Honda A: Case SummaryThis 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
THE RELATIONSHIP BETWEEN PRICE AND COSTEXPERIENCE 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
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
Pro
fita
bil
ity
Low
High
Low High
Relative Accumulated Experience (Relative Market Share)
Relative market share is a key indicator of relative long-term profitability
Cost Leadership
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
Grant, Robert Contemporary Strategy Analysis
Drivers of Cost AdvantageEconomies of Scale •Specialization and division of labor
•Indivisibilities
Economies of Learning •Increased dexterity•Improved coordination/organization
Process TechnologyAnd Process Design
•Mechanization and automation•Efficient utilization of materials•Increased precision
Product Design •Design for automation•Designs to economize of materials
Drivers of Cost Advantage (CONT)
Input Costs
•Location advantage•Ownership of low-cost inputs•Bargaining power•Supplier cooperation
Capacity Utilization •Ration of fixed to variable costs•Cost of changing capacity
Managerial / Organizational Efficiency
•Organizational slack
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.
Top Related