Honda

James Oldroyd
Kellogg Graduate School of Management Northwestern University

J-oldroyd@northwestern.edu 801-422-7888 650 TNRB

Harleys First Bike

1903
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Harley Models

Model S Lightweight 1948

FL Duo-Glide 1958
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Why Did Honda Come to North America?

How did they enter the Market?

Hondas New Plant 1958

30,000 Units a Month 360,000 Units a Year

Present Demand About 450,000 in 1959 in Japan 247 Competitors with 3 Strong Competitors: Suzuki, Yamaha, and Kawasaki How big was the US market?
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Hondas Entry (Customer?)

You meet the Nicest People on a Honda
Enter the Motorcycle Market in North America

Deliberate Strategy
Most NA Dealers were unwilling to accept an untested product line. Of the units sold in NA, it became apparent the vehicle was not designed for highway use. Repairs on warrantied bikes significantly drained the company.

Honda switched to the new, untested, recreational off-road market.

Unrealized Strategy

Realized Strategy

Emergent Strategy
The Honda employees began to dirt-bike to vent their frustrations in the hills of Los Angeles. Their neighbors thought it looked fun and began requesting dirt-bikes

US Competitors:

Sears Harley Davidson

BSA Ltd.

Hondas US entrant

1958

Response:
The lightweight motorcycle is only supplemental. Back around World War I, a number of companies came out with lightweight bikes. We came out with one ourselves. We came out with another one in 1947 and it just did not go anywhere. We have seen what happens to these small sizes.

The British insist that theyre not really in competition with the Japanese.

Advertising Age 1965

William Davidson

Figure A: The Value of Experience 19591974

Price in Yen (1,000s) 100 80 60 40 20 Volume in Millions
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51-125 cc Class

60,000 X 10 Million = 600 Trillion/280 (280 yen to the dollar) = $2.1 Billion

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Hondas Strategy
Soichiro Honda

The value of marketshare and volume in allowing firms to accelerate down the experience curve, thereby generating cost advantages.

In 1965 Hondas volume was 1.4 million ($316m sales) vs. Harley Davidson at roughly 1520,000 units (based on avg. price of $1000 to $1500 per bike and total revenues of $29.6m).

Hondas Strategy
Hondas success at product line expansion, starting at the low end (inexpensive products) and as volume builds, expanding its product range at the high end.

From

To

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Results of Riding the Cost Curve

From To

Hondas car strategy was identical to their motorcycle strategy. The potential value of global chess (cross subsidization) as a strategy for competitive advantage

Use domestic profits and volume to subsidize

aggressive entry (based on the experience curve) into new markets
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Why didnt Harley counter them?

Imitation of Honda by Harley would have been difficult due to different manufacturing skills (job shop vs. continuous process) and desire not to dilute the Harley name by pursuing the low end of the market.

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The Honda Advantage

450 to 350 Cost Drop = 100 Per Bike X 2.1 Million Bike Produced = 210 Billion Yen / 280 Yen to the Dollar = $750 Million Dollars Cost Advantage

Employees are 4x productive as US employees

20% Price Premium (Ability to discount significantly and still remain profitable)
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Lower Cost to Owners (quality benefits)

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Vs. US Costs

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The Relationship between Price and Cost

EXPERIENCE CURVES COMPANY PROFITABILITY)

Cost/Unit (Constant Dollars)

A B C Cost

Industry Price

Accumulated Experience (units of experience)

Different companies within an industry will have similar prices but will have accumulated different amounts of experience Predictable Unit Cost Differences

Predictable Profitability Differences

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Which is more beneficial to a firm?

Cost (Steep Curve) Cost (Flat Curve)

Cost Per/Unit

Industry Price

Profit Points

Number of Units
With a Steep Curve the initial costs are higher and there is greater risk.
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THE IMPORTANCE OF Importance of Relative Market Share RELATIVE MARKET SHARE

High

Relative market share is an excellent proxy for relative accumulated experience - of leader relative to next largest follower - of all followers relative to leader Therefore, there will be a relationship between RMS and profitability

Low Low

Profitability

Relative Accumulated Experience (Relative Market Share)

High

Relative market share is a key indicator of relative long-term profitability

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PROFITABILITY VS MARKET SHARE Profitability vs. Market Share US CONSTRUCTION COMPANIES (MEGABUILDERS)
0.1
Return on Sales (Average 1972 - 1978)

0.08 0.06 0.04 0.02 0 -0.02 0 0.5 1 1.5

Roytheon Parsons Fluor Pullman Foster Wheeler Brown & Root (Halliburton Bechtel

Morrison-Knudsen McKee

Relative Market Share (Revenues, 1972 - 1978)

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Strategic Implications of the Experience Curve

First movers in a fast growing market will secure a widening cost advantage. Firms must grow as fast, or faster, than rivals or be at a cost disadvantage.
Cost (Firm A)

Cost (Firm B)
Cost Per Industry Unit Price

Cost Disadvantage For Firm B

Profit Points Number of Units

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More Often the Disadvantage Looks Like:

Cost (Firm A)

Cost (Firm B)

Time Advantage for Firm A

Cost Per Industry Unit Price

Cost Disadvantage For Firm B

Number of Units Firm A Has First Mover Advantage and Crosses into Profitability First.
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Advantages Continued.
Understanding the behavior of costs allows for more sophisticated pricing strategies. The experience curve can be used:

As a basis for pricing a production run or

contract As a basis for market share based pricing strategy As a basis for planning future prices

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Continued
Experience curves can be plotted for a company and its competitors to assess how well each company is managing its costs. Companies with the greatest cumulative experience should have the lowest costs (if business is properly defined).
Product life cycles influence how you use the experience curve for pricing. Products with a short product life cycle (rapid development of new models) need to be priced to make money more quickly because they cant count on a long learning curve and long productions runs.

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Economies of Scale-Applied to:

Learn from Production Purchase parts cheaper Raw Materials

Capital Equipment

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Whats New?

ASIMO weighs 43 kilograms and is 120 centimeters tall. A fully charged ASIMO can walk at speeds of 1.6 kilometers per hour and last for 30 minutes before recharging.

A rainwater-collection system that gathers accumulated rainwater on the roof and funnels it into a 90,000-gallon storage tank for onsite use. This "gray water" will irrigate landscaped areas and provide water for toilets. Hallway flooring is made from recycled automobile tires. Office flooring is made from 100% recycled and recyclable carpet fiber and backing. Conference Room wall coverings are made from recycled telephone books. Conference Room tabletops are made from compressed 26 sunflower seeds.

Who Does/Should Honda Fear?

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Spend the Rest of the Time Forming Your Teams

They should be 5-6 people per team. Team will write a paper (strategic audit) of a firm and prepare and deliver a 10 min. presentation.

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