Honda Vs Harley - The Real Story Behind Honda's Success - CMR
Honda Vs Harley - The Real Story Behind Honda's Success - CMR
Honda Vs Harley - The Real Story Behind Honda's Success - CMR
Perspectives on Strategy:
The Real Story
Behind Honda's Success
Richard T. Pascale
motorcycle production was exported. By this time, however, the Japanese had
developed huge production volumes in small motorcycles in their domestic market,
and volume-related cost reductions had followed. This resulted in a highly competitive
cost position which the Japanese used as a springboard for penetration of world
markets with small motorcycles in the early 1960s. 3
The BCG study was made public by the British government and rapidly
disseminated in the United States. It exemplifies the necessary (and I
argue, insufficient) strategist's perspective of
examining competition primarily from an intercompany perspective,
at a high level of abstraction,
with heavy reliance on micro-economic concepts (such as the experience
curve).
Case writers at Harvard Business School, UCLA, and the University
of Virginia quickly condensed the BCG report for classroom use in case
discussions. It currently enjoys extensive use in first-term courses in
Business Policy.
Of particular note in the BCG study, and in the subsequent Harvard
Business School rendition, is the historical treatment of Honda.
The mix of competitors in the U. S. motorcycle market underwent a major shift
in the 1960s. Motorcycle registrations increased from 575,000 in 1960 to 1,382,000
in 1965. Prior to 1960 the U. S. market was served mainly by Harley-Davidson of
U.S.A., BSA, Triumph and Norton of U.K. and Moto-Guzzi of Italy. Harley was
the market leader ....ith total 1959 sales of $16.6 million. After the second world
war, motorcycles in the U. S.A. attracted a very limited group of people other than
police and army personnel who used motorcycles on the job. While most motorcyclists
were no doubt decent people, groups of rowdies who went around on motorcycles
and called themselves by such names as "Hell's Angels," "Satan's Slaves" gave
motorcycling a bad image. Even leather jackets which were worn by motorcyclists
as a protective device acquired an unsavory image. A 1953 movie called "The Wild
Ones" starring a 650cc Triumph, a black leather jacket and Marlon Brando gave the
rowdy motorcyclists wide media coverage. The stereotype of the motorcyclist was
a leather-jacketed, teenage trouble-maker. Honda established an American sub-
sidiary in 1959-American Honda Motor Company. This was in sharp contrast to
other foreign producers who relied on distributors. Honda's marketing strategy was
described in the 1963 annual report as "With its policy of selling, not primarily to
confirmed motorcyclists but rather to members of the general public who had never
before given a second thought to a motorcycle ...... Honda started its push in
the U. S. market with the smallest, lightweight motorcycles. It was superior to the
lightweight being sold by Sears, Roebuck in America at that time. It had a three-speed
transmission, an automatic clutch, five horsepower <the American cycle only had
two and a half), an electric starter and step through frame for female riders. And it
was easier to handle. The Honda machines sold for under $250 in retail compared
with $1.000-$1,500 for the bigger American or British machines. Even at that early
date Honda was probably superior to other competitors in productivity.
By June 1960 Honda's Research and Development effort was staffed with 700
designers/engineers. This might be contrasted with 100 engineers/draftsmen em-
ployed by ... (European and American competitors). In 1962 production per man-
year was running at 159 units. (a figure not reached by Harley-Davidson until 1974).
Honda's net fixed asset investment was $8170 per employee ... (more than twice
50 RICHARD T. PASCALE
its European and American competitors). With 1959 sales of $55 million Honda was
already the largest motorcycle producer in the world.
Honda followed a policy of developing the market region by region. They started
on the West Coast and moved eastward over a period of four-five years. Honda
sold 2,500 machines in the U.S. in 1960. In 1961 they lined up 125 distributors and
spent $150,000 on regional advertising. Their advertising was directed to the young
families, their advertising theme was "You Meet the Nicest People on a Honda."
This was a deliberate attempt to dissociate motorcycles from rowdy, Hell's Angels
type people.
Honda's success in creating demand for lightweight motorcycles was phenomenal.
