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THE JAPANESE MULTI-STAGED DIVERSIFICATION AND PRICING STRATEGIES, RELEVANT TO THE LUXURY CAR MARKET Allen S. Marber, Roosevelt University Syrous K. Kooros, Nicholls State University ABSTRACT This paper discusses the successful penetration into the American luxury car market by the Japanese automakers, Honda, Toyota and Nissan, and the pricing strategies that enabled them to "unlock the keys" and open a market heretofore considered the exclusive territory of the American and German automobile companies. INTRODUCTION The Japanese success in conquering and creating new markets has become a real challenge to numerous industries throughout the globe, with a diversification strategy for penetrating the hardest markets and their segments. This paper discusses the successful penetration of the American luxury car market by the Japanese automakers. The U.S. luxury car market seemed impregnable, whereas, each major automotive group appeared so entrenched that many experts, even the most optimistic ones had very little to say about the Japanese opportunities for profit and success. Yet, the Japanese auto industry has been so successful that it caused the German car manufacturers to vacate the $30-50,000 segment. Shortly thereafter Mercedes-Benz (M-B) introduced the "S" class luxury sedans starting at $50-60,000. It is only recently that the Germans are making a push in the lower ranges of the luxury market which have been dominated by the Japanese since their introduction of the Acura, Lexus and Infiniti brands. The Japanese achieved their enviable position through the use of a diversification and pricing strategy at the entry and penetrating stages and a product strategy at the line stretching stage to acquire, hold and expand its market share. The Japanese were able to embellish their products with what consumer behaviorists call a "tangible value." Later on, once they were entrenched, they were able to convey to their products those "intangible values" that

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enabled them to further expand their share of the U.S. luxury car market. DIVERSIFICATION STRATEGY Diversification strategy can be subsumed into three categories: related, unrelated, and mixed. In related diversification strategy, complement goods (or service) come to mind. For example, the production of steel by an automobile company is related diversification. Our imagination can be expanded to include vertical integration and or the production and distribution of different classes of the same product, such as an automobile, especially when this is accomplished by different divisions such as General Motors. Such a divisional structure, so long as it does not duplicate the economies of scale and scope can be very beneficial since decentralization of decision making improves effectiveness and long term performance. Product diversification is usually recommended when the firm has reached its stage of maturity (Kooros 1996). It is at this stage that the firm can undertake new acquisitions, divest itself from "weak performing business", become a multinational, and initiate vertical integration (Thompson and Strickland 1995). However, "diversification doesn't need to become a strategic priority until a company begins to run out of growth opportunities in its core business" (Thompson and Strickland 1995). In the auto industry forward integration may entail the creation of owned distributorship, repair shops, financing, and parts stores. Generally, diversification makes a strategic sense, especially when it fills a void, reinforces the company's core business, and contributes to the growth and profitability of the organization. The danger of not diversifying is enormous: superior performance is much harder to achieve; new technological innovation can drastically reduce the demand for the product; and the probability of the business cycle adversely affecting the business is high. Diversification in a product class provides the opportunity to cover all customer's segments. General Motor's product diversification ranging from Chevrolet Cavalier to Cadillac Fleetwood and Limousine is a good example of such a diversification. Alvin Toffler attributes this diversification to entail over 300 combinations of options only in the Buick Division. Diversification begins to make sense when competitive forces and market growth rate considered in combination is both strong and rapid, respectively. Related diversification, especially in the automobile and

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similar industries have several advantages: 1. 2. It utilizes the same resources, and thus gains both economics of scale and scope. It utilizes similar technologies except at varying degrees of quality; capitalizes on the existing know-how, and is a case of know-how, transfer; and thus... The business expands the use of common core, and the firm's competencies.

3.

