Honda

Honda

James OldroydKellogg Graduate School of ManagementNorthwestern University

[email protected] TNRB

2

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?

3

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”

4

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

5

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)

6

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

7

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

8

Profitability vs. Market Share

9

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

10

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

11

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

12

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.

Southwest



14

American’s Volume Advantage?

Industry Price

Cost Southwest

Costs American

Number of Units

Cost Per Unit

Cost Disadvantage For Southwest

American Has First Mover Advantage and Crosses into Profitability First.

Time Advantage for

American

15

Why don’t we see the results

we expect?

How does Southwest do it?

16

What does your chart look like?

Market Share

Profits

17

Measuring Success

Airline ProfitabilityAirline Profitability

In order to survive and profit in this tough environment, airlines attempt to manipulate three main variables:

Cost, calculated as total operating expenses divided by available seat miles (ASM)

Yield, calculated as total operating revenues divided by the number of revenue passenger miles (RPM)

Load Factor, calculated as the ratio between RPMs and ASMs, which measures capacity utilization.

Profitability = [yield X load factor] - cost

18

Southwest Airline’s Focus

CEO Herb Kelleher, a Connecticut attorney turned Texan, CEO Herb Kelleher, a Connecticut attorney turned Texan, had the best labor relations in the industry and an excellent had the best labor relations in the industry and an excellent company culture. company culture.

Lowest cost structure in the industry. Lowest cost structure in the industry.

Company vision was to provide low cost airline service to an Company vision was to provide low cost airline service to an increasingly larger number of people. increasingly larger number of people.

Objective to minimize reservation costs.Objective to minimize reservation costs.

19

Wal-mart’s Distribution Model

A key to their success

Airlines use the same model.

Does this make sense?

20

Point to Point Vs. Hub and Spoke

Southwest

The National Carriers

VS.VS.

Commuter airline that concentrates on city pairs. (Average Commuter airline that concentrates on city pairs. (Average flight is 400 miles or less and takes less than one hour) flight is 400 miles or less and takes less than one hour)

COST ADVANTAGE AT SOUTHWEST“Airlines don’t have revenue problems, they have cost problems.” Southwest.

Conventional Strategy: Meals, pre-assigned seats, membership in airline reservation system, travel agents, and hub & spoke system are key to success.

Southwest Strategy: Lowest cost operations and lowest prices.

Sales/Marketing Operations Human Resource Mgmt.

• Offer direct flights to busy cities of less than 500 miles• No pre-assigned seats• Little reliance on travel agents (saves 5-10%)• Snacks rather than meals• Prices 20-50% lower than the competition

• Fly only Boeing 737s (smallest, most fuel efficient craft)• Train pilots & mechanics only on 737s• Fly to cheaper, less congested airports (i.e. Love Field Dallas; Midway, Chicago)• Don’t transfer baggage to other airlines• Fast turnaround of aircraft (20 minutes vs. 50 minutes for industry)

• Initially non-union, now partially union labor• Cross training, flexible workforce• Employees receive same pay per job hour regardless of location (low turnover overall but accept high turnover in high cost areas; i.e. Calif.)

COST ADVANTAGE AT SOUTHWEST CONTINUED…• Airfares in Southwest markets are roughly 25 percent lower than in non-Southwest markets.

• Southwest has an average 65 percent marketshare compared with less than 40 percent for other airlines in their top 100 markets.

• Unit costs of other airlines are 50-60 percent higher than Southwest’s, except for America West with unit costs that are 20 percent higher.

•Southwest has been the most profitable U.S. airline from 1980-1995.

Source: U.S. Dept. of Transportation

Target’s Differentiation Strategy



24

To Date

Dual Advantage

Willingness to Pay

Supplier opportunity

cost

Differentiation

Goldman Sachs

Merrill Lynch

McDonald’sBurger King

Low Cost

Wal-mart

K-mart

Mom and Pop

Store

25

Dimensions of Value

Value

Price

Differentiation

Product

Service

Bottom Line Value

Top Line Value

Willingness to Pay

Cost

Price

Value Captured by Customer

Value Captured by Firm

Value Captured by Supplier

Supplier Opportunity Costs

Achieving Differentiation Advantage

How one goes about obtaining a differentiation advantage depends upon the nature of the product/service:

• Observable Goods: the buyer can easily form accurate judgements about the quality of a product.

• Experience Goods: the buyer finds it difficult and/or costly to determine the quality of the product prior to purchase and use.

• Communication/Network Goods: the value to the buyer rises as the number of buyers and users increases.