American Honda's sales went from $500,000 in 1960 to $77 million in 1965. By 1966
the market share data showed the ascendancy of Japanese producers and their
success in selling lightweight motorcycles.
U.S.
Market Share
(!k )
Honda 63
Yamaha 11
Suzuki 11
Harley-Davidson 4
BSAffriumph and Others 11
starting from virtually nothing in 1960, the lightweight motorcycles had clearly estab-
lished their lead. 4
300 CL350
100~----~--~~--~-r-r-r'-~----.---~------~----~
.2 4 .6 8 2 3 4
Retail list Hondas Cumulative Volume
price (Million Units >250 CC)
(-Ir000 1965)
Source. BCG "Strategy Alternatives for the British Motorcycle Industry
PERSPECTIVES ON STRATEGY 51
The overall result of this philosophy over time has been that the Japanese have
now developed an entrenched and leading position in terms of technology and pro-
duction methods. . . . The major factors which appear to account for the Japanese
superiority in both these areas are ... (specialized production systems. balancing
engineering and market requirements. and the cost efficiency and reliability of
suppliers. s
Honda's phenomenal sales and share gains over the ensuing years have
been previously reported. History has it that Honda "redefined" the U.S.
motorcycle industry. In the view of American Honda's start-up team, this
was an innovation they backed into-and reluctantly. It was certainly not
the strategy they embarked on in 1959. As late as 1963, Honda was still
working with its original Los Angeles advertising agency, its ad campaigns
straddling all customers so as not to antagonize one market in pursuit of
another.
In the spring of 1963, an undergraduate advertising major at UCLA
submitted, in fulfillment of a routine course assignment, an ad campaign
for Honda. Its theme: You Meet the Nicest People on a Honda. Encouraged
by his instructor, the student passed his work on to a friend at Grey
Advertising. Grey had been soliciting the Honda account-which with a
$5 million a year budget was becoming an attractive potential client. Grey
purchased the student's idea-on a tightly kept nondisclosure basis. Grey
attempted to sell the idea to Honda. 29
Interestingly, the Honda management team, which by 1963 had grown
to five Japanese executives, was badly split on this advertising decision.
The President and Treasurer favored another proposal from another
agency. The Director of Sales, however, felt strongly that the Nicest
People campaign was the right one-and his commitment eventually held
sway. Thus, in 1963, through an inadvertent sequence of events, Honda
came to adopt a strategy that directly identified and targeted that large
untapped segment of the marketplace that has since become inseparable
from the Honda legend. 3u
The Nicest People campaign drove Honda's sales at an even greater
rate. By 1964, nearly one out of every two motorcycles sold was a Honda.
As a result of the influx of medium income leisure class consumers, banks
and other consumer credit companies began to finance motorcycles-shift-
ing away from dealer credit, which had been the traditional purchasing
mechanism available. Honda, seizing the opportunity of soaring demand
for its products, took a courageous and seemingly risky position. Late in
1964, they announced that thereafter, they would cease to ship on a
consignment basis but would require cash on delivery. Honda braced itself
for revolt. While nearly every dealer questioned, appealed, or complained,
none relinquished his franchise. In one fell swoop, Honda shifted the power
relationship from the dealer to the manufacturer. Within three years, this
would become the pattern for the industry. 31
The "Honda Effect" - The preceding account of Honda's inroads in the
U.S. motorcycle industry provides more than a second perspective on
reality. It focuses our attention on different issues and raises different
questions. What factors pennitted two men as unlike one another as Honda
and Fujisawa to function effectively as a team? What incentives and under-
standings permitted the Japanese executives at American Honda to respond
PERSPECTIVES ON STRATEGY 57
to the market as it emerged rather than doggedly pursue the 250cc and
305cc strategy that Mr. Honda favored? What decision process permitted
the relatively junior sales director to overturn the bosses' preferences and
choose the Nicest People campaign? What values or commitment drove
Honda to take the enormous risk of alienating its dealers in 1964 in shifting
from a consignment to cash? In hindsight, these pivotal events all seem
ho-hum common sense. But each day, as organizations live out their lives
without the benefit of hindsight, few choose so well and so consistently.
