honda james oldroyd kellogg graduate school of management northwestern university...
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Honda
James OldroydKellogg Graduate School of ManagementNorthwestern University
[email protected] TNRB
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Harley’s First Bike
19031903
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Model S Lightweight
1948
Harley Models
FL Duo-Glide
1958
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Why Did Honda Come to North America?
How did they enter the Market?
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Honda’s New Plant 1958
30,000 Units a Month360,000 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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Honda’s Entry (Customer?)
Deliberate StrategyDeliberate Strategy
Emergent StrategyEmergent Strategy
Realized Realized StrategyStrategy
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”
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US Competitors:
SearsSears
Harley DavidsonHarley Davidson
BSA Ltd.BSA Ltd.
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Honda’s US entrant
1958
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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 DavidsonAdvertising Age 1965
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Figure A: The Value of Experience 1959-1974
20
40
60
80
100
1 10Volume
in Millions
Price in Yen
(1,000s) 51-125 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 15-20,000 units (based on avg. price of $1000 to $1500 per bike and total revenues of $29.6m).
Honda’s Strategy
Soichiro Honda
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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
FromFrom
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Results of Riding the Cost CurveFrom 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
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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.
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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)
• Different companies within an industry will have similar prices but will have accumulated different amounts of experience
Predictable Unit Cost Differences
Predictable Profitability Differences
Cos
t/U
nit (
Con
stan
t Dol
lars
)
Accumulated Experience (units of experience)
IndustryPrice
Cost
A
BC
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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
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Importance of Relative Market Share
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Profitability vs. Market Share
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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
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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
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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 can’t 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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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.
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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.