Lessons from Honda’s recall

February 20, 2011

Honda recalled its Ciy sedans in India last week. From all I could make out, hardly any City owners had felt any problems. In fact, the first thing that Honda’s actions did was to make people aware of a problem that they were oblivious of. And all this at a significant cost to Honda.

Let us for a moment try to step into the shoes of the person who made the decision. On one hand is a defect that could probably lead to issues for some of the customers and on the other hand is a sure cost across the entire customer base. On one side is is the customer and on the other is the shareholder. One option is to do nothing for now and to prepare for a situation where the probable problem does become real. Do a recall at that time and be ready with a media offensive to contain any possible PR fallout. Thus the choice is postponed and exercised only if there is a problem. The other option is to do the recall right away and bear the enormous cost. Also minimise the PR battle. In any cash flow based analysis that B-Schools teach, option 1 is likely to win out. Yet option 2 was chosen. Why?

The difference lies in ordering of priorities. B-school education is full of tools appropriate for optimisation of profits which is what shareholders want. This is is usually right for most situations that MBA grads encounter – large running business. Most choices are for shareholder. But any person who has started any business knows well – optimisation for the customer comes first. If there is no customer, there is no business. A B-school education usually assumes that optimisation is already achieved for the customer and the task at hand is to optimise for the shareholder.  In the Honda situation, this assumption doesn’t hold true. Hence, there really is only option 2.

I think that truly stellar companies and leaders never forget that customer comes first and this is what distinguishes them from the good ones. Honda has demonstrated that it still stands committed to the customers. Kudos Honda!

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