Honda
James Oldroyd
Kellogg Graduate School of Management
Northwestern University
J-oldroyd@northwestern.edu
801-422-7888
650 TNRB
Honda’s New Plant 1958
30,000 Units a Month
360,000 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?
1
Honda’s Entry (Customer?)
“You meet the Nicest People on a Honda”
Enter the Motorcycle Market in North
America
Deliberate Strategy
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.
Honda switched to the new,
untested, recreational off-road
market.
Realized
Strategy
Unrealized
Strategy
Emergent Strategy
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”
2
Figure A: The Value of Experience 19591974
Price in
Yen
(1,000s)
100
51-125 cc Class
60,000 X
10 Million =
600
Trillion/280
(280 yen to
the dollar)
= $2.1
Billion
80
60
40
20
1
10
Volume
in
Millions
3
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)
4
The Relationship between Price and
Cost
Cost/Unit (Constant Dollars)
EXPERIENCE CURVES COMPANY PROFITABILITY)
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
5
Which is more beneficial to a firm?
Cost (Steep Curve)
Cost (Flat
Curve)
Cost
Per/Unit
Industry
Price
Profit Points
Number of Units
With a Steep Curve the initial costs are higher
and there is greater risk.
6
PROFITABILITY VS MARKET SHARE
Profitability vs.
Market Share
US CONSTRUCTION
COMPANIES
(MEGABUILDERS)
Return on Sales (Average 1972 - 1978)
0.1
0.08
Brown & Root (Halliburton
0.06
Bechtel
0.04
0.02
Roytheon
Parsons
Fluor
Pullman
Foster Wheeler
Morrison-Knudsen
McKee
0
-0.02
0
0.5
1
1.5
Relative Market Share (Revenues, 1972 - 1978)
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.
Cost (Firm A)
Cost
(Firm B)
Cost Per Industry
Unit
Price
Cost
Disadvantage
For Firm B
Profit Points
Number of Units
8
More Often the Disadvantage Looks
Like:
Cost
(Firm A)
Cost
(Firm B)
Time
Advantage for
Firm A
Cost Per Industry
Unit
Price
Cost
Disadvantage
For Firm B
Number of Units
Firm A Has First Mover Advantage and
Crosses into Profitability First.
9
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
10
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.
11
Southwest
James Oldroyd
Kellogg Graduate School of Management
Northwestern University
J-oldroyd@northwestern.edu
801-422-7888
650 TNRB
American’s Volume Advantage?
Costs
American
Cost
Southwest
Time
Advantage for
American
Cost Per Industry
Unit
Price
Cost
Disadvantage
For Southwest
Number of Units
American Has First Mover Advantage and
Crosses into Profitability First.
13
Why don’t we
see the results
we expect?
How does Southwest do it?
14
What does your chart
look like?
Profits
Market Share
15
Measuring Success
Airline Profitability
Profitability = [yield X load factor] - cost
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.
16
Southwest Airline’s Focus
CEO
Herb Kelleher, a Connecticut attorney turned Texan,
had the best labor relations in the industry and an excellent
company culture.
Company
vision was to provide low cost airline service to an
increasingly larger number of people.
Lowest
cost structure in the industry.
Objective
to minimize reservation costs.
17
Wal-mart’s Distribution Model
A key to their success
Airlines use the same model.
Does this make sense?
18
Point to Point Vs. Hub and Spoke
Southwest
The National Carriers
VS.
Commuter
airline that concentrates on city pairs. (Average
flight is 400 miles or less and takes less than one hour)
19
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:
Sales/Marketing
• 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
Lowest cost operations and lowest prices.
Operations
• 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)
Human Resource Mgmt.
• 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
James Oldroyd
Kellogg Graduate School of Management
Northwestern University
J-oldroyd@northwestern.edu
801-422-7888
650 TNRB
To Date
Low Cost
Differentiation
Dual Advantage
Willingness
to Pay
Supplier
K-mart
opportunity
cost
Wal-mart
Mom
and Pop
Store
Goldman
Sachs
Merrill
Lynch
McDonald’s
Burger
King
23
Dimensions of Value
Top Line
Value
Product
Differentiation
Service
Value
Willingness to Pay
Value Captured by
Customer
Price
Cost
Value Captured
by Firm
Price
Bottom Line
Value
Value Captured
by Supplier
Supplier Opportunity Costs
24
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
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.