And it embraces the whole relationship between supplier and customer

27

Differentiating Observable Goods

By differentiating an observable good the producer acts to reduce the total cost of use to the buyer. Very often this requires an increase in product price. But in successful differentiation the price increase is more than offset by a reduction in the costs experienced by the buyer. The aim is not be the low cost producer but TO BE THE LOW COST PROVIDER.

Manufacturer's Value Added

EngineeringLaborMarketingDistributionAdministration

Product Price

Raw Materials

Buyer’s Costs

SearchLearningSwitchingRisk/lossPerformanceService

Total Cost of Use to Buyer

28

Differentiation-Based Strategy

User’s Total Cost of New Software

Product

Price

Search

Evaluation

Learning Risk

Adaptation

Utility Software

Resources

29

Firm A:

Firm B:

Price

Price

Total cost to buyer Producer’s cost Producer’s margin Buyer’s cost

Firm A has a cost advantage

Value Chains for Cost Advantage and Differentiation Advantage

Firm C:

Firm B:

Price

Firm C has a differentiation advantage

Price

30

Strategic Positioning

The essence of strategic positioning is to make choices that are different from those

of rivalsStrategy is not a race to one ideal position ---

it is the creation of a different positionDifferences in positioning are necessary but

not sufficient for sustainable competitive advantage

• Sustainable advantage depends on barriers to imitation

• Advantage is magnified by mutual reinforcement across activities

Vertical and Horizontal Alliances



32

Alliances-How far have we come?

“Alliances are mere transitional devices and because of this they are destined to fail”

Michael Porter

“Many so-called alliances between Western companies and their Asian rivals are little more than sophisticated outsourcing arrangements -- the traffic is almost entirely one way”

Hamel, Doz, and Prahalad

“Avoid alliances like the plague.”Reich and Mankin

33

Alliances Growing as a Source of Revenue

Alliances as a Percentage of Revenue forTop 1,000 U.S. Public Corporations

Source: Columbia University, European Trade Commission, Studies by BA&H, AC.1983-1987, 1988-1993, 1994-1996, 1999

0%

5%

10%

15%

20%

25%

30%

1980 1985 1990 1995 1998

34

Total business conducted Total business conducted through alliancesthrough alliances

20%

30%

40%

0%

10%

20%

30%

40%

50%

2000 2005 2010

Source: EIU Global Executive SurveyAndersen Consulting, Warren Company

3-5%

1990

35

Alliances-How far have we come?

“If you think you can go it alone in today’s global economy, you are highly mistaken” (Jack Welch, CEO of GE)

“Microsoft can’t make it alone, but together anything is possible.” (Bill Gates, Chairman of Microsoft)

“Our approach is to develop long term relationships with companies that offer a unique advantage with General Motors. The Alliance Strategy is our major thrust.” (John F. Smith, Jr., Chairman & CE of General Motors)

36

Alliances vs. Acquisitions: Stock Market Response to Announcements

Average Stock Market Gains (Average over 10 day window following announcement)

.84 percent

Per

cen

t S

tock

Mar

ket

Gai

ns

Fol

low

ing

Ann

ounc

emen

ts(in

per

cen

tag

es)

0

0.2

0.4

0.6

0.8

1

0 percent

Alliances* Acquisitions** (Acquirers)* Source: Dyer, Kale & Singh, 2001

** Source: Bradley, Desai, & Kim, 1988

37

Strategic Alliances

Benefits:• Speed (vs. acquisition or

greenfield)• Access to key

complementary assets• Removal of potential

competitor• Maintain incentives for

partner management

Drawbacks:• Lack of control; must

share decision making• Potential spillover of

knowledge and capabilities

• Organizational clashes may impede ability to collaborate

INTERNAL FOCUSINTERNAL FOCUS

TOTAL SYSTEM ECONOMICS

30%

20%

50%

0%

20%

40%

60%

80%

100%

CUSTOMERECONOMICS

MY ECONOMICS

SUPPLIERECONOMICS

MY ECONOMICS

HISTORICAL VISION PARTNERSHIP VISION

EXPANDING THE PIE

Leverage the full resources of suppliers to create value for the end customer

Develop partnerships with key suppliers to optimize the system (lower total systems costs)

LEVERAGING THE RESOURCES OF PARTNERS

Top 35Affiliated Suppliers(5-6,000 Engineers)

ToyotaEngineering

(7,000 Engineers)

Remaining 250Tier I Suppliers(10-15,000 Engineers

Toyota can leverage its value creation resources by 5-15x by involving suppliers in the Extended Enterprise

41

THE VALUE OF A NETWORK CHANGES AS MEMBERSHIP INCREASES

Connections: 0 3 15Directions: 0 6 30

As the number of nodes in a network increases arithmetically, thevalue of the network increases exponentially (n2 growth). Small improvement efforts that ripple through the network can dramatically increase the value for all members.

