Summary of Case Study: The Honda – Yamaha War

In 1970s, when Honda began focusing on the automobile market, Yamaha saw an opportunity to attack and take territory in the motorcycle market. However, instead of doing an all out direct assault on Honda’s motorcycle troops, Yamaha decided to launch its first attack, a sneak attack (quietly move). What Yamaha did was to increase quietly it’s capacity and able to supply dealers with more products quicker than Honda. This tactic has been successful. By the end of 1981, Yamaha and Honda had nearly equal shares of the Japanese motorcycle landscape.

Throughout the period from 1970s to 1980s, Yamaha’s profit compared favorably with Honda’s i.e. Operating profits of about 7% to 10% of sales in the late 1960s and 3% of sales in the early 1980s. Yamaha was able to push into Honda’s territory and capture market share by focusing all of its resources on motorcycles and related products.

However, bulk of Honda’s profit been on its heavy investments in R & D for its young auto business where it spends about 5% in 1983. As for Yamaha, it only spent slightly more than 1% of sales on R & D throughout the entire period. The second phase of Yamaha’s strategy involved a more direct, frontal attack. Throughout 1970s to 1980s, Yamaha increased its product line as compared to Honda.

Despite the attack, Honda continues to exhibit a preoccupation with autos and began investing in large scales automobile production in the United States. Most of its production was devoted to building the Honda Accord but some capacity was also directed toward manufacturing large ‘cc’ motorcycles.

In 1981, Yamaha embarked on a breakneck production spree while totally disregarding the arrival of a low-pressure economy’. In August 1981, Yamaha announced its plan to construct a new motorcycle factory with an annual capacity of 1 million units and would be increased to 4 million units, as compared to Honda’s capacity by 200,000 units.

With the opening of the new factory, it would shift the balance of power and make Yamaha the world’s largest motorcycle manufacturer, the prestigious position that Honda had won from Tohatsu and held for almost 20 years. In 1982, Yamaha had its sales increased to 516 million yen. Yamaha’s management was betting its company could achieve leading market share in motorcycles.

Since Yamaha had no other business with significant growth potential, it was prepared to invest heavily in motorcycles. As such, Yamaha invested at a rate far higher than its internal cash generation could support. Yamaha turned to banks for the difference and end up with its increased debt burden. Yamaha and its affiliated companies had a debt to equity ratio of almost 3:1, while Honda group’s ratio was less than 1:1.

Although Yamaha thought its overt and public challenge had gone unnoticed by Honda, they were mistaken. The innovative element of Honda’s counterattack was the use of product variety as a competitive weapon. The effects of Honda’s two pronged attack of new model proliferation and price cutting were devastating for Yamaha. New model introductions offered greater technical and design appeal to customers, thereby increasing demand, and dealers had incentives for pushing them. But increased volumes of new models came at the expense of older ones; therefore the life cycles for existing models were shortened and demand for them declined sharply.

Yamaha’s sales of motorcycles plummeted by more than 50 percent and the company incurred heavy losses. By early 1983, Yamaha’s unsold stock of motorcycles in Japan were estimated to be about half of the industry total of unsold stock. At the then-current Yamaha sales rate, its inventories were equivalent to about one year’s sales. Yamaha’s debt to equity ratio increased from less than 3 to 1 in 1981 to 7 to1 in 1983.

1. Problem Statement/Identification

Our group has discussed thoroughly on this case study and we are of the opinion that the problem faced by Yamaha is ‘Poor Ketsudan’ or Poor Decision Making’. The reason being why we choose ‘Poor Decision Making’ as the main problem is because of the following:

a. Yamaha was able to push into Honda’s territory and capture market share by focusing all of its resources on motorcycles and related product. What Yamaha did was putting all its egg in one basket. There was no mentioned of diversification of product thus exposing its company to risk should the motorcycles industry failed. Not only have that but Yamaha also made itself less competitive in terms of other product other than motorcycles.

b. Yamaha spent slightly more than 1% of sales on R & D throughout the entire period as compared to Honda where it spent about 5% of its sales of R & D. Research and Development is supposed to provide avenue to study further on how to improvise its present product as well as doing research to identify potential new product, market, competitors and many more. Honda is willing to spend about 5% of its total sales purely on R & D because of its importance and impact to the company. But for Yamaha, it is not willing to spend more than 1% of its sales thus preventing itself its company from venturing into new things as well as improving its present product.

c. Ignoring the arrival of a ‘low pressure economy’ in 1981, Yamaha embarked on a breakneck production spree. Without taking into consideration of the economy situation at that point of time, Yamaha increased its production of motorcycles tremendously. Low pressure economy can also means less purchasing power on the part of customers thus resulting in less demand of products.

d. Yamaha invested at a rate far higher than its internal cash generation could support. Its debt burden increased steadily. In financial views, Yamaha actually has no cash to cover its debt. Though it may have high stocks of motorcycles but if the selling is slow it may not be able to generate sufficient cash flow to cover its debts.

