Honda: From Obscurity to Renown

Soichiro Honda ventured into the emerging motorcycle industry in the mid-1940s after achieving advancements in piston ring design and experimenting unsuccessfully with weaving machines. He manufactured motorized bicycles for two years before establishing the Honda Motor Company in 1948. Honda Motors assembled and sold motorcycles and supplied engines as components to other manufacturers during its early stages.?

Despite Soichiro's creative genius, he tended to be temperamental and lacked the necessary business acumen to thrive in an increasingly competitive market. However, in October 1949, Takeo Fujisawa joined the Honda Motor Company and became a vital asset to Honda. Fujisawa brought a level-headed approach to reign in his eccentricities. For instance, when Honda was reluctant to accept an award from the Emperor due to the requirement of wearing a suit to the ceremony, Fujisawa found one and convinced him to attend appropriately dressed. Additionally, Fujisawa encouraged Honda to leverage engine advancements in racing to create more marketable motorcycles for everyday consumers.

?By March 1952, Soichiro had successfully developed the prototype of the 50cc "Cub Type F." This marked the initial achievement of a compelling fusion between power and compactness. The substantial technological advancements made in the Super Cub later served as the foundation for Honda's significant technological advancements in the Super Cub, propelling the company onto the global stage.

Throughout the 1950s, the Honda Motor Company experienced success in Japan's domestic and commercial markets. During this decade, it emerged as one of the four leading companies in the industry, witnessing a steady increase in its market share: 9.9% in 1951, 15% in 1954, and 18.9% by 1957. For Honda and Fujisawa, ambition and triumph went hand in hand, prompting them to set their sights on international markets in the late 1950s. To spearhead this expansion, Fujisawa appointed?Kihachiro Kawashima.?Kawashima joined the Honda organization in 1951 and has previously worked alongside Fujisawa and other sales team members to develop and maintain distribution channels.

As the Honda organization contemplated venturing into foreign markets, Kawashima was entrusted with?heading a Special Planning Division in late 1958.?This division was responsible for evaluating potential foreign markets, determining the best approach for entering them, and following their assessment. Kawashima made a reconnaissance trip with his assistant Takayuki Kobayashi to San Francisco, Los Angeles, Dallas, New York, and Columbus. After they reported to Japan, Fujisawa decided that Honda would expand first into the States, and he appointed Kawashima to establish and run a wholly-owned subsidiary there,?American Honda.

Business strategy - especially when it involves case studies from business schools - is always written with the benefit of hindsight and often with a broad brush. It's like the plot of an old-fashioned thriller in which the good and bad guys are sharply defined: the good guys always get stuck in terrible fixes, but they know what they are doing and somehow emerge victorious as the story progresses.

?But business does not work like this. The good guys often don't have a clue what they are doing. They try one approach, find it doesn't work, pivot to a different strategy, and another until they finally find one that works.

An excellent example of this phenomenon fit in the competition between Harley-Davidson, and Honda, during the 1960s and 1970s. Nobody viewed the Japanese firm as much of a threat to the motorbike market leader, Harley-Davidson. Honda's customers were different, and the company sold its bikes through sporting goods shops, not motorcycle dealerships. Harley's customers wanted serious bikes, not puny Japanese toys, no matter how cute they looked. But then, once Honda had secured a toehold in the market, it began to develop more powerful bikes intended for use on the road. Bit by bit, model by model, the firm moved upmarket, and Harley-Davidson was gradually forced to retreat.

After failing to compete effectively with Honda in the 100-300cc range and later in the 500-750cc range, Harley repositioned itself solely at the high end of the market. Although high margin, this sector was much smaller than the others, and Harley fell on hard times. It has rationalized itself as a successful premium brand today, boosted by a successful clothing side business, but Honda sells three times as many motorcycles worldwide. As this happens, the typical response of the market leader - such as Harley - is 'segment retreat' - a move to even more complex and expensive products. This is usually explained as a natural response to short-term earnings pressure from the simpler product.

In 1975, a Boston Consulting Group (BCG) study explained that Honda gained a significant foothold in the American market by leveraging experience economies in segment advances. Their ability to achieve high production volumes allowed them to lower production costs and offer their motorcycles at more affordable prices than their competitors. This explains their growing market share within segments. The concept of "segment advance" refers to the repeated application of this approach to larger classes of motorcycles, leading to further market share growth between segments.

BCG's findings reveal that the average price of smaller Japanese motorcycle models began to decline in 1959 (figure 1), indicating underlying reductions in cost. They also describe a similar trend occurring in Honda's larger models, which were introduced in the late 1960s (figure 2).