Single Firm 3-Firm Network 6-Firm Network

Toyota’s Supplier – Customer Interface

Surface Contact vs. Multiple-Point Contact(Correct)

Customer SupplierPoint Contact(Wrong)

TopExecu-tives

R & D

Manufacturing

TopExecu-tives

Quality AssuranceQuality Control

Purchasing

R & D

Manufacturing

Quality AssuranceQuality Control

Sales

CREATING EFFECTIVE PARTNERSHIPS

Build supplier trust

Use new processes of supplier selection and evaluation

Create multiple functional interfaces to facilitate system learning

Make dedicated/customized investments

THE FUTURE….

Supply chain management will become increasingly important for competitive advantage

Teams of companies will increasingly compete with other teams (extended enterprise); lean teams will win

Leveraging the full resources of the extended team will be critical

Leading companies will increasingly use partnerships--though not with all suppliers

45

Horizontal Alliances

Contractual Agreements Equity Arrangements

Traditional Nontraditional No New Firm Creation of Entity DissolutionContracts Contracts of Entity

Arm’s-length Joint Research Minority NonsubsidiaryJV Mergers and Buy/Sell Equity JVs Subsidiaries Acquisitions Contracts Investments of MNCs

Franchising Joint Product Equity Fifty-fifty Development Swaps Joint Ventures

Licensing Long-term Unequal Sourcing Equity Agreements Joint

Ventures Cross- Joint Manufacturing licensing

Joint Marketing

Shared Distribution/ Service

Standard Setting/ Research Consortia

Strategic Alliances

Based on: Yoshino and Rangan, 1995

The Scope of Inter-corporate Linkages

Why Seek a Partner?

Reduce Risks• Size or Uncertainty

Associated with Project• Preempt Competitors• Flexibility/Option Value

Gain Efficiency• Economies of Scale

and/or Scope• Speed to Market

Access Complementary Skills• New market entry;

synergy-sensitive skills

Learning• Acquire New Skills• Gain Market Knowledge

and Experience• Monitor Competition

Politics• Sensitive Industries• Regulations• Market Access

1

2

3

4

5

49

Challenges for Horizontal Alliances

Leveraging each partner’s resources while protecting proprietary know-how; many horizontal alliances are inherently learning races.

Building trust with potential competitors; simultaneously cooperating and competing (Co-opetition)

Less ability to “control” partner decisions (relative to supplier alliances).

1

2

3

50

Favorable Conditions for Horizontal Alliances

The partner’s strategic goals converge while their competitive goals diverge.• (e.g., Philips and Du Pont collaborate to mfg. compact disks; neither

invades the other’s market)

The size, market power, and skills/resources of partners is modest compared with industry leaders; an attempt to catch up.• (e.g., Japanese chipmakers collaborate to develop chips; U.S.

automakers collaborate on autobody and battery technology).

Each partner believes it can learn from the other and at the same time limit access to proprietary skills • (e.g., Xerox and Fuji alliance; Xerox gets access to Japanese market

and technology in Japan; Fuji participates in copier business; Fuji believes it can protect film business while Xerox believes it can protect worldwide copier business)

51

The Logic for Joint Ventures

Alliance objective is characterized by a high degree of uncertainty, such as R&D alliances (need incentives to bring best technology)

Desire to create a “new culture” (resources, processes, values) that fit the new opportunity.

Desire to limit liability of parent companies.

Superior way to measure alliance performance (separate P&L)

52

Identify Partners with:• Strategic Fit: Compatible resources, assets, and capabilities• Cultural Fit: Compatible cultures and work processes

Establish clear performance objectives & monitor performance• for the alliance and requirements for each partner; make technology

transfer dependent on meeting performance requirementsDevelop plan to learn from partners

• Invest in absorbing key skills/technology from partners while protecting protect proprietary knowledge/skills as much as possible.

Use appropriate “governance” mechanisms• Build trust and align the incentives of partnering firms (e.g., joint

stock ownership is superior to legal contracts for eliciting knowledge transfer).

Create a “Strategic Alliance” function in your firm• Assign responsibility to acquire and codify knowledge with regard to

effective alliance management practices.

Keys to Horizontal Alliance Success

53

Str

ate

gic

Fit

Organization/Cultural Fit

Hig

hL

ow

Low High

OptimalStrategicAllianceSolution

Compatibilitybut few

Synergies

Good CommercialCompatibility butOrganizational

IntegrationDifficult

NoRedeeming

Value

HOWEVER,Remember

that it is the differences between the organizations

that drive the formationof the alliance

The Importance of Strategic and Cultural Fit

Amazon and BN.com



B&N vs. Amazon Summary

B&N and Borders was in the process of B&N and Borders was in the process of consolidating the industry before Amazon’s entryconsolidating the industry before Amazon’s entry• Acquisitions and numerous new sites reduced number

of players, thereby increasing B&N’s market power and bargaining power over suppliers.

