The Lahore School of Economics

BUSINESS POLICY
WACC: Honda (A)

Submitted To: Prof Fareedy

Group Members:
Saba Ashher
Fareeha Zafar
Adeel Ahmad

25TH May 2015

Japanese Motorcycle Industry:

Industry minimise risk by investing in one winning design and milking that product until
it became technologically obsolete. Japanese motorcycle industry expanded since World War II
to meet cheap transportation. In 1959 Honda, Kawasaki, Suzuki, Yamaha together produced
450000 motorcycles sales accounted for 55million.

HONDA:
Honda Motor Company was founded by Sochiro Honda. The company is in automobile
industry before World War II. Honda has the largest market share. They provide technologically
manageable and economically affordable bikes and their main focus is on middle class
consumers. They are innovators as they offer multiple product line, leadership in product
innovation, exploit opportunities for economies of mass production.
In 1946 Hondas Technical Research Institute was established to improve internal
combustion engines. In 1947 Honda introduced first A type 2 stroke engine. In 1948 Honda has
247 Japanese participants (competitors) in motorcycle industry. In 1949 Honda expanded its
presence and introduced light weight 50cc 2 stroke D-type motorcycle and in 1951 Honda
responded to competitors move they come up with the superior 4 stroke design with doubled
horsepower and no additional weight. In 1958 Honda Market Research showed large untapped
market for small motorcycle business for local deliveries and entered in American Market in
1959. In 1961 lined up with 125 dealers and spent heavily on advertising.

Quantitative & Qualitative facts

Honda Technical Research Institute was established in 1946, Honda Technological

strategy.
In 1947 Honda introduced its first AD-type, 2 stroke engines.
As of 1948 Hondas Japanese competition consisted of 247 Japanese participants
In 1949 Honda introduces lightweight 50cc, 2stroke, and D-type motorcycle.
Hondas engine at 3hp was more reliable and had a superior stamped metal frame and
also introduced 4stroke engine.
The 50cc Honda was an explosive success. Unit sales reached 3000 per month for future
product Honda invested heavily in highly automated 30000 units per month
manufacturing plant, a capacity 10 times in excess of demand.
In 1959 Honda, Suzuki, Yamaha and Kawasaki together produced some 450000
motorcycles with sales of $55 million in that year and became the worlds largest
producer.
Honda machines sold for less than $250 retailed, compared with $1000-$1500 for the
bigger American or British machines.

In 1961 it lined up 125 dealers and spent $150000 on regional advertising.

Japanese exporters also invested substantial sums: $1.5 million for Yamaha and $0.7
million for Suzuki.
Hondas strategy was successful U.S sales rose from $500000 in 1960 to $77 million in
1965. By 1996 Honda, Yamaha and Suzuki together had 85% of the U.S market.
British exports doubled between 1960 and 1966, sales increased from $16.6 million in
1959 to $29.6 million in 1965.
In 1965 domestic sales represented only 59% of Hondas total of $316 million, down
from 98% in 1959.over the same period, production, volume had increased almost five
hold from 285000 to 1.4 million units.
In 1974 about 35% of Hondas turnover and about 40% of Suzuki, Yamaha turnover
about 40%.
Honda actually losing money in its cars business in 1974, in which motorcycle showed
the returns of the order of 20% (BIT) compared with the 12.4% earned by the company.
U.S manufactures had been dislodged by Japanese competitors due to technological shift.
Japanese invasion motorcycle was super headed by Honda Motor Company. It was
founded by Sochiro Honda a visionary inventor and industrialist.
Japanese motorcycles were more technological manageable and economical.
Competitors operated in job shop, adapting clip on engines for bicycles.
Manufactures in Japan tended to minimize the risk by investing in one winning design
and milking that product until it became technological obsolescent.
Honda seeking to offer a product line, leadership and innovation, opportunities, mass
production
The Honda machine had a three speed transmission, automotive clutch, five horsepower,
an electric starter and a step through frame for female riders.
Strategy to expand regionally.
Honda created the market for the recreational uses of motorcycles through its extensive
advertising and promotional efforts.
Honda used its productivity-based cost advantage and R&D capability to introduce new
models at prices below those of competitive machines.
Honda also established the largest dealership network in U.S.
The whole focus of marketing program was to maintain and improve market share.
The manufacture products and s and d system therefore influence sales both directly, at
retail and proximately through their effect on the dealer network.

Problems
The company is facing heavy competition & competitive prices from competitors.
The motorcycle industry was exhibiting the effects that differences in growth rates,
volume, and level of capital investment among competitors can have on relative

costs. The existence of this effect in the company has important implications
discussed in our core problems.

Core Problem
Commercial Vulnerability as mentioned in the case at some point your
competitors will start setting prices which you cannot match profitability, losses will
ensue. The strategic importance of the experience curve is that it explains clearly
the two possible long-term causes of uncompetitive costs:
Firstly Relative growth rate: failure to grow as rapidly as competitors, there by
progressing more slowly than them along the experience curve.
Secondly Relative slopes: failure to bring costs down the characteristics experience
curve slope achieved by competitors.

Recommendations
It is for this very reason that the auto industrys survival is dependent on its ability to
innovate continuously. Undoubtedly, this puts a lot of pressure on the existing application
portfolio. Hence therefore efficiency, alliances, meeting demand & cost reduction seems to be
the only possible solution to overcomer commercial vulnerability.