Product
Price
Manufacturer's
Value Added
Raw
Materials
Engineering
Labor
Marketing
Distribution
Administration
Total Cost of
Use to Buyer
Buyer’s Costs
Search
Learning
Switching
Risk/loss
Performance
Service
26
Differentiation-Based Strategy
Utility Software
User’s Total Cost of New Software
Product
Price
Search
Learning
Risk
Resources
27
Value Chains for Cost Advantage
and Differentiation Advantage
Price
Firm A has a
cost advantage
Firm A:
Firm B:
Price
Price
Firm C:
Price
Firm C has a
differentiation
advantage
Firm B:
Producer’s cost
Producer’s margin
Buyer’s cost
Total cost to buyer
28
Strategic Positioning
The essence of strategic positioning is to
make choices that are different from those
of rivals
Strategy is not a race to one ideal position --it is the creation of a different position
Differences 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
29
Vertical and Horizontal
Alliances
James Oldroyd
Kellogg Graduate School of Management
Northwestern University
j-oldroyd@northwestern.edu
801-422-7888
650 TNRB
AlliancesHow 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
31
Alliances Growing as a Source of Revenue
Alliances as a Percentage of Revenue for
Top 1,000 U.S. Public Corporations
30%
25%
20%
15%
10%
5%
0%
1980
1985
1990
1995
1998
Source: Columbia University, European Trade Commission, Studies by BA&H,
AC.1983-1987, 1988-1993, 1994-1996, 1999
32
Total business conducted
through alliances
50%
40%
40%
30%
30%
20%
20%
10%
3-5%
0%
1990
2000
2005
2010
Source: EIU Global Executive Survey
Andersen Consulting, Warren Company
33
AlliancesHow 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)
34
Alliances vs. Acquisitions: Stock Market Response to
Announcements
Average Stock Market Gains
(Average over 10 day window following announcement)
1
.84 percent
0.8
0.6
0.4
0.2
0 percent
0
Alliances*
* Source: Dyer, Kale & Singh, 2001
Acquisitions**
(Acquirers)
** Source: Bradley, Desai, & Kim, 1988
35
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
36
HISTORICAL VISION
INTERNAL FOCUS
PARTNERSHIP VISION
TOTAL SYSTEM
ECONOMICS
100%
80%
CUSTOMER
ECONOMICS
50%
MY
ECONOMICS
20%
60%
MY
ECONOMICS
40%
20% SUPPLIER
ECONOMICS
0%
30%
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
Toyota
Engineering
(7,000 Engineers)
Top 35
Affiliated Suppliers
(5-6,000 Engineers)
Remaining 250
Tier I Suppliers
(10-15,000 Engineers
Toyota can leverage its value creation resources by 5-15x
by involving suppliers in the Extended Enterprise
THE VALUE OF A NETWORK CHANGES
AS MEMBERSHIP INCREASES
Single Firm
Connections:
Directions:
0
0
3-Firm Network
3
6
6-Firm Network
15
30
As the number of nodes in a network increases arithmetically, the
value of the network increases exponentially (n2 growth). Small
improvement efforts that ripple through the network can
dramatically increase the value for all members.
40
Toyota’s Supplier – Customer Interface
Surface Contact vs. Multiple-Point Contact
(Correct)
Top
Executives
R&D
R&D
Manufacturing
Manufacturing
Quality Assurance
Quality Control
Quality Assurance
Quality Control
Sales
Purchasing
Customer
Point Contact
(Wrong)
Supplier
Top
Executives
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
Horizontal
Alliances
44
The Scope of Inter-corporate
Linkages
Contractual Agreements
Traditional
Contracts
Nontraditional
Contracts
Equity Arrangements
No New Firm
Arm’s-length
Buy/Sell
Contracts
Joint Research
Minority
Equity
Investments
Franchising
Joint Product
Development
Equity
Swaps
Licensing
Long-term
Sourcing
Agreements
Crosslicensing
Joint Manufacturing
Creation of Entity
Nonsubsidiary JV
JVs
Subsidiaries
of MNCs
Fifty-fifty
Joint Ventures
Unequal
Equity
Joint
Ventures
Joint Marketing
Shared
Distribution/
Service
Standard Setting/
Research Consortia
Based on: Yoshino and Rangan, 1995
Strategic Alliances
Dissolution
of Entity
Mergers and
Acquisitions
Why Seek a Partner?
