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.