Related diversification in the case of automobile industry is tantamount to horizontal integration and expansion within the firm, whereas product configuration remains intact, but its size, quality, performance and thus price varies to serve or meet the needs of vertically different income and preference groups, that is different market segments. This paper provides an analysis of how this quasidiversification strategy has been adopted by the Japanese automakers. FROM THE TANGIBLE TO THE INTANGIBLE Theoretically, price represents the value of a good or service for both the seller and the buyer. Consumer behavior states that the value of a good or service can involve both tangible and intangible factors. An example of a tangible factor is the cost saving a consumer can get from buying a new, high quality car; an example of an intangible factor is a consumer's pride in the ownership of a BMW, for example, rather than a Toyota or another similar car. Therefore, in order for a consumer to choose the latter, the lack of an intangible value has to be offset by tangible values, such as price, performance, customer service or future status appreciation from holding onto the merchandise. A key determinant of the future price of a product is the consumer demand for that good. Through product research, the manufacturer is informed of the specific commodities needed for the market and of their respective prices. It is also true that, producers do not always target consumers, in general, rather, they select specific social groups, or segments who would be most interested in the merchandise, and would be willing and able, of course, to

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pay the price tag. For the luxury market, one can identify status seekers, brand loyal customers, service/features shoppers, and price shoppers as target groups. THE U.S. LUXURY CAR MARKET: MID 1980s

A study of the 1986 U.S. luxury car market allowed the Japanese to make several general observations that might be relevant to this paper. The 1986 luxury market was dominated by the American brands such as Cadillac, Lincoln, Buick and Oldsmobile, which comprised of up to 70% of all car sales. The German automakers MercedesBenz, BMW, Audi and Porsche, known for their long tradition of producing top luxury and performance cars, accounted for the other 28%, leaving a tiny share to the British and the rest of Europe. (Wall Street Journal 1989). These European brands carried huge intangible values built in as their status and prestige, as well as, tangible values such as excellent performance. Producers of these cars were mainly involved in non price competition, and emphasized their cars' distinctive attributes, rather than their prices. They mostly targeted the first two groups of customers, and were enjoying almost 100,000 units of sales annually. The success of the German automakers was even felt in Japan. The triumph of BMW came in the early 1980's when after several years of losses, it managed to gain control of almost 80% of the Japanese luxury imported car market, and tripled its sales by 1986. Unusual Revealed Preference in Demand Curve With the westernization (or adoption of western paradigms of behavior and values) of Japan, as well as, the eventual success of the Germans, and the oil crises in the 1970's (the American cars becoming less popular due to their heavy gas consumption), made the Japanese automakers such as Honda, Toyota and Nissan seize the opportunities in the U.S. upscale market. Prior to this event, the underlying Japanese automakers proved themselves to be perfect high quality small car producers, with a large share of the U.S. market, through well established owned distribution systems with numerous dealerships. Honda research revealed that, while transgressing to the lower end of the price range, the demand for luxury cars in the U.S. turned out to be more and more elastic. This

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meant consumers sensitivity to price changes and thus, the amount of cars purchased. This phenomenon revealed new possibilities for price competition and the expansion of this market segment. The evidence of this estimation was proved by the existence of something called a "close-toluxury" car market where the Japanese were competing successfully against the American producers. For the situation just described, pricing theory suggests a penetrating strategy that might be employed by a newcomer, endeavoring to command its own share of the market. Basically, the strategy entails setting the lowest possible price for a product supplied in large quantities. Such a strategy discourages potential competitors, and reduces per unit production and distribution costs as sales rise, and thus it, enables the company to attract many more potential buyes. Honda Challenges Upscale Market Through Penetration Strategy The first challenge to the U.S. upscale market was made by Honda in 1986 when it opened its new division called Acura (Ad Week's Marketing Week 1986). The new division introduced two luxury models, Legend and a sports coupe Integra. The Legend with a $19,298 price in the lower end of the upscale market, was selected as the flagship. Prices were set at least $13,000 below the German's, and $6,000-8,000 below the American cars in order to offset their initially low intangible value. The ads claiming that to purchase a Legend was almost the same as buying a BMW, because the new V6 had the same performance features (Automotive Industries 1986). Honda targeted the consumers who were moving up from small cars, although they were still unable to afford German or American prices. For the young status seekers, Acura introduced the Integra sports model. It was emphasized that Integra contained the characteristics of its German or American versions, which at the price of $9,300 to $10,400 was quite affordable (Automotive Industries 1986). It took Acura awhile to advance its cars to the image and status of a European luxury car. To accomplish its penetrating strategy, Acura kept building more dealerships, where its number increased from 150 on the day of entry in 1986 to nearly 300 by 1988. The success did not stay away for too long for Acura. After a slow start, Acura almost reached its targeted sales of 55,000 during its first year, (52,869 cars was sold in 1986). This amount was doubled in 1987, reaching its peak of 143,708 units sold in 1991. In order to satisfy the American customers, Acura used a 'price