1 Reduce Risks
• Size or Uncertainty
Associated with Project
• Preempt Competitors
• Flexibility/Option Value
2 Gain Efficiency
• Economies of Scale
and/or Scope
• Speed to Market
3 Access Complementary
Skills
•
New market entry;
synergy-sensitive skills
4 Learning
• Acquire New Skills
• Gain Market Knowledge
and Experience
• Monitor Competition
5 Politics
• Sensitive Industries
• Regulations
• Market Access
Challenges for Horizontal Alliances
1 Leveraging each partner’s resources while protecting
proprietary know-how; many horizontal alliances
are inherently learning races.
2 Building trust with potential competitors;
simultaneously cooperating and competing (Coopetition)
3 Less ability to “control” partner decisions (relative to
supplier alliances).
48
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)
49
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)
50
Keys to Horizontal Alliance Success
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 requirements
Develop 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.
51
High
Low
Strategic Fit
The Importance of Strategic
and Cultural Fit
Good Commercial
Compatibility but
Organizational
Integration
Difficult
No
Redeeming
Value
Low
Optimal
Strategic
Alliance
Solution
Compatibility
but few
Synergies
HOWEVER,
Remember
that it is the differences
between the organizations
that drive the formation
of the alliance
High
Organization/Cultural Fit
52
Amazon and BN.com
James Oldroyd
Kellogg Graduate School of Management
Northwestern University
j-oldroyd@northwestern.edu
801-422-7888
650 TNRB
B&N vs. Amazon Summary
B&N and Borders was in the process of
consolidating 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
into many industries, including bookselling;
Amazon.com uses an entirely different business
model (value chain) to attack B&N.
B&N vs. Amazon Summary
The online book selling model has a number of
potential advantages 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 see/feel product, browse, or get advice from
salesperson, (2) time to ship, (3) fewer impulse
purchases
Amazon.com: Sustaining its Advantage
Resources/Capabilities that may make Amazon’s
advantage 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 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 online booksellers for the best price
Strategy as Revolution
James Oldroyd
Kellogg Graduate School of Management
Northwestern University
j-oldroyd@northwestern.edu
801-422-7888
650 TNRB
Radically Improving the Value Equation
Reconfigure the Value Chain and employ a completely
new/different value chain
Value for Whom?
Separate Form and Function
Finding new uses for existing technologies
Credit Cards turned to hotel keys
59
Achieving Joy of Use
Products – services should be fun to use
60
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?FOL
DER%3C%3Efolder_id=385651&FOLDER%3C%3Eb
rowsePath=385651&PRODUCT%3C%3Eprd_id=311
11&PRDREG=POL&bmLocale=en_US&bmUID=101
7153506454
61
Striving for Individuality
Mass Customization/Striving for Individuality
http://www.us.levi.com/fal02
a/levi/ospin/l_ospin_frame.j
sp?FOLDER%3C%3Efolde
r_id=2357089&bmUID=102
6829418909
62
Increase Accessibility
24/7
365
Banking, Retail
63
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
64
Structure of Microprocessor Market Before and After the 386
PC
Mfr
Licensee
Licensee
PC
Mfr
Intel
PC
Mfr
IBM
Licensee
PC
Mfr
Licensee
PC
Mfr
65
Compressing the Supply Chain
Disintermediation
Supplier
Wholesaler
Wal-mart
Supplier
66
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
67
Value Division
Customer
Willingness to Pay
Value Captured
by Customer
Price
Value Captured
by Firm
Firm
Cost
Value Captured
by Supplier
Supplier
Supplier opportunity cost
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.
68