads to make-or-buy decisions and reversing such decisions too. This is not just about cost savings through cutting jobs, but also about creating vital jobs to ensure effectiveness.

Learning Capacity

The organization must encourage innovations and promote systems thinking and a learning attitude among the workforce. This develops tacit knowledge and ensures that employees are well tuned to changes in their environment. This is true with financial institutions because of the fact that changes are frequent in this field and business is spread out globally. The ability of the firm to learn from within its processes creates cost saving opportunities and also work force optimization opportunities.

Human Capital Measurement in Banks – Implementation

In the Balance Score Card, the final quadrant, People, is the most difficult to quantify and report for many organizations. The information available to fill this quadrant is available as fragmented and un-integral data from across the globe for a bank. This is because the global organization implements different managerial systems which are incompatible to each other or use legacy systems. Even though data is available in most organizations and people know where the data is, they will not be able to compile this quickly, analyze and use it for decision making. Hence, the first and most significant driver for successful implementation of the human capital approach in banking is the availability of data. Unless contiguous data is available at the push of a button, there is bound to resistance in the system to utilize data which is available in various forms and formats.

Data is available for organizations from across the globe, across functions and divisions in business. Thus, integration of processes and the systems that run and create this data has to be accomplished and compatible with each other. Without integration, the intention will not translate to accurate measurements. Thus, an organization needs a single people management system and single global HR management system. This makes data available for strategic planning and analysis at a macro level. Thus, to implement a human capital management program within the organization, significant investments may be needed to create common platforms to enable people to utilize data more effectively and integrate the various divisions of the bank.

Banks are a people centered business, with people forming the core of the services offered and people being consumers of the services offered. Thus, the evaluation of the impact of people and their roles in ensuring customer satisfaction and to drive business performance is important (Bontis et al, 1999). Such a tool is the Human Capital Scorecard (HCS). The HCS enables an organization to (Whitaker & Wilson, 2007):

  1. Plan sourcing to meet growth aspirations
  2. Identify and analyze key human resource issues
  3. Informed business decisions by risk evaluation and priorities
  4. Monitor progress of strategic initiatives
  5. Tracking trends

The HCS has been successfully implemented by Standard Chartered Bank, throughout its global operations and various businesses (Whitaker & Wilson, 2007). The scorecard has measures inbuilt into it which help analyzing the effectiveness of human resources processes in helping business performance. Standard Chartered has automated its HCS enabling it to take out the scorecard for every division for every country in a matter of seconds. This is possible because of data homogeneity.

The use of advanced systems to compute and analyze global human resources data is applied in many banks with thousands of employees. Without such integration of systems and automation of the process of evaluating and compiling data, human capital can never be assessed and used as a basis for strategic plans and further evaluate performance. There are several software companies which cater to the need of banks in their human capital management initiatives. Such companies utilize data from other managerial systems such as ERP and CRM systems to compile and present data for human resource analysis (ACCA, 2009). Usually, the data required for implementing human capital management is available within the organization (Whitaker & Wilson, 2007), but the forms and content of such data will be radically different, arising out of legacy systems prevalent in different countries and divisions. This could lead to significant investments in managerial software and systems to ensure that data is available in the form it is wanted quickly.

Human Capital Management Solutions

Human capital management is available as customized software solutions for banks and other organizations. Such solutions specialize in extracting data from legacy ERP systems of the bank and integrate and present them in ways suitable to the particular bank. Their primary function is turn data into intelligence for the organization. This intelligence or relevant reports are alone are not enough, but the will to utilize this intelligence is more important.

We will now explore the case of human capital management solution implemented in two prominent and large banks:

Case 1: BNL –Gruppo BNP Paribas

BNL is one of the top Italian Banks raking in the top 60 among European banks. It is owned by BNP Paribas, a global financial institution which employs over 170000 people. BNL has approximately 16000 employees (SAS, 2010). This gives an indication of the complexities and the enormity of the human resource management function.

The objectives of a program implementation have to clear before embarking on the process. The bank wanted to implement a human capital management system with the following objectives:

  1. Using HR employee and line manager times effectively
  2. Identifying areas where it gets maximum return n investment in human capital
  3. Spending human resources budget in effective ways to align individual and organizational development needs

The solution was implemented in multiple stages, with the first stage being understanding of and evaluating existing human resource practices:

  1. Analyzing historical staffing and retention costs, estimating redundancies
  2. Effectively design career paths and skill maps
  3. Simplifying budgeting and reporting
  4. Analyze compensation components and simulating for synergies and cost-savings

Having analyzed the existing business processes, the bank then went on to creating intelligence. The solution’s second stage saw BNL adding more features and capabilities to the SAS solution:

  1. Efficiency studies – time and cost study
  2. Role and position analysis
  3. Performance analysis through scorecard models

The key challenge to the implementation lay in the extraction of vital information from the bank’s SAP R/3 ERP module and utilizing it in this solution. This involved significant complexities in configuring the solution for BNL. This is a major problem faced by organizations when implementing organization wide business solutions.