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haggling" approach, giving room for some price negotiations. It also attempted to vary the price even in the narrow range ($19,200-21,400 for the Legend, and $9,200-11,000 for the Integra). This included replacing additional luxury elements like CD players, types of seats and bonuses, to name a few. Acura's Skimming Pricing Strategy Acura's management realized that their new products had already obtained a strong foothold by the end of 1986, and a slight increase in price would not hurt the demand. Another argument was that higher price tags would contribute to the image of luxury. It was further learned that low prices compared to German prices undermined the status the customers were seeking. Therefore, Acura started in 1987 with a 2.3% price increase on its cars. By 1988, Integra had been selling for $10,915 (+3.5%), and the flagship Legend carried the price of $23,675 (+2.5%). However, sales data indicate that this price increase did not push the sales down. In fact, through the entire period of the late 1980's, prices kept rising, bringing new revenues to Acura. At the end of 1989, after some modifications, Legend carried the nominal price of $30,840 but, nevertheless, was still able to keep up with the pace of sales. By undertaking the described measures, Acura management gradually began to move from a penetrating pricing strategy to a market share strategy. By 1988, Acura already had a 7.2% share of the regular luxury car segment (Wall Street Journal 1989). The end of the penetrating strategy characterized Honda's start. With the introduction of the new model in 199 1, Acura moved away from a market share pricing strategy to a skimming pricing strategy. It is positioned as the "ultimate" luxury car, and uses TV ads depicting ultra luxury to back up its claim. Acura becomes the number one imported luxury car in the U.S. surpassing M-B. Thus, Acura in its pricing and promotion strategy attempted to convey those intangible consumer behavior values of prestige, status and pride. Acura further moved to introduce a sports model NSX at the price of $70,000 plus. THE U.S. MARKET IN THE 1990s Toyota and Nissan Entry Strategy The success and substantial profits of Acura on the upscale car market could not be left without due analysis and attention of its competitors Toyota and Nissan. Before

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entering the market, these automakers had done a thorough market research, which showed the possibility of large profits and decent market share. For the next ten years, Infiniti (Nissan's brand) projected a 60% increase in $50,000 and up households, while Lexus (Toyota's brand) was looking for a 90% increase in those households, which at that time numbered ten million. Therefore, the $30,000+ market was expected to grow about 14% over the first half of the decade (Advertising Age 1 989). Recession, strong dollar, and changing consumer tastes had already walloped the Europeans at that time. Their market share of the U.S. car market had dropped from 4.5% in 1986 to 3.2% in 1989. Mercedes-Benz lost over one billion dollars in revenues during the previous three years. The Japanese were entering the automarket at a time when buyers were already ridiculing the price value relationship of German cars (Ad Week's Marketing Week 1990). The auto luxury segment demand analysis suggested an almost perfect strategy for Toyota and Nissan, marketing high performance cars presumably equal in quality to Mercedes and BMW, but priced somewhere between those and such luxury U.S. models Cadillac and Lincoln. The combination of price and quality was supposed to attract the loyal owners of the cheaper Nissan and Toyota models who were ready to trade up, as well as, the affluent buyers put off by the higher prices for Mercedes and BMW brought on by the strong German mark (Business Week 1990). In other words, Toyota and Nissan believed that the American consumer would react to their entries in the same manner they did to Honda's Acura. So, they delivered the tangible factors of price, quality, and performance. After a short while, the American consumer would relate to the intangible factors as they had to the German cars. The Lexus Launch The Toyota managers had announced that they expected as many as half of the Lexus buyers would be their move up customers and/or individuals between 40-45 years of age with a household income of $100,000 a year (Economist 1989). In order to fulfill its goals, Lexus came up with two models in September 1989: the flagship LS400 priced in the range of $35,000-40,000, depending on the accessories included. The base price of $35,000 was about $10,000 less than the competitive BMW 535i and Mercedes 300E, and some $6,000 higher than the Lincoln Continental. Another model, a sports sedan ES250, carried the price tag of $21,050. This amount was