The juxtaposed perspectives reveal what I shall call the "Honda Effect. "
Western consultants, academics, and executives express a preference for
oversimplifications of reality and cognitively linear explanations of events.
To be sure, they have always acknowledged that the "human factor" must
be taken into account. But extensive reading of strategy cases at business
schools, consultants' reports, strategic planning documents as well as the
coverage of the popular press, reveals a widespread tendency to overlook
the process through which organizations experiment, adapt, and learn. We
tend to impute coherence and purposive rationality to events when the
opposite may be closer to the truth. How an organization deals with mis-
calculation, mistakes, and serendipitous events outside its field of vision is
often crucial to success over time. It is this realm that requires better
understanding and further research if we are to enhance our ability to
guide an organization's destiny.
100%r-~~--~~~--~--------~------------L-----------~
100%[.
Xerox
19620
1982.
46%
.42%
40%2
GE" 36%
Goodyear ~-""""'33%
29,c 0 _____
26'00 _ .27'
US c ~
S te el 24%
International
20% .... -.19 %
18%
Harvester
Sears
5~o D---------..~. 5%
0% 1...______.____________________________________________ ~
Markets defined as follows Xerox plain copiers Harley-Davidson motorcyCles, Kodak. photo-
graphic film IBM. mainframe computers. GE (General Electric), generators GE2 electrical
appliances (refrigerators), GM. passenger cars. Boeing commercial wldebody Jet aircraft.
RCA color TVs: Goodyear. OEM tires, US Steel finished steel, International Harvester farm
tractors, Sears massmarket retailing
Environmental Shifts
From (19605) To (19805)
Growth Rates Rapid growth in most Slowed growth or stagnation
industries with room for squeezing Incremental
most serious competitors growth out of competition
InflatIOn
terest has placed the spotlight on the success of each country's contestants
in key industries. One finn's competitive response is thus linked to a
coordinated national response-involving diplomatic exchanges, threats of
trade sanctions, central bank behavior, and protective domestic pricing.
In aggregate, the forces depicted have drastically reshaped competitive
activity. Most importantly, they have transformed a great many stable and
secure domestic markets into battle zones that more closely resemble the
major home appliance example cited earlier. International competitors seem
more prone to play by different rules. Some invest to achieve scale
economies, some for quality leadership, others for price leadership, still
others pursue a niche strategy stressing innovation. Under these cir-
cumstances, there is no impregnable strategic stance. As in the home
appliance example, every participant, in order to survive, behaves in a
way that destabilizes his counterparts. Innovators achieve a breakthrough,
draw off customers, and start a share swing. To avoid losing share, the
most cost efficient producer must follow, rendering his existing product
and process technology obsolete. The low price strategy of still another
player, content to follow in technology, creates a cost/price squeeze on
the rest . . . forcing further innovation and the cycle repeats itself.
Survival for all but the most favored players requires a new competitive
response and new organizational capabilities. For those remaining in the
upper left-hand corner of Figure 1. defense of the status quo is sufficient.
(IBM and Boeing, for example, seem to need to do no more than what
they have always done.) For those with high share and weakening competi-
tive advantage, the microeconomic concepts of scale efficiencies are highly
applicable. (Insofar as price is the key success factor, being larger and
reinvesting to sustain low price position assures continued success.) As
long as a firm's position remains secure, much of what the old strategy
model prescribes still obtains.
But for the vast majority of the firms charted in Figure 1, the shift is
down scale, with weakening share position and weakening competitive
advantage. For these firms, future success is more dependent on flexibility.
In particular, three organizational factors become important:
operational efficiency
incremental product improvements, and
the capacity to sense opportunity and execute an effective response.
For most of the firms in Figure 1, these are the key success factors
for the eighties. Older, generalized ways of thinking about strategy must
expand to adequately grapple ~ith this new challenge.
readily agree, did not result from a bold insight by a few big brains at the
top. On the contrary, success was achieved by senior managers humble
enough not to take their initial strategic positions too seriously. What saved
Japan's near-failures was the cumulative impact of "little brains" in the
form of salesmen and dealers and production workers, all contributing
incrementally to the quality and market position these companies enjoy
today. Middle and upper management saw their primary task as guiding
and orchestrating this input from below rather than steering the organiza-
tion from above along a predetermined strategic course.