• Use of costly Superstores (with highly specific assets) both a) created barriers to entry (brick & mortar), and b) differentiated the bookstores (greater selection; food, etc.)

The internet effectively reduces the barriers to entry The internet effectively reduces the barriers to entry into many industries, including bookselling; into many industries, including bookselling; Amazon.com uses an entirely different business Amazon.com uses an entirely different business model (value chain) to attack B&N.model (value chain) to attack B&N.

B&N vs. Amazon SummaryThe online book selling model has a number of potential The online book selling model has a number of potential

advantages relative to the traditional modeladvantages relative to the traditional model• Costs are significantly lower due to little investment in brick and

mortar (9 percent of sales for B&N). This reduces equity investment and dramatically increases ROE

• Wider selection of titles is possible • Allows for creation of a database of customers with insight into

revealed customer preferences (captured electronically)• Customer transaction costs are reduced (can order at home;

don’t have to search through the store).• Customer currently does not have to pay sales tax

The disadvantages of the online model include: (1) can’t The disadvantages of the online model include: (1) can’t see/feel product, browse, or get advice from salesperson, see/feel product, browse, or get advice from salesperson, (2) time to ship, (3) fewer impulse purchases (2) time to ship, (3) fewer impulse purchases

Amazon.com: Sustaining its Advantage

Resources/Capabilities that may make Amazon’s Resources/Capabilities that may make Amazon’s advantage in online book-selling sustainableadvantage in online book-selling sustainable• Reputation (bookmark/favorites share)• Database on customer preferences• Relationships/alliances (links) with other Internet

companies (40,000 affiliates in Amazon’s affiliates program)

• Access to capital (market value)

Threats to Amazon’s advantageThreats to Amazon’s advantage• B&N’s supplier bargaining power due to greater volume• Potential for B&N to leverage distribution network for

quick delivery (or order and pick-up at store)• New online navigators that search across existing on-

line booksellers for the best price

Strategy as Revolution



Radically Improving the Value Equation

Reconfigure the Value Chain and employ a completely new/different value chain

Value for Whom?

60

Separate Form and Function

Finding new uses for existing technologies

Credit Cards turned to hotel keys

61

Achieving Joy of Use

Products – services should be fun to use

62

Pushing the Bounds of Universality

Focus not only on the served market but on the entire imaginable market

http://www.polaroid.com/promotions/promo.jsp?FOLDER%3C%3Efolder_id=385651&FOLDER%3C

%3EbrowsePath=385651&PRODUCT%3C%3Eprd_id=31111&PRDREG=POL&bmLocale=en_U

S&bmUID=1017153506454

63

Striving for Individuality

Mass Customization/Striving for Individuality

http://www.us.levi.com/fal02a/levi/ospin/

l_ospin_frame.jsp?FOLDER%3C

%3Efolder_id=2357089&bmUID=1026829418909

64

Increase Accessibility

24/7365

Banking, Retail

65

Rescaling the Industry

Re-scale the Industry• Increasing scale, from local to national or

national to global (e.g., IKEA, Service Corporation [funerals] International)

• Downscaling to serve narrow or local customer segments (e.g., microbreweries, local bakeries, bed-breakfast inns).

PFIZER TO ACQUIRE PHARMACIA CORPORATION FOR $60 BILLION IN STOCK,

STRATEGICALLY POSITIONING COMPANY FOR LONG-TERM LEADERSHIP IN RAPIDLY

CHANGING PHARMACEUTICAL INDUSTRY

66

Licensee

Licensee

Licensee

Licensee

Intel IBM

PC Mfr

PC Mfr

PC Mfr

PC Mfr

PC Mfr

Structure of Microprocessor Market Before and After the 386

67

Compressing the Supply Chain

Disintermediation

Supplier

Supplier

Wholesaler Wal-mart

68

Driving Convergence

Product/Service Bundling • Offer broader mix of related products along the

value chain beyond “core” product (e.g., software office suites, GM car loans/leasing)

• Swimming in other industry pools

69

Value Division

Customer

Supplier

Firm

Willingness to Pay

Supplier opportunity cost

Cost

Price

Value Captured by Customer

Value Captured by Firm

Value Captured by Supplier

Added Value is the total value created with the firm in the game – total value created without the firm in the game or the value that would be lost to the world if the firm disappeared. A firm cannot capture more

than its added value.

Documents

Honda