5 Brilliant Strategies That Make Honda One Of The World's Most Innovative Companies

The path to writing "Driving Honda: Inside The World's Most Innovative Car Company" began with a question that perplexed me: If globalization was supposed to be such a boon to multinationals, why are so many large manufacturers struggling to make money outside of their home markets?

Few global manufacturers would admit it publicly, but in many private conversations with executives I heard some version of this statement: "We're selling more products than ever in China and South America and other emerging markets, but our profit margins there are minuscule to flat, when they even exist."

To address this puzzle, I sought to find companies that could serve as successful models for multinationals operating in a globalized commercial environment; I hoped to identify the characteristics that make an individual business more likely to generate high profit margins, innovate, behave in socially responsible ways, and be strategically creative wherever it establishes a foothold. Almost immediately, Honda Motor Co. fit the bill.

To begin with, Honda has looked outward from its home shores well before other manufacturers considered making or even selling products overseas. As long ago as the 1950s, when Honda was only a few years old, the company's founder, Soichiro Honda, bemoaned the limited growth opportunities in "little Japan," declaring that Honda Motor must "maintain an international viewpoint" and perceive the rest of the world as its potential customer base and factory footprint.

It's no surprise, then, that Honda began selling motorcycles in the U.S. as early as 1959 and autos a few years later. Nor that Honda stunned the auto industry with its 1974 Civic, the first car to meet stringent U.S. Clean Air Act emissions standards even as the large American automakers and Toyota were claiming it was impossible to economically produce an engine that lived up to the act's goals. Or that Honda became the first non-domestic automaker to successfully manufacture cars in the U.S. when it opened its Anna plant in 1982.

Honda's aggressive early globalization strategy in the U.S. was followed by similar successful forays in other parts of the world: It was the first Japanese company to produce cars in China and its earnings record in India and Southeast Asia and other far-flung regions is the envy of the auto industry.

In large part because of its approach to global operations, Honda, a relative industrial newbie, has a lot to boast about: By a large margin, Honda is the preeminent engine maker in the world with an output of more than 20 million internal combustion motors annually; Honda has never posted a loss in its history, and its automobile operating profit ratios of about 5% consistently top the industry; Honda's stock price has nearly doubled since September 2008, when the global economy collapsed; and Honda vehicles are the most durable and long-lasting of any automaker, with 75% of its cars and trucks sold in the last 25 years still on the road.

What then has made Honda excel so adeptly as a global multinational? The secret strategic sauce that distinguishes Honda from other manufacturers can be broken down into five ingredients:

1. Don't globalize, localize.

Unlike Toyota and most other multinationals in any industry, Honda is not a top-down company, controlled by headquarters. Instead, Honda manufacturing subsidiaries virtually everywhere around the world operate as autonomous companies, designing and producing vehicles based on local conditions and consumer behavior.

In "The Machine That Changed the World," the landmark book about automobile lean manufacturing, the authors praised Honda's localization strategy for "its conviction about doing it all in one place" - in other words, combining engineering, design, and manufacturing functions in each of its large local facilities. By contrast, virtually all industrial companies keep R&D and other technical and design functions close to home, where they can be managed by executives who are miles removed from local preferences and circumstances.

2. Embrace paradox.

Honda is a questioning, knowledge-rich organization, which demands that its workers at all levels continually poke holes in the status quo. They do that through daily, often spontaneous meetings known as "waigaya" during which decisions, large and small, are reevaluated and turned on their head in hopes of finding a better strategic or tactical choice.

Throughout its relatively short history, Honda has welcomed paradox as a way to promote critical thinking and reassess the so-called common wisdom, shaping new responses to ingrained expectations. As one Honda executive put it: "Waigaya to me means perpetual dissatisfaction. At our company, self-satisfaction is the enemy." The value of this system to a multinational organization is immeasurable.

Nothing is more important for global companies today than having the dexterity to be simultaneously local and international, to swiftly respond to regional preferences while scaling operating tactics and manufacturing improvements around the world. And as Honda's success in the international arena demonstrates, this capability is directly linked to unremittingly reexamining with every new automobile model - more broadly, with every new undertaking what is already believed to be true.

3. Robots? Not so fast.

Even as most major industrial corporations view robots and other forms of automation as the best way to reduce costs and maintain productivity, Honda prefers a different path. Honda's factories are purposefully the most labor intensive in the auto industry, employing robots only in areas that are dangerous or otherwise obviously less fit for humans than machines.

Honda believes that assemblers become disengaged and their enthusiasm for their jobs and, by extension, local innovation is muted by the presence of machines whose sole purpose is to build cars cheaper and faster than humans.

As Honda sees it, that output and quality standards are too often set to the levels that the technology can achieve and rather than the boundless creativity of human imagination. Consequently, to enhance performance in a local facility, a new piece of equipment would have to be purchased, instead of a new potentially revolutionary process invented. "Once you automate, you're incapable of further improvement," said Sean McAlinden, chief economist at the Center for Automotive Research, paraphrasing Honda's perspective.

4. Put an engineer in the hot seat.

Since Honda's founding in 1949 all of the company's CEOs (including the father of the company, Soichiro Honda) have been engineers, veterans of Honda's prized autonomous research and development unit. That's an extraordinary record: Conventional wisdom among multinationals holds that the most effective chief executives are specialists in marketing, sales, or perhaps accounting - anything but engineering.

As a result, even CEOs in technologically based industries, like pharmaceuticals or computer hardware and software, tend to know little about designing or manufacturing the products that they sell or managing the global supply chain or factory footprint. That's often why CEOs favor centralization in which their most loyal lieutenants near headquarters oversee distributed operations, acting as both a trusted proxy and informant for the chief executive.

Reared in R&D, Honda CEOs' strengths lie in product and process innovation, primarily in designing new vehicle models and features and in conceiving fresh techniques for building them faster and better. Consequently, their success as managers is measured not by quarter-to-quarter results but instead by how well they cultivate individual creativity throughout the organization and how well they disburse Honda's unique corporate culture to its decentralized localization strategy to produce continuous innovation.

5. Focus on factory flexibility.

Unlike other manufacturers, Honda can seamlessly produce multiple autos on a single assembly line, one after another, and switch a line over to a newly designed vehicle within hours. By contrast, it can take months for Honda's rivals to retool a factory for a new vehicle.

One way Honda achieves this is through in-house engineering co-located at each major production facility, serving as an independent operation that is focused solely on local needs. Any problems that arise in the flexible factory can be addressed immediately by this team - which at most companies resides near headquarters and reports to corporate top executives - ensuring that the steady stream of automobiles going through the line is not impeded.

Such an efficient and nimble factory is the Holy Grail for all manufacturers and Honda has earned high marks from auto analysts for its ability to deftly navigate this challenge. In globalization terms, the advantage Honda gains is in being able to alter production and capacity of individual models at a moment's notice, depending on local sales trends and the success of competitive brands.

Honda invented the flexible factory through an innovation known as synchronized engineering: all of the vehicles coming into a factory's assembly zones share common designs, such as similar locations and installation techniques for functions like brakes or transmission. As a result, assemblers are agnostic about which car they are building because in the factory only small variations differentiate, say, an Odyssey from an Accord V6.

Jeffrey Rothfeder is an award-winning journalist and former editor-in-chief at International Business Times. His latest book is "Driving Honda: Inside The World's Most Innovative Car Company."