The Japanese don't use the term "strategy" to describe a crisp business
definition or competitive master plan. They think more in terms of
"strategic accomodation," or "adaptive persistence," underscoring their
belief that corporate direction evolves from an incremental adjustment to
unfolding events. Rarely, in their view, does one leader (or a strategic
planning group) produce a bold strategy that guides a firm unerringly. Far
more frequently, the input is from below. It is this ability of an organization
to move information and ideas from the bottom to the top and back again
in continuous dialogue that the Japanese value above all things. As this
dialogue is pursued, what in hindsight may be "strategy" evolves. In sum,
"strategy" is defined as "all the things necessary for the successful func-
tioning of organization as an adaptive mechanism. " Skillful use of the other
levers help make adaptation possible.
Perspective #2: Organizational Structure-For many American
managers, reorgnizing is the ultimate quick fix. Rearrange the boxes;
never mind whether you change behavior inside the boxes.
There is no contention here that how one clusters various activities in
an organization is unimportant to getting work done. The problem is, as
with any of the other six factors taken in isolation, organizational structure
is necessary but insufficient. The Coca-Cola Company spent the decades
of the 1960s and 1970s in a continuous state of reorganization. The field
force was decentralized, matrixed, recentralized. Pepsi-Cola steadily
gained ground. Not until the eighties, under steadier guidance and with
meticulous attention given to support systems, field management style,
recruitment and training of staff, and shared values, did Coca-Cola begin
to recapture its leadership against its major competitor.
Organizational fads, especially in rapid succession of one another, are
a strong indicator of naivete. No survey of American enterprise over the
past two decades could fail to notice the succession of structural fads that
have come and gone, each promoting itself as the optimum solution. There
was functional organization, then the decentralization of the fifties and
sixties, followed by the matrix format of the late sixties and seventies-
organizational equivalents of a face-lift-and often just as cosmetic. These
solutions almost always failed to live up to expectations. The boxes changed
but most everything else stayed the same.
PERSPECTIVES ON STRATEGY 65
One's ability to get things done in corporations seldom depends upon
one's job description and formal authority alone. A great part of one's
efficacy stems from knowledge, proven track record, reputation and the
trust and confidence of others. These factors are especially important at
the inteifaces between one's job and someone else's. No matter how well
conceived an organization is structured, these interfaces between functions
exist and successful managers build bridges across them with informal
relationships. When a reorganization occurs it destroys these relationships.
Not surprisingly, organizations then require six to eighteen months for its
members to reestablish new interfaces. Frequent reorganizations are very
traumatic as they continually disrupt these essential networks before they
become fully rooted.
Reorganization is like open heart surgery-sometimes it is necessary.
But if a patient can contain a heart ailment through adequate rest, regular
exercise, and by not smoking, it is preferable to the risks of the operating
table. Organizations would do well to use other mechanisms to get their
existing structure to work whenever possible-rather than resorting too
quickly to a structural remedy.
The structural "lever" encounters a fatal flaw in that it imposes a two-
dimensional way of thinking upon a phenomenon that cannot be captured
in two dimensions. The givens of organizations are ambiguity, uncertainty,
imperfection, and paradox. Structural remedies, by their unambiguous
two-dimensional nature, impose a falsehood-organizational charts:
suggest a clarity in reporting relationships that, in fact, retain significant
elements of interpersonal ambiguity;
announce finite changes that are, in fact, the outcome of an uncertain
stream of events;
suggest mechanistic linkages that deny systemic and interpersonal im-
peifections; and
by the very act of representing one organizational solution (rather than
another) deny an inherent paradox-that paradox being that today's
solution to how one organizes, however appropriate, sows the seeds
for the next generation of problems.
Structural solutions are simply not fine enough instruments in and of
themselves to assure these delicate tradeoffs. To succeed, structure re-
quires reinforcement from the other managerial factors.
