Honda A: Case Summary

1. Honda A: Case Summary This Case Illustrates: • 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). • Imitation of Honda by Harley would have been difficult due to different mfg. skills (job shop vs. continuous process) and desire not to dilute the Harley name by pursuing the low end of the mkt. • 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 car strategy was identical. • 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

2. THE RELATIONSHIP BETWEEN PRICE AND COSTEXPERIENCE CURVES (COMPANY PROFITABILITY) Cost/Unit (Constant Dollars) Industry Price A B C Cost 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

3. THE IMPORTANCE OF RELATIVE MARKET SHARE • 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 High Profitability Low High Low Relative Accumulated Experience (Relative Market Share) Relative market share is a key indicator of relative long-term profitability

4. Key Strategy Elements Scale-efficient plants Design for manufacture Control of overheads and R&D Avoidance of marginal accounts Required Resources Access to capital Process engineering skills Tight cost control Specialization of job and function Incentives for quantity Cost Leadership Grant, Robert Contemporary Strategy Analysis

5. Drivers of Cost Advantage • Specialization and division of labor • Indivisibilities Economies of Scale • Increased dexterity • Improved coordination/organization Economies of Learning • Mechanization and automation • Efficient utilization of materials • Increased precision Process Technology And Process Design • Design for automation • Designs to economize of materials Product Design

6. Drivers of Cost Advantage (CONT) • Location advantage • Ownership of low-cost inputs • Bargaining power • Supplier cooperation Input Costs • Ration of fixed to variable costs • Cost of changing capacity Capacity Utilization Managerial / Organizational Efficiency • Organizational slack

7. 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. • 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 • 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.