The successful implementation of the SAS Human Capital Management solution the bank has been able to generate return on investment because of the solution implementation. Also the solution put valuable information in the hands of human resource managers and line managers, thus reducing dependence on central planning but not reducing the quality of decisions made. This leads to significant time and cost rationalizations for the organization (ACCA, 2009).

Case 2: Standard Chartered Bank

Standard Chartered is a banking powerhouse head quartered in the UK. It employs over 60000 people in 1500 branches spanning 56 countries across Europe, Asia and Africa. The company has a high growth strategy and has doubled headcount and revenue post 2005 (Whitaker & Wilson, 2007). The organization manages human resources at a global level and places considerable importance on human resource management and is one of the pioneers in human capital management in banking.

Standard Chartered approach towards human capital management is guided by three principles (Whitaker & Wilson, 2007):

  1. Focus on the right talent at all levels for all roles and enabling human resources function to identify and retain high performing individuals
  2. Help individual employees utilize their strengths effectively and manage their limitations
  3. Develop exceptional managers and leaders who will help the bank achieve its human resources potential
  4. Manage and assess strategic human resource initiatives like diversity development

True to the classical implementation process of human capital management (Pfeffer, 1995), the bank at the first level analyzes the effectiveness of its people processes; understand the levers and drivers which contribute most to the core capabilities of the division or the organization (Lepak & Snell, 1999). The analysis happens on multiple metrics. The progress of high value individuals, their retention compared to the general population, talent management processes, succession planning for key roles are some of the processes that are measured to ensure that the various HR practices of the organization are being effective in their improvement of these key metrics.

The next level of understanding comes from the “so-what” angle. The inferences captured from the first level are taken to the level of understanding on how to make them better. The key drivers of human capital management and associated human resource practices are analyzed and taken to a new level of understanding. For example, leadership practices in the organization are assessed through various tools and practices across the various functional domains. Gallup scores from subordinates are also used. Then the efficacy of leaders is studied and exceptional leaders are unearthed through such an analysis. Standard Chartered does not stop with this but goes on to the level of understanding winning traits and characteristics of its most effective leaders and trying to replicate them across the organization.

The above discussion is a vital reminder that human capital management is more about action that access to information and understanding functional efficiency and processes. The action part is not brought out by any software or enterprise solution. The top management has to understand the essence of human capital management and utilize the data to further the achievement of organizational goals (Hitt et al, 2001). Unless this is done, the actionable elements of the concept will remain undone and human capital management will remain on paper and will not help the organization or its stakeholders in any way (Bassie & Mcmurrer, 2007).

To transform information to action, Standard Chartered uses a Human Capital Scorecard. This is an adaptation of the Balanced Scorecard and gives the top management the insights they need to make decisions regarding human capital. Data from across the globe is consolidated through a single global data warehouse and a Human Capital Scorecard is generated for every country and for every division to enable its leaders to make effective interpretations of the human issues in their sphere of action. The scorecard provides leaders with tools to effectively analyze trends and identify issues with the human capital and also to measure progress of previously started human resource initiatives. Thus, the leader is able to meet the human resource goals for his division or country and is also able to ensure that he is in line with the organizational goals and the specific goals set for his division.

The scorecard is generated annually, quarterly and in every month and the bank has automated the process to be able to generate country reports in 40 seconds. The reasoning of the bank for the high level of automation is to reduce the time spent on human resource planning thus making business leaders more efficient and also to ultimately make this tool available with its line managers, so that the dependence on headquarters will go down to make effective decisions. This saves significant costs for the organization.

To utilize the scorecard further, the bank sets a strategic planning agenda every year to evaluate and plan for human resource management annually. For example, in 2006, the scorecard highlighted the trend of attrition in the first year of joining by new employees. This led to increased focus on the induction process for joiners. The results of this action will be assessed periodically again through the scorecard. This process has brought increased rigor into the understanding, planning and action parts of the human resource function and involved other functional areas into effective human capital management.

The Importance of Human Capital Reporting to Stakeholders

There are other successful cases of human capital solutions implementations in the banking sector. For example, the Banca Carige, one of the oldest banks in Italy implemented an SAS Human Capital Management Solution to increase visibility and to make better HR decisions (SAS, 2010). The plethora of human capital management solutions available in the market indicates a high level of competency and popularity of the approach to banks.