Perspective #3: Systems-Systems pertain to such things as forms
and computer printouts, to how information flows up, down, and across
the hierarchy of an organization. Systems to a large extent prescribe how
communication occurs-and as a result, tend to configure how appropri-
ately and quickly an organization can respond. Senior management can
revise a strategy by a simple decree. Likewise, a structural reorganization
is readily conceived and announced. But systems often remain unchanged.
66 RICHARD T. PASCALE
Stop to consider the fonns we fill in, the reports we receive and promulgate,
the incentive systems that reward us, and the procedures that guide us
and regulate our lives. Systems condition us like mice in a maze; they
gobble up an enonnous portion of our discretionary energies. They are
not chic, they are not pretty, they're not fast in how they work or how
they change. (In fact, their maintenance in organizations is regarded as a
low-status activity.) But systems insidiously and powerfully influence how
people spend their lives at work each day.
"Hard copy" systems focus on things written in ink on paper-proce-
dures that are written down, computer printouts, tables of numbers, fonns,
and so forth. In addition, all organizations have infonnal systems, that is,
unwritten understandings that employees internalize about "how business
gets done around here." Every organization has unwritten habits and
routines. Two important ones are systems for conflict resolution and meet-
ing fonnats. All organizations evolve rules about how one deals with conflict.
In some organizations, it is dealt with openly and directly; in others it is
handled in a roundabout way. Likewise, most organizations develop accept-
able patterns for meetings. Infonnal rules provide guidelines as to who
talks, who listens, whether presentations are fonnal monologues or infor-
mal dialogues, whether presenters use models and data with lots of analysis,
whether they focus on the competition, market assumptions, or the bottom
line. Infonnal systems also determine who gets mentored and the legitimate
avenues for favoritism. Infonnal criteria are usually the first to signal
fast-track candidates. These largely unseen and unwritten rules account
for a great deal.
The Japanese culture pays attention to infonnal systems. A great many
of the most important rules are implicit. There are rituals for bowing and
for who has to bow most deeply, for gift giving, and for eating. Japanese
life, to a much greater extent than is true in the Western world, is regulated
by these unwritten rituals. As a result, survival in Japanese society requires
a certain degree of astuteness at perceiving these unwritten rules. This
contributes to the ability of Japanese managers to read the unwritten rules
of their organization as clearly as most Westerners can read a balance
sheet. Not surprisingly, they expect the infonnal rules to mesh with the
fonnal ones. In most American organizations, we are far less conscious
of whether this meshing occurs and, as a result, many of our fonnal
systems are undermined by the infonnal ones. In summary, fuller and
more meticulous attention to both fonnal and infonnal systems is a precon-
dition to improved organizational functioning.
Perspective #4: Style-A manager's style breathes life into strategy
and systems. Regrettably, most readers equate style with certain person-
ality traits. Once so defined, "style" is relegated to the idiosyncratic and
intangible domain of psychology.
A most useful way of thinking about style is to equate it to how a
PERSPECTIVES ON STRATEGY 67
manager allocates time and attention. Henry Mintzberg once researched
the managerial span of attention. 36 The average length of time spent on
anyone thing is nine minutes. Management time is chaotic, fragmented,
and filled with interruptions. This is the nature of managerial work.
Nonetheless, from that chaos subordinates perceive a pattern, whether
intended or not. Subordinates observe how bosses allocate their time,
what issues really capture their attention, and from this they interpolate
what the boss really cares about.
The three most powerful mechanisms for conveying time and attention
messages are within an ann's length of where one sits each day. One of
them is the in-basket, another is the telephone, and the third is one's
calendar. What goes into the pending tray and yellows with age and what
items get turned around immediately? What things get circled, and what
comments are written in the margins? Is the "metamessage" of style-
cost? quality? budget overruns? new product innovation? The people down
the line read these messages with uncanny accuracy.
Consider the telephone. Who gets calls? Who doesn't? What question
does the boss ask? What behavior is complimented? What draws criticisms,
and what doesn't draw comments at all? What is the cumulative pattern
that derives from the way the boss uses the phone?