?Initially, business operations for American Honda faced sluggish progress and uncertainty. Upon their arrival in Los Angeles, the founders brought 300 motorcycles divided into four classes: the Super Cub (50cc), the Bentley (125cc), and the Dream (250cc and 350cc). However, after three months, by September, Kawashima and his team had only managed to sell eight units of the Dream. By the end of December, their sales improved slightly, with 200 units sold and partnerships established with 15 dealers. By spring 1960, they had recruited 40 dealers, primarily selling 100 units per month of the larger models.

Unfortunately, larger bikes were not designed to withstand the wear and tear imposed by American drivers. Customers began encountering issues such as clutch failure and oil leaks, prompting Kawashima to recall the faulty models for testing and repairs. As a result, he was left with only the Super Cub, a model that the home office executives did not anticipate to sell well and traditional motorcycle dealers had shown limited interest in.

The entire endeavor turned into a fiasco. Most dealers were reluctant to stock Honda motorcycles. Honda had no experience making bikes driven over long distances on freeways, and it soon turned out that its new product was no good for this. Honda tried to address the issues by air-freighting replacement parts from Japan to the United States, but the expenses nearly bankrupted the company.

Kihachiro Kawashima had the unenviable task of leading Honda's three-person American sales and marketing team. American sales and marketing team. One Saturday, he sought relief from his work troubles by going dirt-biking in the hills around LA on the little 'Supercub: a 50cc bike he'd shipped over from Japan. The next week, he invited his colleagues to share this biking therapy. (They had also brought over Supercubs to get around LA.) In short, to summarize, the other dirt bikers noticed and admired these three Dinky Toy bikes, many asking where to buy one.

The three Honda executives became convinced they could sell the Supercub for recreational purposes, mainly for the type of off-road biking they enjoyed each weekend. The head office in Japan hated the idea because they still believed the market research, which stated that chunky Americans would never buy tiny Japanese bikes. But out of sheer desperation - after the evident failure of the big-bike strategy - they eventually agreed to let Kawashima give it a go.

Among the various initiatives, the one where Kawashima displays remarkable nerve was the initial division within the committee to alter public perception by running campaigns. The campaign was to counter the negative image of motorcycles portrayed in a movie like 'The Wild One’, where Marlon Brando rode a motorcycle and played the leader of a gang responsible for disturbing the quiet of a small California town. Honda sponsored a successful ad campaign with the tagline, 'You meet the nicest people on a Honda.' The campaign depicted ordinary individuals engaging in everyday activities on Honda models. The campaign successfully changed people's perception of motorcycles despite initial disagreements among the committee.

Despite facing uncertainties and challenges, Honda established itself as a prominent motorcycle manufacturer in the United States by the mid-1960s and maintained its position well into the 1970s. The company witnessed a significant increase in sales during this period. In 1960, American Honda sold only 1,315 motorcycles, but by 1965, the number surged to 227,600 and 441,200 in 1970. Concurrently, revenue from sales in America experienced substantial growth, rising from approximately $0.5 million in 1960 to $77 million in 1965.

Within just eight years of its presence in the United States, American Honda emerged as the leading supplier of lightweight motorcycles, capturing a remarkable 63% of the market share. By 1974, the company not only dominated specific product segments with a 60% market share but also diversified across various segments, commanding 43% of the entire market.

During his early tenure at American Honda, Kawashima made significant decisions crucial to the company's rise to prominence. These decisions included rejecting a department store's offer to sell the Super Cub and selling through unconventional outlets like sporting goods and hunting stores. Initiated rebranding effort with the 'Nicest People' campaign and implemented a policy of only advancing goods to dealers with payment. These actions were instrumental in shaping American Honda's history in the United States.

A company can outperform rivals only if it can establish a difference that it can preserve. It must deliver greater value to customers, create comparable value at a lower cost, or do both. The arithmetic of superior profitability then follows: delivering greater value allows a company to charge higher average unit prices; greater efficiency results in lower average unit costs.?

Honda's early struggles have valuable lessons about strategic decision-making. Honda initially targeted a market already dominated by a competitor with superior products, which proved to be a wrong strategy. Instead, they should have identified a gap where price could be the key advantage, leveraging their ideal product. Firms can avoid unnecessary expenses and frustrations by asking crucial questions such as whether a competent competitor already occupies the target market and whether they can simplify to provide a better product in terms of usefulness, ease of use, and art.

?Two essential decision rules emerge from this story:

• When the market leader is competing on features and performance, in that case, waiting to enter their market is wise until you can simplify and provide a significantly superior product that offers a delightful user experience.
• If there is a gap in the market where no firm is offering price-simplified performance, and you can find a way to cut prices significantly, seize the opportunity.

Following these decision rules can help firms navigate the competitive landscape more effectively and increase their chances of success.

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