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close enough to Acura's Legend that they could compete in the $20,000+ range. Toyota realized, however, that competition would be indirect as the underlying cars belonged to different classes (Fortune 1989; Wall Street Journal 1989). Because of the lack of experience in the given market segment the ES250 sales did not go well. Among other factors, the price was believed to be accountable for the stagnation in sale. It was argued that the image of luxury created by Toyota was undermined by the low price. The consumers did not perceive the model as it was thought they would, because the price tag did not look "luxury" at all. Taking these facts into account, Lexus had to cut its projected 1990 sales from 75,000 units to 60,000. The flagship was also facing similar problems. Many buyers were opting for pricier, fully loaded versions of the LS400, where the dealers had waiting lists for cars with leather upholstery and CD changers. At the same time, the $35,000 stripped down, cloth seat model was collecting dust in the dealers lots (Business Week 1990). By means of applying price haggling deals and model variations, Lexus eventually managed to fulfill its 16,000 units task in 1989 and sell 63,534 versus the 60,000 which was expected in 1990. The sales reached a peak in 1992 with 92,890 sold. It was a success that even BMW, with all its prestige and experience, never managed to attain. The expansion of Lexus dealerships and the necessity to pay off its loans compelled Toyota to enter into the phase of higher profit margins, which were then followed by gradual increases in price. With the division earned sufficient credibility, it was believed that higher prices would not push the demand down, but, on the contrary, as was suspected, they would contribute to the image of "luxury". In May 1990, Lexus announced a 2.9% base price increase ($1,000) on the flagship LS400, while leaving the ES250 price unchanged. The $36,000 price tag even after its raise, still separated Lexus from its closest competitor, the M-B300E, by almost $10,000. Upon examining the data, one will notice that by 1994 the LS400 model carried the approximate price of $55,000. However, the gained popularity and image, that is the intangible values, helped Lexus to prevent a drop in sales. "We introduced the U.S. car at $35,000 in 1989, and now it sells at $51,500", a Toyota official said, "Our job was to make it worth the additional $16,500." The Infiniti Launch

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Three months following the Lexus' launch in the U.S., another Japanese automaker Nissan introduced its own models on the upscale market under the Infiniti label. Infiniti attempted to define "Japanese luxury," with Zen like advertisements featuring rocks and pussy willow buds, and rice paper screens in its showrooms. It entered the market with two models, a flagship Q45, and a sports coupe M-30, priced at $38,000 and $23,500 respectively (Advertising Age 1989). Infiniti set fixed prices, thus avoiding the previous (Toyota) tactics of price haggling deals and model variations. At these prices, the cars looked like bargains next to the M-B 420SEL which had a smaller V8 engine than the Q45 and had a list price of more than $60,000. The Jaguar XJ6 had a price tag starting at $48,000. The BMW 3 series that competed with the M-30 had a start at $24,650 and ranged up to $30,000. It was believed that one price deals made customers feel more confident when making a purchase, and it removed the need to negotiate with salespeople (Wall Street Journal 1988). In contrast to Lexus, Infiniti advanced its prices very little, endeavoring to emphasize "more luxury" built into its models and correct the mistakes of the ES250. The number of dealerships on the day of entry was limited to 65, in contrast to Acura which had more than double that figure and was adding to that number on a daily basis. Although, the strategy looks exactly identical to the one undertaken by Lexus, Infiniti sales were lagging 25% to 35% behind the estimates of Nissan's goals and the expected units sold had been changed to 15% less of the 35,000 to 40,000 cars projected (Business Week 1990). The reason for the weak sales at Infiniti was not due to the pricing strategy of Nissan, but it was attributed to the type of advertising pursued in the early years. Another factor that contributed to weak sales was its resemblance in the front and side view to a Ford Taurus. Why pay twice as much for an Infiniti! In 1991 Infiniti raised its price on the Q45 for the first time by 2.6% to $39,000, where 31,890 units were sold compared to 23,960 in 1990. As was expected, a large proportion of the customers were the Nissan's move up owners or those who selected the Q45 when trading it off against Mercedes-Benz or BMW. Acura, Lexus, and Infiniti Pricing Strategies Now, let us compare the pricing strategies undertaken by each individual division, Acura, Lexus and Infiniti. The analysis made in this paper allows us to name two general