Lastly the calendar. Who gets in, and who's screened out? When the
boss is outside the office, where is he-with the controllers, customers,
on the production line?
In aggregate, the calendar, the in-basket, and the telephone tell us a
lot about one's style. "Style" defined as symbolic behavior provides every
manager with a potent lever of influence and we need not transfonn our
personalities to use it. The effective employment of this managerial lever
results from nothing less or more than the self-discipline to allocate our
time and attention to do what we say our priorities are.
Perspective #5: Staff-There is a set of consistent steps that organi-
zations go through to develop a cadre of committed and productive employ-
ees. IBM and Procter & Gamble, each in very different ways, do this
well. First of all, they target malleable applicants just beginning or very
early in their careers. They invest in careful selection. They avoid oversell-
ing the candidate and hiding blemishes. They allow the applicant to see
rather clearly what the finn is like, pennitting applicants to deselect them-
selves. In addition, of course, the finn plays its part in screening out those
who don't fit the mold.
Socialization process begins in the trenches. No employee skips this
step. One needs to learn the territory via immersion in the basics of the
industry. It's like the infantry: one has to learn to shoot a gun, dig a
foxhole, and hit a target.
Next comes coherent, frequently spaced, and predictable rewards. IBM
sets quotas that 80 percent of its sales force can reach, then provides
68 RICHARD T. PASCALE
ideas. Further, any of us who work in organizations knows how hard they
are to move. One has to really believe an organization cares in order to
invest the energy and effort needed to help it change. Such commitment
derives from shared values. And if we look at outstanding American finns
that have a sustained track record of keeping up with or ahead of competi-
tion, we see this to be the case. Hewlett-Packard, Procter & Gamble,
3M, Boeing, Caterpillar are examples. Each has a highly developed value
system that causes its employees to identify strongly with the firm. Perhaps
the intense loyalty that these finns inspire is just an interesting idiosyn-
crasy. I believe, on the contrary, that this bond of shared values is funda-
mental to all of the rest. It is probably the most underpublicized "secret
weapon" of great self-sustaining companies.
Conclusion
The intent of the "strategy model" has always been to assess the relation-
ship of a firm with its environment, and identify the key elements of the
managerial mix that are relevant to an effective organizational response.
Given this charter to view the firm and its environment as an organic
whole, our challenge is to develop a more adequate model. The central
contention of this paper is that six dimensions are better than one or two
or even three. Strategy, structure, and systems are not enough.
A multiple perspective disciplines us against the cognitive and perceptual
biases that produce the "Honda Effect." It keeps us honest by drawing
us into the interior of organization, forcing us to focus on the fine grain
details that drive an effective strategic process. So doing, we learn how
each of the S dimensions goes back in history-how the strategies that
have been attempted, the firm's history of reorganizations, the systems
that have been layered one upon another, the different styles of former
leaders, and so forth-how each contributes to the legacy of what the
firm is today and what stands in the way of moving it forward. Finally,
attention to multiple dimensions causes us to grapple with the interdepend-
ence of each-that neither strategy nor structure nor any of the factors
stands alone. Change efforts that shift only one or two of the factors and
leave the remainder alone almost always fail. Only when we move on the
multiple fronts across all six factors do we achieve lasting change. This
has powerful implications for diagnosis and for practice.
References
1. Joseph L. Bower, Managing the Resource Allocation Process, Division of Research,
Graduate School of Business Administration, Harvard University, Cambridge, Massachu-
setts, 1970, pp. 7-8.
2. A recent set of articles have begun to address this problem. See R. H. Hayes and
W. J. Abernathy, "Managing Our Way to Economic Decline," Harvard Business Review
Guly/August 1980), p. 67; see also R. H. Hayes, and]. G. Garvin, "Managing As If
Tomorrow Mattered," Harvard Business Revieu' (MaYl3une 1982), p. 71.
3. Boston Consulting Group, Strategy Alternatives for the British Motorcycle Industry, Her
Majesty's Stationary Office, London, 30 July 1975, p. XIV.
72 RICHARD T. PASCALE