Honda James Oldroyd Kellogg Graduate School of Management Northwestern University TNRB

1 Harley’s First Bike 1903

2 Model S Lightweight 1948 Harley Models FL Duo-Glide 1958

3 Why Did Honda Come to North America? How did they enter the Market?

4 Honda’s New Plant ,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?

5 Honda’s Entry (Customer?) Deliberate Strategy Emergent Strategy RealizedStrategy Unrealized Strategy Enter the Motorcycle Market in North America  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. 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” Honda switched to the new, untested, recreational off-road market. “You meet the Nicest People on a Honda”

6 US Competitors: Sears Harley Davidson BSA Ltd.

7 Honda’s US entrant 1958

8 Response: The British insist that they’re not really in competition with the Japanese. 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. William Davidson Advertising Age 1965

9 Figure A: The Value of Experience Volume in Millions Price in Yen (1,000s) cc Class 60,000 X 10 Million = 600 Trillion/280 (280 yen to the dollar) = $2.1 Billion

The value of marketshare and volume in allowing firms to accelerate down the experience curve, thereby generating cost advantages. In 1965 Honda’s volume was 1.4 million ($316m sales) vs. Harley Davidson at roughly ,000 units (based on avg. price of $1000 to $1500 per bike and total revenues of $29.6m). Honda’s Strategy Soichiro Honda

11 Honda’s success at product line expansion, starting at the low end (inexpensive products) and as volume builds, expanding its product range at the high end. Honda’s Strategy To From

12 Results of Riding the Cost Curve From To Honda’s 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

13 Why didn’t 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.

14 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)

15 Lower Cost to Owners (quality benefits)

16 Vs. US Costs

17 The Relationship between Price and Cost EXPERIENCE CURVES COMPANY PROFITABILITY) Different companies within an industry will have similar prices but will have accumulated different amounts of experience Predictable Unit Cost Differences Predictable Profitability Differences Cost/Unit (Constant Dollars) Accumulated Experience (units of experience) Industry Price Cost A B C

18 Which is more beneficial to a firm? Industry Price Cost (Flat Curve) Cost (Steep Curve) Profit Points With a Steep Curve the initial costs are higher and there is greater risk. Cost Per/Unit Number of Units

19 Importance of Relative Market Share

20 Profitability vs. Market Share

21 Strategic Implications of the Experience Curve First movers in a fast growing market will secure a widening cost advantage. Firm’s must grow as fast, or faster, than rivals or be at a cost disadvantage. Industry Price Cost (Firm B) Cost (Firm A) Profit Points Number of Units Cost Per Unit Cost Disadvantage For Firm B

22 More Often the Disadvantage Looks Like: Industry Price Cost (Firm B) Cost (Firm A) Number of Units Cost Per Unit Cost Disadvantage For Firm B Firm A Has First Mover Advantage and Crosses into Profitability First. Time Advantage for Firm A

23 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

24 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 can’t count on a long learning curve and long productions runs.

25 Economies of Scale-Applied to: Learn from Production Purchase parts cheaper Raw Materials Capital Equipment

26 What’s New? A rainwater-collection system that gathers accumulated rainwater on the roof and funnels it into a 90,000-gallon storage tank for on- site 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 sunflower seeds. 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.

27 Who Does/Should Honda Fear?

28 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.