Impact of Poor Decision Making

Due to the poor decision making done by the important people in Yamaha, its sales plummeted by more than 50 percent thus resulting in the company incurring heavy losses. Early 1983 estimated Yamaha’s unsold stock of motorcycles in Japan estimated to be about half of the industry total of unsold stock. At the then-current Yamaha sales rate, its inventories were equivalent to about one year’s sales. At the same time, Yamaha was burdened with debts from the bank where its debt to equity ratio is about 3 to 1 in 1981 to 7 to 1 in 1983.

2. ALTERNATIVES AND ITS EVALUATION

2.1. Effective Marketing Strategy

Yamaha’s sales of motorcycles plummeted to a huge percentage and the company incurred heavy losses. From this we concluded that Yamaha’s effort in pushing up their sales volume is not to its mark. Effective Marketing Strategy is a strategy to counter poor decision making by the Yamaha’s management. We believe that by revising its marketing strategy, Yamaha would have an opportunity to increase its sale and reduce its debt ratio.

We of the opinion that Yamaha should get rid of the stock as soon as possible by selling it at a more competitive price. Selling at a more competitive price means fixing a price that will attract buyers. A price that make buyers heads turn around to give it a go ahead instead of not considering buying Yamaha’s model at all. Yamaha can get a big share of the motorcycle market in terms of increased sales through better price. Better price means not reduction in term of price, in which Yamaha is not capable to do so. But in terms of better offer of services before selling and after sale services.

By having an aggressive marketing strategy this can be seen as a good move as the sayings go. Laying low to recover from the wound inflicted by Yamaha’s rival. Rather than seeing the stock laying around and not contributing at all in keeping Yamaha

moving towards better debt ratio, Yamaha should go all out to sell of it stock through more robust marketing methods.

Besides that, Yamaha could also improve its relationship with its present dealer by giving them more attractive incentive. With this, the dealers may perhaps want to push up the selling of the unsold stock.

Positive Outcome

By revising their Marketing Strategy, we believe that not only Yamaha could reduce its massive stock but also able to capture the market once again with its various marketing style.

Negative Outcome

This maybe considered a blow to the decision-makers as Yamaha need to revise its strategy. However, in order to further save Yamaha from going down, then it need to revise the strategy.

2.2. Process Innovation Strategy

The second strategy would be Yamaha need to emphasis more on “process innovation”.

This effort is to “reinvent” the manufacturing process that result lower cost, better production quality, greater capability to turn out multiple product versions, and shorter design-to-market cycles.

This process innovation involves of mechanizing high-cost activities, revamping production lines to improve labor efficiency, creating self-directed work teams, reengineering the manufacturing portion of the value chain, and increasing use of advanced technology (robotics, computerized controls, and automatic guided vehicles). Yamaha significantly can improve their process innovation by emphasis on technology intensive rather than labor intensive.

Yamaha Motor has to come out with a new manufacturing technology that enables the mass production of large but thin aluminum die-cast parts in as environment-friendly, low-cost way that will contribute significantly to manufacturing innovation. By adapting high intensive technology, Yamaha can are now leading to the large mass production but low cost manufacturing especially in their motorcycles and outboard motors.

Positive outcome

By implementing this strategy Yamaha will be able to reduce the costs of manufacturing and at the same time increased the quality with decreased costs. What we can see that when Yamaha emphasis more on technology intensive rather then labor intensive is that they can reduced time to market because by enhancing high technology can produce high quantity rather than labors. At such, this can increased their revenue and competitive advantage in wide range of products such as motorcycles and outbound motors.

Negative outcome

However by implementing process innovation, it may also cause negative impact to Yamaha Company. It may cause increased in the unemployment rate in Japan. High cost of expenses for innovation process which can leads to the high debt of ratio because Yamaha need to finance a lot of machinery and technology which they can’t afford to pay back later if the product failed in the market. Finally, need to invest in unlimited knowledge in innovation project including a right intellectual scientist and right method of research.

2.3. Dump Excess Output Strategy

As we know about 75% of all Yamaha models were smaller than 700cc and sold domestically while its larger bikes were exported to overseas markets. Perhaps what Yamaha can do to recover some of its cash is to do away with is present massive unsold stock. One of the best markets would be USA. Though the US ITC had increased its import tariff, but it is more for the heavyweight motorcycles.