The significant stakeholders for a bank are its shareholders, the Government, the society at large and the bank and its employees. For all these stakeholders, the primary concern with respect to the working of the bank is the need to have access to transparent, well-defined and quantifiable measure of the human resource strategy and the performance of its human resources to understand how the bank’s intangible elements are related to the bank’s worth and the efficacy of its decision making (ACCA, 2007). This creates the relevance of human capital reporting, with human capital becoming a metric of organizational performance and business sustainability. The employees of the bank are also important stakeholders. By defining its human capital strategy, the bank can focus on how to develop this capital for organizational growth. For example, Standard Chartered’s human capital goals for 2007 included the following points, affecting its employees (ACCA, 2007):

  • Embed sustainable lending training in core risk management training.
  • Review our approach to climate risk, including raising levels of awareness amongst appropriate staff on how to assess climate risk.
  • Upgrade the social, ethical and environmental (SEE) e-learning. Get external stakeholders’ input.

The market has started demanding significant data on human capital management as a sustainability issue and this has resulted in ranking in the US on human capital reporting. The fact that human capital reporting is deemed a sustainability requirement makes it imperative on organizations to go in for reporting. The Dow Jones Sustainability Index features human capital reporting as criteria in rating organizations (Sustainability Index, 2008). Association of Chartered Certified Accountants (ACCA) 2007 ranking rated Wells Fargo in the top 5 among Fortune 100 companies in human capital reporting (Creelman, 2007). The importance of human capital reporting is gaining statutory importance with many countries making it mandatory for organizations. In Denmark it is a statutory requirement in management reports, while in Austria, it is mandatory in all universities (Eubusiness, 2006).

In the small entrepreneurship context, human capital reporting creates investment opportunities for banks by showing them enterprises with great promise (Eubusiness, 2006). The downside of why most SMEs do not report human capital is lack of awareness in how to report human capital and lack of clear guidelines. Thus, banks could significantly benefit from companies and SMEs reporting human and intellectual capital in their annual and management reports. So the gaining of popularity by human capital measurement and reporting can aid banks both internally and externally.

Financial institutions have created human capital strategy papers for specific periods, which strategize the human capital approach and link it with its strategy and organizational objectives (FHFA, 2009). By doing so, banks are able to create an environment where human resources function is treated as a profit center and as one which yields business benefits which are tangible and measurable.

Human Capital Reporting – In Practice

In many countries, human capital reporting, or for the matter, any form of extended reporting is optional. When human capital reporting is viewed from the CSR perspective alone, it creates a number of reporting formats, which result in incomparable reporting structures which are not of use for observing industry trends and the value of the philosophy. Hence, there is a growing demand among intellectuals for a consistent reporting structure or pattern which will enable the further development of knowledge based on understanding these reports (Cuganesan, 2007). The genuine interest taken by some leading banks have created a need for other banks to adopt human capital reporting.

Standard Chartered Bank has been a leader in human capital management and reporting. It is one of the first organizations, along with Royal Bank of Scotland to measure and report human capital. It recognizes that human capital is intangible and hence difficult to quantify as directly related to cost and financial implications, as the variables are too complex to decipher and harness. Hence, it uses proxies which are tied to performance, like cost of training, cost of increasing workforce, etc. to arrive at relationships between factors in human capital which it deems to be important and its actual performance, at a national and an international level. It reports these proxy relationships as individual metrics, indices and ratios, which indicate a certain level of competency or worth for the bank (Bentley, 2007). Royal Bank of Scotland also reports similar indices and ratios to quantify its human capital to its stakeholders. Though various standards have been adopted by various nations, the reporting is still not mandatory, meaning that organizations need not report, even if they do they can do it in their own ways.


Banks are service providers to retail customers and business. They are faced with a number of challenges – high competition, geographical business spread, high headcount and significant emphasis on people and service quality. People deliver quality here, and not machines or computers. Hence, the way banks and financial institutions manage their people is very important and in fact the most important factor in success.

Human capital management which emphasizes the role of employees in an organization as its assets is best suited and is very important for banks in today’s complexities in financial services. The rapid advancement in technologies have enabled banks to serve customers far away and also allowed banks and customers access to each other from far apart. Thus, the role of intangibles is more important than tangible advantages. Thus, a person could be using phone banking more frequently than a bank teller. Significant levels of automation have taken place and it would seem as if the whole banking process would be automated and there would be no people working in banks.

But human beings create this technology, knowledge and manage it. Hence, the underlying factor for success is always going to be the human edge, the edge of the employee. The worth of an employee is far more than the salary he gets paid, he is worth the knowledge he possesses. Unless this knowledge is quantified and billed accordingly, the organization cannot realize its full value and hence is bound to discount in unwarrantedly. This is more so in banking, where business relationships hold the key to retaining and acquiring customers.


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