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strategies that the Japanese automakers employed to succeed in that upscale market. They were a penetration pricing strategy employed by Acura, and the demand-based pricing strategy used by Lexus and Infiniti. The difference between the two is apparent. Honda came up with the lowest possible prices and the largest possible distribution system of 150 dealerships, when its Acura models hit the market, speculating on more mass sales and the possible intangible value appreciation that would lead to higher profit margins in the future. Lexus and Infiniti, on the other hand, started with a limited number of dealerships (80 and 65 respectively), and more advanced and upscale prices. Their prices fell into the range between the U.S. Cadillac and the German BMW 500 series and Mercedes 300 series models. The two Japanese divisions speculated on the changing tastes in the American society, and the devastating effect that the newly introduced "gas-guzzler" tax had on the German models. This gasoline tax was one of the important factors that made the Japanese cars more attractive to consumers. Unlike Acura with its mass invasion, Lexus and Infiniti started very carefully, just "nibbling" the market and establishing marketing relationships with potential consumers. Although Lexus and Infiniti started approximately in the same price range, they used different approaches when promoting their models. Advertising its Q45, Infiniti tried to create the Japanese image of luxury by exhibiting rice paper screens and rocks with plants in its showrooms. Lexus, on the contrary, emphasized excellent performance, showing the superior handling of the LS400 on highways and sand roads, as well as wealthy couples enjoying the comfort and luxury of the LS400. Toyota also allowed for more price variation, using price haggling deals and equipping the models with additional luxury accessories, whereas Infiniti stuck to a one price strategy with no price haggling. A step that made the strategies of the three, Acura, Lexus and Infiniti, look similar was their gradual transformation from market-share-oriented policies to higher profit margins, exhibiting a skimming strategy. The earlier success of Acura and Lexus enabled them to start moving in this direction after they had been on the market for 3-4 months, whereas Infiniti dared to raise the Q45 price only one year after its entry into the market. Eventually, all the divisions increased the base prices of their flagships an average of $13,000 to $16,000 in the

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four-five years of selling history in the U.S. CONCLUSION The Japanese were able to penetrate the U.S. luxury car market through the use of pricing and diversification strategy as well as an understanding of American consumer behavior. Their market research confirmed a heretofore unrecognized elasticity at the lower end of the U.S. luxury car market which had been considered by all producers to be inelastic. In addition, their studies confirmed the existence of a "close to luxury" segment. This "glitch" in the demand curve enabled Honda's Acura to use a penetrating pricing entry strategy coupled with an intensive dealership program (150 vs. 80 & 65) which allowed for maximum distribution. Toyota's Lexus and Nissan's Infiniti introduced a few years after Acura, chose a more selective distribution pattern, as well as, a more upscale pricing strategy. Once the market was entered and established, all three exhibited a similar skimming pricing strategy. They were all successful with this strategy, because they understood American consumer behavior. The Japanese Big Three gave the luxury car buyer an excellent value. They translated this advantage first into the tangible consumer behavior relevant to factors of price and performance, and then into the tangible consumer behavior, factors of pride and status. REFERENCES "Upscale Stretching to Infiniti," Advertising Age, (July 24, 1989), S8+. "A Pricey Approach: Honda's Acura Line," Ad Week's Marketing Week, (February 24, 1986), 56. "Euro-imports Hit a Speed Bump Called Lexus," Ad Week's Marketing Week, (January 1, 1991), 14-15. "Acura: A New Dawn for American Honda," Automotive Industries, (April 1986), 31-33. "No Joyride for Japan," Business Week, (January 15, 1990), 20-21. "Actually, I Drive a Lexus," The Economist, (June 3, 1989), 66.

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"Toyota's Lexus-New Luxury Car," Fortune, (August 14, 1989, 62-66. Kooros, Syrous K. (1996), "Matching Globalization Strategies with Nation-States," in Business Research Yearbook: Global Business Perspectives, A. Alfakhaji, ed. New York: University Press of America. Thompson, Arthur A. Jr. and A. J. Strickland, III (1995), Strategic Management: Concepts and Cases. Homewood, IL: Irwin 1995. "Auto Dealers to Sell Toyota's New Lexus in Their Japanese Style," The Wall Street Journal, (July 19, 1988), B4-5. "Try to Crack the Luxury Car Market," The Wall Street Journal, (August 7, 1989), B4-3.

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