Therefore, it is high time for Yamaha to spread its wing and established its overseas market such as the USA by selling the smaller cc (where the tariff is not that high) and at also other countries.

Positive Outcome

By implementing his strategy, it may reduce the massive unsold stock immediately and generate revenue. As far as the balance sheet is concerned, assets have been reduced and in turn cash has been generated.

When the unsold stock was sold out, it will help to generate the company cash flow. This strategy also save the cost of paying salary for the employees that takes care of the stock. And also save the cost of rental for putting the unsold stock in the warehouse.

Besides that, this strategy can help Yamaha to open the new market in the developing country in future. Meaning to say, dump excess output by using new promotional skill is the first way to introduce Yamaha’s motorcycles to the developing country.

The examples for new promotional skill are After Sales Service, Package and Free Prizes.

Negative Outcome

Anyway, this strategy may also have setback. The Yamaha may totally lose their domestic market. These strategy just focuses on the foreign market and no action are done to recover the domestic market. In the long run, this strategy not only cannot get back the domestic market but also will lose the chance to compete with Honda in domestic market.

And the way to dump excess output also will influence the image of Yamaha and the prices of Yamaha’s motorcycles in the foreign market in future. For examples, during the dump-excess is being done, normally the price has to be cheap and also need to provide after sales service. But when the business is stable, it may be difficult to push up the price of the motorcycles.

3. BEST ALTERNATIVE

Our group is of the opinion that by implementing the above strategies it could solve its present problem as well as increased its sales in the future. Therefore, we strongly believe that the best alternative would be to combine the above three strategies. Despite of the various positive and negative impacts, Yamaha need to revise its marketing strategy in order to attract more buyers and dealers.

While at the same time, Yamaha should not depend solely on one product but rather diversify into other product through process innovation strategy. It is a very risky decision to put all the eggs into one basket. As for the dump excess output, Yamaha surely need to reduce its massive unsold stock and one of the ways is to sell it elsewhere other than Japan by establishing overseas market.

4. IMPLEMENTATION: LONG AND SHORT TERM

Our Group would like to propose the following steps of implementing the above combined strategies:

4.1. Short Term

a) Introduce a competitive pricing so as to attract more buyers.

The Public Relation Department of Yamaha need to do a lot of promotional activities such as road show, exhibition, brochures and so forth. Perhaps, they also need to consider strategic location to optimize contact with the potential buyer. Or, go into areas where Honda does not do the trading.

b) Introduce After Sales Service

This would definitely attract loyal customers. After Sales Service means that the Sales Team would do follow up with the buyer after sometime just to find out whether the product is doing well. At the same time, the Sales Team could also get feedback in terms of improvement in the product itself from the customer

c) Introduce attractive incentive to its dealers in terms of higher commission.

In getting good result in sales volume, attractive incentives should be given to dealers or outlets that help to sell Yamaha motorcycles. Perhaps some of the incentive would be like holiday package.

d) Reduce Other Cost

This can be done so by closing down outlets which are not performing well.

e) Motivate the Sales Team by setting sales target

Set Target to the Sales Team. In this way, then they will be motivated to work harder to sell the motorcycles as bonuses, salary, incentives would be based on achievement in meeting the Target. At the same time to further help the Sales Team, perhaps Yamaha could also develop and train the Sales Team the various selling skills.

4.2. Long Term

a) Establish overseas market by selling its unsold stock to other countries such USA, and throughout the nearest countries such as Hong Kong, Singapore, Malaysia, Thailand and so forth. In this way, Yamaha would be able to secure a long term market.

b) It is high time to increase its investment in R & D to further improve its present product as well to identify new potential product. Yamaha need to do in order to compete with other motorcycle producers. This is because knowledge evolve very fast and should Yamaha remain as where it is, then it would be left out.

c) Revise its manufacturing process by introducing innovations right from the beginning of the production. One the ways is through advance technologies.

5. Summary

In summary, Yamaha need to resolve its current debt ration in order to attract more investors as well as to be able to generate enough cash to reduce its debt. While at the same time, Yamaha also need to reduce its unsold stock which we believe is incurring them high cost especially in maintenance as well as storing.

Therefore, it is only wise for Yamaha to implement the above combination of three strategies in order to tackle the present problem as well for future expansion. Poor decision making can lead to massive loss as well as could tarnish the image of the company. However, it is not too late for Yamaha to revise it strategy.

By implementing the above steps, not only Yamaha could reduce the unsold stock but also improve its sales, thus revive its profit margin. In the long run, Yamaha would also be able to extend its market to overseas thus enabling them to compete with other manufacturers.